The Financial Monitoring Service should not be Transferred to the Ministry of Finance - საერთაშორისო გამჭვირვალობა - საქართველო

The Financial Monitoring Service should not be Transferred to the Ministry of Finance

10 March, 2014

A legislative amendment proposed by to transfer Georgia’s Financial Monitoring Service from under the management of the National Bank of Georgia to the Ministry of Finance has been registered at the Parliament. This amendment to the Law on Legalisation of Illicit Income was proposed by Davit Onoprishvili, Head of the Parliamentary Budget Committee, parliamentary majority. TI Georgia believes that this initiative is a step backwards, and should not be passed into law.

The main function of the Financial Monitoring Service is to investigate illegally obtained income and money laundering. The Financial Monitoring Service was set up in 2003 as a requirement of the membership of the Council of Europe’s “Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism” (Moneyval) to which Georgia acceded in 1999. Currently, the Financial Monitoring Service has more autonomy to pursue its role as an independent legal entity of public law (LEPL) within an independent body (the National Bank). If combatting money laundering is on the the government’s list of priorities, this initiative will erode the autonomy of the FMS, diminish its status and have the following negative consequences:

1. This amendment will restrict the independence of the FMS, which would detract from the quality of its work. As a result of transferring the service to the Ministry of Finance, the FMS is very likely to lose the independence that it currently enjoys both legally and in practice. It is true the FMS is a legal entity of public law (LEPL) within the National Bank and per Georgian legislation LEPLs are independent entities even they are under some other institution, but unlike many other LEPLs, FMS statute clearly states that it is an independent body, that it is not subordinate to any other body and/or public official while carrying out its activities in accordance with the Constitution, international treaties and agreements, laws provided in the statute and the statute itself. The proposed bill cannot guarantee financial independence of the FMS since the service will be financed by the state budget whereas it is currently financed by the National Bank, an independent body. According to the amendment  the FMS will be under the management of the Ministry of Finance, the head of the Service to be appointed by the Prime Minister based on the finance minister’s nomination, rather than in agreement with the board of the National Bank, as is the case today.

Appointment of  the head of the service by the prime minister in agreement with the board of an independent body, such as the National Bank, guarantees independence and impartiality of the FMS, while the proposed changes will undermine its independence.

2. The status of the Financial Monitoring Service will be diminished. The proposed appointment by nomination of the Minister of Finance will not only limit the independence of the FMS, but will also diminish its status and effectiveness. Currently, as has been noted above, the head of the service is appointed by the Prime Minister in agreement with the board of the National Bank, an independent body.

3. The new status of the FMS will pose serious obstacles to its work.  The idea of creating the FMS within the National Bank was that anti-money laundering measures may require access to confidential banking details, which, for a number of reasons, the Ministry of Finance should not have. The receipt, systematization and processing of information from commercial banks and money transfer companies is within the powers of the National Bank. It is unclear why an LEPL under the Ministry of Finance should be doing this.

4. Disregard for the FMS’s institutional memory. It is worth noting that despite a few troublesome issues, Moneyval’s 2012 assessment of the Financial Monitoring Service was for the most part positive, and showed progress in a number of areas compared to the 2007 assessment.

Should the proposed changes go through, it is presumed that that the head of the FMS will be dismissed and a new one appointed. Apart from this, over the years, the National Bank and the Financial Monitoring Service developed relationships with a number of national and international organizations to determine the watch zones for money laundering and terrorist financing. This relationship covers many details (a country or part of a country’s territory will be deemed as non-cooperative or high-risk if there are substantiated claims that there are weak mechanisms for controlling the legalization of illicit income).

5. Restricting the independence of the Financial Monitoring Service is a blatant disregard for recommendation 29.7 of the Financial Action Task Force (FATF).

This recommendation calls for the Financial Monitoring Service to:

a) be operationally independent and autonomous

b) have the opportunity and capacity to carry out its functions freely, and when it is located within the existing structure of another authority, the service’s core functions should be distinct from those of the other authority

c) be able to obtain and deploy the resources needed to carry out its functions, on an individual or routine basis, free from any undue political, government or industry influence or interference, which might compromise its operational independence.

Transferring the Financial Monitoring Service to the Ministry of Finance would mean changing the entire system of preventing legalization of illicit income. It is unclear what led the Budget Committee to propose such systematic changes. Not only does the explanatory note to the draft amendment fail to describe why the old system did not work – that is, what are the reasons behind the proposed changes – but it does not as much as say what the amendment aims at. It is essential that the Ministry of Finance provides the public concrete information on the issue. Otherwise, the initiative could be seen as an attempt to influence and change the leadership of an important LEPL.

Author: Mikheil Kukava