Palau’s Financial Sector Needs Improvement to Combat Money Laundering and Terrorism Financing

Introduction

A recent report presented to the Asia-Pacific Group (APG) has revealed that Palau’s financial sector is still vulnerable to money laundering and terrorism financing due to inadequate implementation of its anti-money laundering and combating the financing of terrorism (AML/CFT) laws.

Deficiencies in AML/CFT Framework

The report praised Palauan authorities for their excellent cooperation and hospitality during an assessment mission, but highlighted several deficiencies in Palau’s AML/CFT framework. These include:

• Inadequate implementation of AML/CFT laws
• Only about half of the twenty FATF-designated categories of predicate offenses are covered by the money laundering offense
• Freezing of terrorist assets under UN Security Council Resolutions is not adequately addressed

Challenges Facing Financial Intelligence Unit (FIU)

The report also found that Palau’s FIU lacks dedicated resources to carry out its functions effectively. Specifically:

• The FIU has been operating without a documented standard operating procedure for analyzing suspicious transaction reports (STRs)
• The FIU should be able to obtain additional information from reporting entities in response to STRs without the need for a court order

Recommendations

To address these deficiencies, the report recommended that Palau:

• Dedicate additional resources to implementing AML/CFT laws
• Improve customer due diligence and record-keeping requirements
• Enhance supervisory and oversight systems
• Establish a more effective system for freezing terrorist assets under UN Security Council Resolutions

Progress Made by Authorities

Palau’s authorities were praised for their efforts to combat money laundering and terrorism financing, including:

• The establishment of a Financial Institutions Commission (FIC)
• The relocation of the FIU from the Office of the Attorney General to the FIC

Conclusion

The report provides a roadmap for Palau to improve its AML/CFT framework and better protect its financial system from money laundering and terrorism financing. While progress has been made, more needs to be done to ensure Palau’s financial sector is adequately protected against these threats.

Key Takeaways

• Palau’s financial sector is still vulnerable to money laundering and terrorism financing
• Inadequate implementation of AML/CFT laws and lack of resources hinder the effectiveness of the FIU
• Recommendations include dedicating additional resources, improving customer due diligence, and enhancing supervisory systems