Chapter 2: Legal and Institutional Framework PDF

**Chapter 2** ============= **Legal and Institutional Framework** ===================================== A system of institutions, laws, mechanisms, and regulations that governs a society is known as the Legal Institutional Framework. It comprises the procedures and rules to control the organizatio...

**Chapter 2** ============= **Legal and Institutional Framework** ===================================== A system of institutions, laws, mechanisms, and regulations that governs a society is known as the Legal Institutional Framework. It comprises the procedures and rules to control the organizational and individual behaviors through justice, stability, and order in a society. Judicial Institutions, executives, agencies, legal professionals, enforcement mechanisms, legal systems, legislative bodies, and checks and balances are the framework\'s components. The framework plays a significant part in maintaining economic and social development by retaining the rule of law. **2.1 International Framework** ------------------------------- The institutions, rules, and structure govern the interactions and legal relations between the organization and the country. A comprehensive set of principles, agreements, guidelines, treaties, and institutions to control the relationship on a global scale is known as the International Framework. This framework resolves conflicts, development, and cooperation promoting stability in the political, social structures, legal, and economic. It is a multi-layered system to combat financial activities worldwide. It is essential for the integrity of the international financial system and ensuring stability and security in international transactions. International Legal framework influences the domestic legal framework of the countries. To implement the obligations that arise by becoming a member to a treaty or a multilateral organizations, Countries domesticate such obligations in their local laws. International Framework concerning ML/TF/PF consist of FATF, FSRBs, UNSC Resolutions, IAIS propounded Insurance Core Principles and so on which is discussed in the following sections. ### **2.1.1 FATF Recommendation** Financial Action Task Force (FATF) was established in 1989 in Paris by G7 Countries, the European Commission, and other countries to protect, secure, and integrate the economy and financial system by examining, reviewing, making policies, and regulating the combat money laundering. The FATF benefits the global financing system by diagnosing the exposure of domestic-related threats (terrorist financing, financing of proliferation, and money laundering). It monitors the compliance that helps to govern international standards. After 2001, the member formed a 40+9 standard to cover money laundering and terrorist activities. Revised version of FATF Recommendation consist of 40 recommendations and 11 immediate outcomes. Hence, these standards are known as FATF Recommendations that guard the financial sector from threats like terrorist and criminal activities. The FATF Recommendations provide a comprehensive framework of measures to help countries tackle illicit financial flows. These include a robust framework of laws, regulations and operational measures to ensure national authorities can take effective action to detect and disrupt financial flows that fuel crime and terrorism, and punish those responsible for illegal activity.  The 40 Recommendations are divided into seven distinct areas:  - AML/CFT Policies and coordination - Money laundering and confiscation - Terrorist financing and financing of proliferation - Preventive measures - Transparency and beneficial ownership of legal persons and arrangements - Powers and responsibilities of competent authorities and other institutional measures - International cooperation Among the above mentioned areas, the Preventive measures are central to the obligations to be fulfilled by Insurance Companies which are mentioned in Recommendation 9 to Recommendation 21. These recommendations work as a foundation for the domestic laws as reflected in ALPA, ALPR and rules thereunder. The FATF Recommendation helps the country to adapt to the specific circumstances to implement the measures that are included in the international standard. Nepal is not a direct member of FATF. However, it is a member of the Asia/Pacific Group on Money Laundering (APG) which is a FATF Style Regional Body (FSRB). Implementation of risk-based supervision in financial sectors, strengthening of the FIU, and enactment and amendment of AML/CFT laws are aligned with FATF recommendations for Nepal. ### **2.1.2 Insurance Core Principles** The Insurance Core Principles (ICPs) are developed by the International Association of Insurance Supervisors (IAIS). ICP 22 states that the executive requires intermediaries and insurers to measure the combat money laundering effectively. It demands all the elements of FATF Recommendation standards for supervisor and jurisdictions with their laws, national risk, and regulations reference to AML/CFT. IAIS was established in 1994 A.D by membership organization of insurance regulators and supervisors. It consists of 97% world's insurance premium. IAIS supervise the insurance industry globally and effectively to maintain and develop stable, fair and safe market by protecting and benefiting policyholders and contributing to financial stability internationally. See **Appendix 1**. ### **2.1.3 Relevant United Nations Security Council Resolutions (UNSCRs)** The resolutions impose various obligations to maintain international security and peace creating an important role in the global framework for combating money laundering and terrorist financing. Key UNSCRs are as follows: 1. **Resolution 1267 (1999) and the following resolutions:** Al-Qaida, Taliban, ISIS, and other associated entities/individuals are targeted. The members are required to restrict entry or transit to their territories, freeze assets, and forbid the supply of arms to the listed entities or individuals. 2. **Resolution 1373 (2001):** This resolution was adopted after the attack of 9/11 in the USA the criminalize terrorism financing. It obligates member states to prevent and suppress the financing of terrorist acts by enhanced international cooperation in prosecuting and investing in terrorist financing that mandates freezing the assets and funds of terrorists and those who support them. 3. **Resolution 1540 (2004):** This resolution focuses on averting the explosion of weapons of mass destruction and their means of delivery. It prevents non-state actors from acquiring chemical, biological weapons, nuclear, and related technology and materials. 4. **Resolution 2178 (2014):** It addresses the threat of foreign terrorist fighters for improving information sharing and border controls. This resolution also helps in enhanced due diligence on international transactions. 5. **Resolution 2462 (2019):** It unites existing counter-terrorism financing obligations. It emphasizes the need for robust risk assessments and risk-based approach applications that enhance the cooperation between the private sector and governments. **2.2 Domestic Framework** -------------------------- ### **2.2.1 Money (Asset) Laundering Prevention Act, 2008 (ALPA)** **Asset (Money) Laundering Prevention Act (ALPA)** was enacted on January 28, 2008, A.D ( Magh 14, 2064 B.S.) by the Nepal Parliament to prevent Money Laundering and Terrorist activities. This Act is enacted by the government to control all types of criminal activities from operating and covering illegal money. As per this Act, any person who utilizes, uses, earns, transacts, holds, possesses, deals, or consumes the asset by earning directly or indirectly through investing activities, terrorist activities, tax evasion, or commission that are presented in the following offense; the asset to convert or transfers or causes to disguise the place, ownership, source, right by purchasing, holding those assets with an intention to convert the assets as legally acquired or conceal sources to do the transaction in any form that can be converted to cash by avoiding legal way to possess the assets. Another important aspect of this law is to provide the obligations, duties and responsibilities of the reporting entities, regulators and the law enforcement agencies. It imposes the ban on anonymous transactions, compulsory requirements of customer due diligence on establishing any sort of business transactions, enhanced due diligence and ongoing due diligence as per the requirement. Similarly, regulatory agencies have been empowered with adequate supervisory powers of regulation and supervision. Details in **Appendix 2**. ### **2.2.2 Assets (Money) Laundering Prevention Rules (ALPR)** Assets (Money) Laundering Prevention Rules (ALPR) was formulated in 2073 B.S. (2016 A.D.) sets out the procedural requirements for the implementation of the provisions of ALPA. The ALPR also states the coordination committee functions, technical committee, transaction threshold, FIU functions and duties, obligation of the regulatory, and other miscellaneous. ### **2.2.3 AML/CFT Directives issued by NIA** Directives are the rules and regulations or instructions that the entities or organization should follow. It helps the companies to ensure stability, legal standards, and integrity, promote fair practices, and protect consumer rights. If any company organization or person does not follow the directives, the regulator has the right to impose fines and other sanctions. To implement the ALPA provisions, the NIA has issued an AML/CFT Directives to insurers in 2024, which makes it mandatory for insurers to carry out different activities like Customer due diligence, transaction monitoring and reporting of TTR and STR to FIU. AML/CFT Directive, 2022 also states that the insurers should conduct a periodic review of its risk assessment guided by its annual working plan to test the effectiveness of the compliance regime. Each insures have to apply their own guidelines for AML/CFT issues. Mandatory provisions for KYC, CDD, EDD, reporting, and record-keeping are some of the tools for reducing the ML/FT risk in the insurance regime. Nepal Insurance Authority has issued a circular regarding the rules and regulations to control the ML/PF/TF as follows: a. In case of beneficiary/nominee insurance policy, it is mandatory to provide her/his identity document (citizenship or any other identity documents issued by government agency. b. The beneficiary/nominee in the insurance policy, should mentioned whether they have relationship with/without political exposed person (PEPs). c. If the life insurance policy is issued with more than twenty-five lakh insurance, it is mandatory to take the document revealing the relationship with the desired person. d. While appointing the insurer\'s promotors and executive head, the examination of Fit and Proper Test and Police Clearance Report is mandatory. e. Need approval of the Authority in respect of founder share transactions of more than one percent, a police report of the buyer should be submitted. f. Insurance companies should increase the number of training/orientation related with AML/CFT to their employees and agents. ### **2.2.4 Financial Intelligence Unit Guidelines** The Financial Intelligence Unit (FIU) is an independent unit responsible for analyzing, disseminating, and receiving ML/FT-related data and suspicious data.. The details regarding the transactions, preliminary analysis, reporting, and new updates are made by the FIU Nepal and also authorized to inspect transactions of non-financial institutions, banks, financial institutions, and government entities. FIU has issued three guidelines for controlling fraudulent activities in Nepal. They are: 1. Suspicious Transaction Reporting (STR) and Suspicious Activity Reporting (SAR) Guidelines 2. Guidelines for Threshold Transactions Reporting (TTR) 3. Guidelines for Suspicious Transactions Reporting (STR) 1. #### **STR and SAR Guidelines** The guidelines provide the reporting entities with have right to report all the suspicious activities and transactions with a proper clarification about the doubtful transactions and activities. The purpose of the guideline is to create information on signs of suspicious activities/transactions and notify reporting entities that help to provide information to FIU-Nepal. There are various signs to detect suspicious activities by filing and recognizing SAR/STRs to prevent terrorist financing, proliferation, and money laundering. The reporting entity should recognize the indicators or red flags of STR/SAR. One or more signs are not evidence of criminal activities but they can be regarded as suspicion. The multiple indicators are a warning sign for the criminal. The indicators for the insurance sector are as follows:  For general indicators and indicators related to laws are in the **Appendix 4** #### **2.2.4.2 Guidelines for TTR** This document outlines the guidelines of Threshold Transactions Reporting (TTR). All the reporting entities provide information to FIU- Nepal related to deposits, withdrawals, or any other payment or transfer that exceeds the prescribed threshold limit stated in this document. The TTR is essential for future records of the customers/client profile that helps investigators to map the transaction of the criminals and assist in adding value to financial intelligence. The reporting entities should report the threshold transaction amount within 15 days from the date of the transaction to FIU-Nepal. For threshold limit please see **Appendix 5**. #### **2.2.4.3 Guidelines for STR** The document outlines the guidelines for suspicious transaction reporting. The Compliance Officer of the reporting entity should report the suspicious transaction within three days as soon as possible to the FIU Nepal in the following case **(Appendix 6)**. The red flags are also known as indicators. The indicator of the suspicious transactions is stated in the document. The purchase of several insurance products in cash in a short period or at the same time with premium payment entirely in a large amount and followed by policy surrender before the due date. Suspicious Activity Reporting (SAR): it is also mandatory for the insurance company to report suspicious activities relating to a financial transaction or an attempted transaction. Sometime people with wrong intention may try to conduct transaction but whenever they know that the employee of insurance company has a suspicion or asking too many questions about the purpose of their transaction, they may abort the transaction and go away. At such time, the information provided by the insurance company may be a good reference to further investigate or correlated with other transactions. ### **2.2.5 Other Circulars issued by competent authorities** There are various competent authorities other than the regulatory frameworks and primary legislation that occasionally issue guidelines and circulars to develop the effectiveness of AML/CFT measures relevant to the insurance sector. 1. **The Ministry of Finance** - occasionally provides directives related to financial crime prevention that can impact the insurance sector. 2. **Department of Money Laundering Investigation (DMLI)** - notices regarding the investigation procedures for suspicious cases. 3. **The Securities Board of Nepal** - provides circulars related to investment-linked products for suspicious alerts. 4. **Office of Company Registrar** - notifies on the updates on beneficial ownership or companies registration procedures for customer due diligence requirements. 5. **International Sanctions circulars** - for implementation of sanctions. 6. **Nepal Rastra Bank** -- related with latest updates and circulars 7. **FIU-Nepal** -- related with threshold reporting 8. **Nepal Insurance Authority** -- related with national risk assessments These circulars provide clarifications, new requirements, or updates to adhere by the insurance sector to ensure that insurance companies understand their obligations, enhance training programs, and new typologies, emphasize the importance of information sharing and cooperation between regulators, law enforcement, and financial institutions, and highlights penalties for violations. Therefore, insurance companies should be up-to-date with circulars for maintaining compliance with the AML/CFT regulatory landscape.