The International Financial Sector Reform and International Legal Framework for Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Regulation

Introduction

Financial liberalisation and the accompanying illicit crimes prompted international harmonisation of a patchwork of domestic regulations on AML/CFT regulation. This process of global regulation, driven by international financial institutions (IFIs) and the Financial Action Task Force (FATF), was in response to the growing complexity of illicit crimes which increasingly occurred on a cross-border level. The relationship between the evolution of the IFIs/FATF and the suitability of the AML/CFT regulations has been questioned, particularly regarding the ability of the regulations to elicit compliance by countries. This has been examined in relation to developed countries such as the United Kingdom[1] and the United States and also the continental blocs, such as Europe. Parochial emphasis on African countries and emerging economies (ACs/EEs) has however occasioned arguments that the global design of IFIs/FATF allows for suitable regulation of, and compliance with, AML/CFT standards globally. Yet, this is not the case; rather, the hegemonic subjection of these countries and consequent agency slack are indicative of a regulatory paradox.

This chapter seeks to understand the mechanics of this. It does this by examining the rationale for international financial regulation, the historical underpinnings and legal structures of the IFIs/FATF and how these affect the suitability of the global standards.

The first section of this chapter focuses on the nature and rationale for international financial regulations as instruments for curbing cross-border externalities.

The second and third sections examine the evolution of international financial regulation (IFR) with an emphasis on the historical and legal status of the IFIs/ FATF, coupled with justifications and reactive steps taken to tackle illicit crimes. The sections highlight that the backing of the FATF by IFIs has hardened the trajectory of the AML/CFT standards and led to a move towards mandator}' compliance. The fourth section engages the agency theory to understand how the evolution of IFIs/FATF facilitates compliance with AML/CFT regulations within countries. It argues that the existing ‘reverse and continuing international delegation’ has created a global hegemony that hinders the suitability of the standards, thus limiting compliance. The fifth section deconstructs the concept of legitimacy and its compliance potential. This section also examines how agency issues flow from legitimacy crises. The sixth section draws the strands together and concludes.

  • [1] Nicholas Ryder, Money Laundering - An Endless Cycle? A Comparative Analysis of AntiMoney Laundering Policies in the United States of America, the United Kingdom, Australia and Canada (First Published 2012, Routledge 2012) 8-39, 73. 2 James Gathii, ‘The Financial Action Task Force and Global Administrative Law’ [2010] 197 J. Prof. Law 1, 2-11; Saby Ghoshray ‘Compliance Convergence in FATF Rulemaking: The Conflict Between Agency Capture and Soft Law’ [2014-2015] 59 N.Y.L. Sch. L. Rev. 521, 533. 3 Ines Sofia De Oliveria, ‘The Anti-Money Laundering Struggle: Actors, Interest and the EU’ (4th ECPR Graduate Conference, 2012). 4 Norman Mugarura, The Global Anti-Money Laundering Regulatory Landscape in Less Developed Countries (2nd edn, Routledge, 2016) 145.
 
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