Supervisory Authorities Struggle to Monitor Compliance with Anti-Money Laundering and Combating Financing of Terrorism Regulations

Lack of Experience in Ensuring Compliance

Azerbaijan’s supervisory authorities have been found to lack experience in ensuring compliance with anti-money laundering (AML) and combating financing of terrorism (CFT) regulations, according to a recent report. The authorities did not have a comprehensive understanding of the ML/TF risk associated with designated persons and entities, including those operating in the financial sector.

Preventive Measures

Financial institutions (FIs) were found to have a reasonable level of ML/TF risk understanding, but there were still some limitations. For instance:

• Difficulties were noted in fully identifying and verifying beneficial owners (BOs), particularly with respect to politically exposed persons (PEPs).
• FIs faced challenges in implementing effective due diligence measures for BOs.

Supervision

The authorities were found to have a general process for licensing FIs, but there were some shortcomings. For instance:

• Market entry checks did not always cover BOs.
• The identification of criminals’ associates was not carried out in practice.
• The reporting of suspicious transactions was concentrated mainly in the banking sector, while other financial sectors accounted for a negligible number of reports.

Sanctioning Regime

The report highlighted that the sanctioning regime in place could not be considered effective, proportionate, and dissuasive due to technical shortcomings. In some cases:

• The authorities opted for action plans instead of sanctions when shortcomings were identified during on-site visits.
• There was a lack of clear guidelines and procedures for imposing sanctions.

Transparency and Beneficial Ownership

The report found that information on the creation and types of legal persons was publicly available, but there were some limitations. For instance:

• Trusts could not be established under Azerbaijani law.
• While residents of Azerbaijan could operate as trustees for foreign trusts, this scenario had never been identified by supervisors or the private sector.

National Risk Assessment

The report concluded that the authorities had a moderate understanding of ML risk based on the conclusions of the National Risk Assessment (NRA), which included a section dedicated to the possible misuse of legal persons. However:

• There was room for improvement in terms of identifying business sectors at greatest risk.
• Vulnerabilities of other types of legal persons were not thoroughly analyzed.

Recommendations

Overall, the report highlighted the need for Azerbaijani authorities to strengthen their supervisory capabilities and improve their understanding of ML/TF risks associated with designated persons and entities operating in the financial sector. Specifically:

• Supervisors should enhance their understanding of ML/TF risks and develop effective strategies to mitigate them.
• FIs should implement robust due diligence measures to identify and verify BOs.
• The authorities should establish a clear and effective sanctioning regime to deter non-compliance.
• Transparency and beneficial ownership information should be improved through the creation of trusts under Azerbaijani law.