2. LEGAL SYSTEM AND RELATED INSTITUTIONAL MEASURES
2.5 The Financial Intelligence Unit and its functions (R.26, 30 & 32)
Recommendation 26
Establishment of FIU as National Centre
290. The Asset (Money) Laundering Prevention Act 2008 (ALPA) establishes the Financial Information Unit (FIU) as a departmental unit within the Nepal Rastra Bank (NRB) for “the collection and analysis of information relating to asset laundering.” The NRB Governor is empowered to appoint the Chief of this unit not lower in rank than a First Class Officer (a relatively senior officer in the Nepal public service).
291. The FIU is a predominantly administrative FIU with limited powers of evidence collection for preliminary investigation. The ALPA and AML Rules 2009 give the FIU a variety of powers and functions including:
Receiving, analysing and disseminating STRs and TTRs (threshold transaction reports);
Obtaining further information or clarification about transactions and records and to obtain their copies where necessary;
Conducting preliminary inquiries into information received where necessary;
Ordering institutions to freeze suspect property where necessary;
Issuing AML/CFT Directives to reporting entities;
Liaising with the AML Department (Department of Revenue Investigation – “DRI”);
Sharing information with other FIUs and international organisations;
Managing AML/CFT-related training programs for government entities;
Carrying out other prescribed functions.
292. The FIU is established for 11 staff members, including the Director (Chief). Four of the officers are information analysts. The remaining are managers and policy experts. The organisational structure of the FIU is as follows:
293. The Nepal FIU started receiving STRs and threshold transaction reports (TTR) in 2008 shortly after its formation. Prior to November 2009, only one STR had been filed. Since then, 185 STRs have been received, bringing the total received to 186. Of the STRs, 183 came from Class A institutions, two from Class B, and one from a Class C institution. The breakdown by month and year is as follows:
TOTAL STRS RECEIVED SINCE 2008 – BY MONTH
2008 2009 2010
August 1 November 10 January 3
December 3 February 17
June 144
July 1
August 7
Total 1 Total 13 Total 172
294. The FIU advised that the spike in STRs for the month of June 2010 (144 STRs) relates to a business involved in a fraudulent investment scheme (or “ponzi”). The financial institutions reporting the STRs did so within a short period of time.
295. The number of TTRs received by the FIU since 2008 are as follows:
TOTAL TTRS RECEIVED SINCE 2008 – BY CLASS OF INSTITUTION
Class of Institution Number of TTRs Volume of Money Involved
Class A ‐ Commercial Banks 1,685,232 US$72million
Class B ‐ Development Banks 514,080 US$14miliion
Class C ‐ Finance Companies 140,572 US$3.6million
Class D – Microfinance Institutions N/A N/A
Cooperatives 697 US$11.8mllion
Insurance Firms 226 US$1.9million
Securities Firms 247 US$9.8million
Money Remitters 1 US$14,500
Money Changers N/A N/A
296. TTRs (as per FIU AML Directives) are payment/remittance transactions and credit/debit transactions of NRps 1 million or more (US$13,000) or forex transactions of NRps 500,000 (US $6,500).
297. There are no TTRs from Class D financial institutions because the size of transactions through those institutions is very small. Class D financial institutions provide financial services to low socio-economic individuals who make deposits of NRps50 to NRps200 (approx. US
$1-$3) per month.
Receipt, Analysis and Dissemination of STRs and TTRs
298. Under ss 10(1)(a) and 10(b) of ALPA the FIU has two principal functions, namely: (a) analysis of STRs and TTRs; and (2) inquiry and investigation into STRs and TTRs. The investigatory function of the FIU relates to evidence collection. These functions are discussed separately.
299. Receipt: Reporting institutions may send STRs and TTRs through mail, fax or email.
There is no secure online reporting system available in Nepal. STRs and TTRs are filed in paper format and then converted manually to electronic disk format.
300. Analysis: Section 9 of ALPA provides the FIU shall collect and analyse information relating to ML. Section 10(1)(a) of ALPA directs the FIU “to regularly obtain details of transactions under s 7 from government entities, bank, financial institution and non-financial institution and maintain records thereof upon conducting an analysis.” Section 40 of the AML Rules further provides that the FIU may develop and implement an internal manual to perform the tasks it is required to perform. However, no such manual has been issued.
301. The FIU does not have a structured and formal analytical process for dealing with information obtained through STRs and TTRs. When asked during the on-site visit how analysts handle that information, officials advised that they use an informal 6-step process as follows:
(a) Determine the elements of suspicion;
(b) Look at all details of the transaction reported, including KYC documents;
(c) Study the transaction pattern of the customer;
(d) Try to link the customer to other transactions within the reporting entity;
(e) Find out if the customer has other bank accounts or other accounts with other reporting entities; and
(f) Talk with the tax authorities and secure any relevant information.
302. The FIU does not have software to cross-check information contained in STRs with information contained in large number of TTRs. It is difficult for the analysis function to match names between STRs and the 2.3 million TTRs received to date.
303. As noted above, four officers in the FIU are dedicated information analysts. No targeted analytical training has occurred for Nepal’s FIU analysts as yet. Only general training and awareness raising workshops have been attended by FIU staff.
304. Inquiry and Investigation: The second FIU function is outlined in s 10(1)(b) of the as follows:
s10(1)(b): In case the notice, details and documents reported to it require an inquiry and investigation on asset laundering, [the FIU shall] conduct [a] preliminary inquiry and send details thereof to the concerned Department, government entity, bank, financial institution and non-financial institution.
305. Additionally, s 10(1)(c) of ALPA obliges the FIU to disseminate details of STRs to the AML Department (Department of Revenue Investigation – DRI) if transactions are suspicious or if there are reasonable grounds to believe that a transaction is suspicious. Officials from the FIU indicated that s 10(1)(b) empowers the FIU to:
Investigate ML and TF suspicions;
Collect evidence to support ML and TF allegations; and
Refer those allegations and the evidence collected to the AML Department under s 10(1)(c) of ALPA.
306. The relationship between the FIU, as an AML/CFT investigation agency, and the AML Department (DRI), also charged with powers to investigate allegations of ML and collect evidence in the course of such investigations, is not clear. One FIU official said that the FIU could of its own accord investigate and collect evidence which it would then refer to the DRI while another seemed to indicate that it only meant the FIU could collect evidence of suspicion and then refer that evidence to the DRI to more fully investigate. No formal structure exists for these overlapping responsibilities. FIU officials have yet to clarify the meaning and functions relating to this statutory function.
Guidelines to Financial Institutions on Reporting STRs and Outreach
307. Directives and Guidelines: Section 10(3) of ALPA empowers the FIU to issue Directives to banks, financial institutions and non-financial institutions about the method, form, time and other procedures regarding reporting of details, statistics, notices and information.
Rule 7 of AML Rules widens this power to permit the FIU to issue directives in relation to:
(a) Customer Identification, introduction and acceptance procedure;
(b) Identification of suspicious transactions;
(c) Modes of reporting suspicious transactions;
(d) Record of the transaction and business relation, particulars to be mentioned in such records and management and security of the record;
(e) Diligence on and control of the transaction and internal inspection; and (f) Other necessary matters.
308. Pursuant to this power the FIU has issued 12 Directives to banks (two), money remitters (two), money changers (two), casinos (two), cooperatives, insurance, securities and government reporting entities27 which cover, among other issues, reporting forms and procedures.
27 Company Registrar, Land Revenue, Customs, Inland Revenue, Transport, Department of Cooperatives,
309. Reporting procedures are not adequately focused in these Directives and the FIU has not undertaken any initiatives to issue comprehensive guidelines for the reporting institutions to assist them with implementing these obligations. Under AML Rule 9 regulatory bodies are also required to issue necessary Directives for the institutions they regulate but no regulator has issued such Directives as yet.
310. Feedback on STRs: The FIU has not provided any feedback to reporting institutions on STRs. Consequently, many of the institutions that are required to file STRs do not have clear understanding of their filing obligations nor what it means to detect a suspicious transaction.
311. All of the reporting entities spoken to by the evaluation team expressed a strong desire to receive feedback to increase their understanding of the specifics of reporting and whether they are providing the quality and quantity of information expected by the FIU. This lack of understanding as a result of an absence of feedback on STRs in reflected in part by the relatively low number of filings.
312. Outreach to private sector While the FIU has provided information sessions and other limited outreach to government agencies pursuant to AML Rule 6(h), there has been no effective and targeted outreach to the private sector28, nor is any planned due in large measure to lack of resources in the FIU to commit to this. Many of the private sector institutions required to file STRs which the evaluation team spoke to during the on-site visit indicated that they would benefit from outreach and have been puzzled why the FIU has not as yet contacted them for this purpose, particularly since the FIU has issued Directives to them. FIU staff are, however, in the initial stages of setting policy, issuing Directives and working out systems for STR and TTR analysis and admit that while outreach is important it cannot as yet occur.
Access to Additional Government Information
313. Access to financial, administrative and law enforcement information is undertaken on an ad hoc basis in Nepal. No statutory authority exists in the ALPA or AML Rules to permit this. Section 10(2) of ALPA mandates the FIU and regulatory bodies to exchange available information and AML Rule 9 requires regulatory bodies to send their inspection reports to the FIU.
314. There is no provision in the ALPA and AML Rules that permits the FIU to gain access to law enforcement information. Neither is there a formal MoU with Government agencies to exchange this information with the FIU. During the onsite visit FIU officials advised the evaluation team that they can make the request to any LEA to provide required information and there is no barrier to provide such information. The FIU can informally request any agency as and when required. Again, however, without a legal right to ask and a corresponding obligation to provide the requested information it is difficult to see that this regime complies with the requirements of the standards.
Additional Information from Reporting Institutions
315. The authority and power of the FIU to seek additional information from reporting entities once an STR has been filed is laid out in the ALPA and to a limited extent in the AML Rules.
Under ALPA s 10 the FIU has access to “details of transactions under s 7” (s 10(1)(a)).
Pursuant to s 10(1)(e) of ALPA the FIU is empowered to inspect transactions and records of banks, financial institutions and non financial institutions, to obtain any information or clarification about any transactions and records and collect copies thereof where necessary.
28 Some private sector involvement has occurred within the context of government targeted training, but participation has been limited.
While the FIU views this provision widely to the extent it permits the FIU to call for any financial information a reporting entity may hold in relation to a person who is the subject of an STR, the wording of the provision clearly reflects that the power and authority is restricted to information about particular “transactions.” The word “transaction is defined in ALPA at s 2 and supports this interpretation: Under s 2, "Transaction" means any act or agreement made in order to carry out any economic or business activities and the term also means the purchase, sale, distribution, transfer or investment and possession of any assets” (attempted transactions are not covered under this).
316. Further, the bank secrecy requirements in BAFIA (s 79(1)) that enable disclosures to
“authorised prosecutors or officers carrying out an inquiry, investigation or prosecution” are not likely to extend to officers of the FIU for the purpose of analysing STRs. The scope of the exemption enabling “disclosure of customer information to the NRB” is not clear. In any event, the legislature has expressly contemplated the FIU’s need for further information and limited its power to seeking information about “transactions”—in other words, the FIU powers appear to preclude “fishing expeditions” where the net is cast wider than a transaction in order to catch additional transactional information. Accordingly, regardless of the position with respect to bank secrecy, the FIU’s capacity to ask for customer information or additional information beyond particular transactions is questionable.
317. AML Rules do not explicitly describe the direct access of FIU to obtain additional information from reporting institutions. Section 7(2) of ALPA requires reporting institutions to furnish any additional information regarding submitted STR/TTR; and AML Rule 9 requires regulatory bodies to send their inspection reports to the FIU.
Dissemination of Information
318. Sections 10(1)(b) and 10(2) of ALPA authorise the FIU to disseminate information to the concerned department (DRI), government entity, bank, financial institution and non-financial institution. Section 10(1)(c) makes the FIU responsible for providing extensive details of analysed reports to the Department of Revenue Investigation. To date the FIU has referred all of its STRs (186 as of the date of the on-site visit) to the DRI. There is no formal process or procedure for the dissemination of STRs to other agencies. Decisions are taken by analyst to disseminate these reports. This issue relates to effectiveness discussed later in this report.
319. Section 10(1)(d) also authorises the FIU to share with foreign FIUs, international organisations and institutions notice, details and documents regarding asset laundering on the basis of reciprocity and receive such notice from concerned country and international organisation and institution. AML Rule 6(f) limits sharing to only those foreign FIUs with which Nepal has an MOU. There is no provision for spontaneous exchange of information with other countries.
STRS, INCLUDING KYC DOCUMENTS AND BANK STATEMENTS, DISSEMINATED
Year Within Nepal Outside Nepal
TOTAL 186 5
Operational Independence and autonomy
320. ALPA s 9 states that “there shall be a Financial Information Unit in the Rastra Bank for collection and analysis of information relating to asset laundering” and that the Governor of the Bank shall appoint the Chief and provide staff required for it. However, no internal administrative order, direction or memorandum has been issued by the NRB to date in order to give effect to this statutory provision. The lack of an administrative order and formal framework for the FIU’s staff, training and operation is a concern. The status of the FIU at present is arguably ad hoc only. Although its existence in the NRB reflects the statutory framework in the ALPA, nevertheless the lack of underpinning within the formal administrative structure of the NRB opens a strong argument that the FIU lacks proper legal status within the NRB.
321. The Chief of the FIU does not hold security of tenure in his position or other guarantees against executive interference in his position (as might be contained in an internal administrative instrument to establish the office). Recruitment, posting, transfer and promotion of the Chief and his staff are the sole responsibility of the Governor. The Governor retains ultimate discretion to remove NRB staff including the Chief of the FIU and his subordinates.
The Governor also retains residual discretion over the FIU’s staffing, budget and operations.
There is no separate development budget allocation for the FIU. Budget “bottom-line”
requirements are determined primarily within the NRB’s corporate planning development department.
322. Because FIU staff members are also, and primarily, NRB staff, the movement in and out of the FIU is seen as a professional development opportunity for many officials not necessarily associated with the operational needs of the FIU. Indeed, the current Chief of the FIU is a senior officer in the NRB’s Legal Department and has not (from what the evaluation team could determine) relinquished his duties in that department. It was apparent to the evaluation team that the role of the FIU Chief is seen within the Bank as an additional responsibility to his primary legal functions. The lack of tenure and the nature of staffing movements raises an issue in relation to the confidentiality of FIU information. Without a formal framework or mechanism in place to protect this confidentiality (of which there is none) the evaluation team has a significant concern.
323. This perception, coupled with the lack of structure within the NRB for the FIU and the inability of the FIU to control staff and budget raises serious concerns about the status and independence of the FIU.
Protection of information held by FIU
324. The FIU is located in a single space within the NRB’s central office building in Kathmandu. Entry and exit to this building is controlled by perimeter security guards who check identification and reasons for entry. Access to the FIU’s offices can be gained from internal and external doorways once access to the general NRB premises. While security for entrance into the NRB grounds is sufficient, there could be better arrangements in place for the FIU itself notwithstanding its location in the NRB complex.
325. The storage, handling and security of information in the FIU is rudimentary. STRs and TTRs are filed in paper format and then converted manually to electronic disk format. The FIU does not have soft ware or programmes to cross-check information contained in STRs with information contained in large number of TTRs. On a more fundamental point, it is difficult to
see how the FIU could match names in STRs (which are only in the hundreds) against those contained in TTRs (which number in excess of 2.3 million reports to date).
326. STRs and TTRs are stored in stand-up filing cabinets within the FIU office. The filing cabinets are not, however, stored in a safe room or other secure area, but are left in the open office area. But the cabinets are each secured and FIU staff are aware of the need for vigilance with the filing system and have taken safeguards with locking systems to prevent unauthorized entry into the information-security cabinets. Nevertheless additional measures and resources for the FIU to ensure greater security seem to be required.
327. Reporting institutions may send STRs and TTRs through mail, fax or email. There is no designated desk officer to receive, manage and handle these reports. Once received they are left in office view for any person in the FIU area to sight.
Publication of information
328. Under AML Rule 6, the FIU must report to the Coordination Committee and Nepal Rastra Bank with an annual report of performance within three months from the completion of the fiscal year. On the other hand, those Rules do not stipulate what information must be contained in the Annual Reports. The first annual report 2009/10 (16 pages) published in June 2010 includes the following chapters:
Policy Decision and Recommendations;
Issuance of Directives to Reporting Institutions;
Receiving, Analysing and Disseminating Data;
Awareness Programs;
International Relations;
Capacity Building Programs; and
Miscellaneous Activities.
329. The report does not provide any detail on these headings, nor does it outline crucial statistics, typologies or trends in ML and TF in Nepal. While the FIU has developed a “News
329. The report does not provide any detail on these headings, nor does it outline crucial statistics, typologies or trends in ML and TF in Nepal. While the FIU has developed a “News