Eduard Ivanov: How much ‘hard law’ is good for anti-corruption compliance?
Monday, June 5, 2017 at 8:18AM
Eduard Ivanov in FATF, International Law, financing of terrorism

Since the FATF 40 Recommendations were published in 1990, Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) compliance became one of the most regulated fields. By contrast, anti-corruption compliance is developing under the influence of international soft law.

Perhaps it is time to discuss which model of regulation is more effective and helpful for the business sector.

Hard law or soft law? The global AML/CFT system is based on the classical model of legal regulation. The FATF standards have created a very detailed framework for AML/CFT compliance. They are implemented into national laws and industry-specific regulations. Financial institutions and designated non-financial businesses and professions have an obligation to fully implement AML/CFT compliance systems in accordance with national laws.

National anti-corruption laws create incentives rather than oblige companies to implement anti-corruption compliance. As a rule, national laws do not define in detail a structure or formal requirements for anti-corruption compliance management systems. International soft law provides companies with the necessary guidance.

The “hard law approach” can be criticized for being too strict and expensive to implement. For example, it is not easy for small and medium-sized enterprises (SMEs) to implement all the requirements under AML/CFT laws. The “soft law approach” provides companies with more flexibility by designing and implementing anti-corruption compliance programs, but it also means more responsibility. Moreover, SMEs are not able to develop compliance programs using international guidance, which is often very vague. They have to pay for lawyers and consultants.

International law or foreign law? Due to the FATF and FATF-style regional bodies’ (FSRBs) efforts, the FATF standards have become a sort of customary international law. Governments, financial institutions, and companies around the world recognize the FATF standards as a “golden standard” for AML/CFT compliance. In the field of anti-corruption compliance, the Foreign Corruption Practices Act (FCPA) and the UK Bribery Act (UKBA) have practically replaced international and national laws in many jurisdictions.

Responsibility of regulators or “privatization” of regulation? In the field of AML/CFT, regulators are responsible for providing financial institutions and companies with guidance on the implementation of the standards. As a rule, they also have supervisory functions. On the one hand, regulators can create additional bureaucracy. On the other hand, they share responsibility with companies for the quality of compliance programs.

Implementation of anti-corruption compliance is taking place under the influence of multinational enterprises. Moreover, the supervision is being replaced with the private certification of compliance management systems and compliance officers. Companies first pay for designing compliance programs and then for certification. However, the legal significance of certification is not clear. The courts are not obliged to take it into account in criminal or administrative proceedings.

Ultimately, the AML/CFT regulatory framework provides less opportunity to modify and adopt existing requirements. At the same time, it has clear rules adapted to specific countries. They are also more predictable.

The regulation of anti-corruption compliance is more flexible. However, designing and implementing compliance programs in accordance with international soft law and foreign laws is challenging. The compliance programs of multinationals are not always localized and applicable in a challenging business environment. The “privatization” of regulation creates legal uncertainties and risks.

In the author’s view, at least three goals in the field of anti-corruption compliance regulation should be pursued: the unification of existing international standards, development of country-specific and industry-specific guidance or national legal acts, and the clarification of the legal significance of certification.

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Dr. Eduard Ivanov is a member of Internation Anti-Corruption Academy's academic team in the Compliance and Collective Action Department. He has served as a professor for international law for the National Research University Higher School of Economics (HSE) in Moscow / Russian Federation and as a head of various departments for Rosfinmonitoring (Russian FIU). He was also co-chair of the Working Group on Typologies in the Eurasian Group on Combating Money Laundering and Financing of Terrorism.

Article originally appeared on The FCPA Blog (https://www.fcpablog.com/).
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