Assessment Report on Palau’s Anti-Money Laundering/Counter-Terrorism Financing Framework

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Executive Summary

The assessment report highlights several areas that require improvement in Palau’s anti-money laundering/counter-terrorism financing (AML/CFT) framework and implementation. Key findings include insufficient legislative implementation, inadequate criminalization of money laundering and terrorist financing, and lacking resources for AML/CFT supervision and oversight.

Strengthened Legislative Framework

Palau has recently strengthened its AML/CFT legislative framework with amendments to existing laws and enactments of new ones. However, despite these improvements, there has been insufficient implementation.

Money Laundering and Proceeds of Crime Act (MLPCA) 2001: The offense of money laundering is criminalized, but only about half of the twenty FATF-designated categories of predicate offenses are covered by the money laundering offense.
Counter-Terrorism Act (CTA) 2007: The financing of terrorism is not adequately addressed under Palauan law.

AML/CFT Supervision and Oversight

The Financial Institutions Commission (FIC) is responsible for AML/CFT supervision, but it lacks resources to ensure compliance and issue regulations or guidelines. Attorneys who provide company formation services are not covered by the MLPCA.

Financial Intelligence Unit (FIU)

The FIU has been relocated from the Office of the Attorney General to the FIC but still lacks dedicated human, technical, and financial resources, hindering its ability to carry out tasks effectively.

Prostitution, consumer marijuana sales, and illegal fishing are significant sources of criminal proceeds in Palau. There is no known organized crime or terrorist financing situation.

Money Laundering Offense

The money laundering offense is broadly criminalized under Palauan law but lacks coverage for eight out of twenty FATF-designated categories of predicate offenses, which are important given Palau’s economic dependence on tourism, agriculture, and fishing.

Terrorist Financing

The CTA criminalizes the financing of terrorism largely in line with international standards, but it has not been implemented effectively.

Freezing of Terrorist Assets

The freezing of terrorist assets under UNSCRs 1267 and 1373 is not adequately addressed due to missing procedural aspects, unclear authority, and lack of procedures for immediate and timely freezing of terrorist funds.

Financial Intelligence Unit (FIU) Operations

The FIU operates without dedicated full-time resources but has processed 71 suspicious transaction reports (STRs). Its effectiveness would be enhanced with documented standard operating procedures, additional staffing resources, and the ability to obtain information from reporting entities without court orders.

Recommendations for Improvement

Prioritize Implementation of AML/CFT Framework: Palau should prioritize the implementation of its AML/CFT framework, focusing on enhancing the FIU’s capabilities and improving legal systems and institutional measures.
Enhance Financial Intelligence Unit (FIU) Capabilities: The FIU should be provided with dedicated full-time resources, documented standard operating procedures, additional staffing resources, and the ability to obtain information from reporting entities without court orders.
Strengthen International Cooperation: Palau should strengthen international cooperation by sharing information with other countries and participating in regional AML/CFT initiatives.

By addressing these areas of improvement, Palau can enhance its AML/CFT framework and effectively combat money laundering and terrorist financing.