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Azerbaijan’s Financial Sector Lags in Anti-Money Laundering Efforts

Baku, Azerbaijan - A recent assessment has revealed that Azerbaijan’s financial sector is falling short in its efforts to combat money laundering and terrorist financing.

Shortcomings in Reporting

According to the report, STR (Suspicious Transaction Report) reporting is concentrated mainly in the banking sector, with other financial sectors accounting for a negligible number of reports. The level of reporting from the DNFBP (Designated Non-Financial Business Sector) sector is also low, with no specific focus on scenarios for detecting and reporting terrorist financing.

Quality of STRs

The quality of STRs is another area that requires improvement, the report says.

Internal Control Function

Additionally, the internal control function in the DNFBP sector is generally less sophisticated than in the banking sector.

Supervision

In terms of supervision, the report notes that all FIs (Financial Institutions) have an internal control framework to ensure compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) due diligence obligations. However, the CBA’s (Central Bank of Azerbaijan) process for licensing FIs is criticized for lacking robust verification measures.

Law Enforcement Agency

The LEA (Law Enforcement Agency) appears to be aware of AML/CFT risks related to non-registered parallel FIs, but the CBA does not consider it a priority. Moreover, there were no instances where a LEA informed the CBA about cases of identified unlicensed financial institutions.

Registration and Beneficial Ownership

The STS (State Tax Service) is responsible for registering realtors, legal advisors, and accountants, but its effectiveness in detecting beneficial ownership (BO) information is limited. The Chamber of Auditors, Ministry of Justice, and Bar Association are responsible for assessing the fitness and propriety of other DNFBPs, with mixed results.

Understanding of ML/TF Risks

The CBA has a good understanding of the sectors it supervises, having initiated sectorial risk assessments and work on the National Risk Assessment (NRA). However, its understanding of ML/TF risks may be limited by shortcomings identified in previous reports. The STS, Ministry of Justice, and Chamber of Auditors also have varying levels of understanding of ML/TF risks in their respective sectors.

Supervision Approach

In terms of supervision, the CBA uses a risk-based approach, but is impacted by a lack of human resources. The STS applies a general risk-based supervision that includes some AML/CFT specific aspects, while the rest of the DNFBPs are not subject to risk-based supervision.

Sanctioning Regime

The report also criticizes the sanctioning regime in place as being ineffective, disproportionate, and dissuasive due to technical shortcomings. In many cases, the CBA opts for action plans instead of sanctions when shortcomings are identified during on–site visits.

Transparency and BO Information

In terms of transparency and BO information, the report notes that information on creation and types of legal persons is publicly available, but there is limited understanding of ML risks based on the conclusions of the NRA. The STS has a moderate understanding of ML risk and has implemented measures to mitigate this risk, including registration and authorization systems.

Conclusion

The report concludes by highlighting several areas that require improvement in Azerbaijan’s financial sector, including STR reporting, internal control function, supervision, and sanctioning regime.