Advisory on the Proper Application of the Risk-Based Approach on Filipinos Following the Inclusion of the Philippines in the Financial Action Task Force (FATF) List of Jurisdictions under Increased Monitoring or Grey List

075 MEMORANDUM NO. M-2021-__ OFFICE OF THE DEPUTY GOVERNOR FINANCIAL SUPERVISION SECTOR To : All BSP-Supervised Financial Institutions (BSFIs) Subject : Advisory on the Proper Application of the Risk-Based Approach on Filipinos Following the Inclusion of the Philippines in the Financial Action Task Force (FATF) List of Jurisdictions under Increased Monitoring or Grey List This is to disseminate the attached Advisory of the National Anti-Money Laundering and Countering the Financing of Terrorism Coordinating Committee (NACC)1 on the application of the risk-based approach on Filipinos after the inclusion of the Philippines in the FATF List of Jurisdiction Under Increased Monitoring or Grey List. The FATF gave the Philippines until January 2023 to address all its identified strategic deficiencies. The FATF statement clarifies that the FATF does not call for the application of enhanced due diligence (EDD) measures to be applied to those jurisdictions included in the grey list but only encourages its members and all jurisdictions to account the information presented in the FATF website in their risk analysis.2 Despite the clear pronouncement of the FATF, there were reports that Philippine-related transactions have been subjected to more scrutiny, or worse, de-risking. These are clear cases of over compliance and disproportionate application of FATF Recommendation 193 measures against grey-listed countries, their citizens, and businesses. Moreover, this is not in line and inconsistent with FATF’s expectations on the application of risk-based approach, which is central to the effective implementation of the FATF Standards. In the statement, FATF clarifies risk-based approach: case-by-case, not wholesale de-risking, dated 23 October 2014,4 “de-risking”5 should never be an excuse for a bank to avoid implementing a risk-based approach, in line with the 1 NACC Resolution No. 03, Series of 2021; http://www.amlc.gov.ph/images/PDFs/NACC%20Statement%20on%20the%20Impact%20of%20Grey%20Listing. pdf 2 https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased- monitoring-june-2021.html 3 FATF Recommendation 19 provides that for higher-risk countries, financial institutions should be required to apply EDD measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries for which this is called for by the FATF. The type of EDD measures applied should be effective and proportionate to the risks. Countries should be able to apply appropriate countermeasures when called upon to do so by the FATF. Countries should also be able to apply countermeasures independently of any call by the FATF to do so. Such countermeasures should be effective and proportionate to the risks (underscoring applied). 4 https://www.fatf-gafi.org/documents/documents/rba-and-de-risking.html 5 De-risking refers to the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF’s risk-based approach (FATF Plenary, 22 October 2014; Ibid.).

FATF standards. The FATF Recommendations only require financial institutions to terminate customer relationships, on a case-to-case basis, where the money laundering and terrorist financing risks cannot be mitigated. Hence, in the case of Philippine-related transactions, the obligation of financial institutions is to conduct customer due diligence in accordance with the AMLA, as amended. The NACC Advisory likewise emphasized that Section 8.16, Rule 19 of the 2018 Implementing Rules and Regulations (IRR) of the AMLA, as amended, does not apply to Philippine covered persons and foreign covered persons conducting business in the Philippines. Covered persons should not apply EDD, or any form of countermeasure against Filipino businesses or nationals by reason only of jurisdictional/country risks arising from the grey list. Therefore, Filipino businesses or nationals should not be considered as high risk based solely on the inclusion of the Philippines in the FATF’s list of “Jurisdiction Under Increased Monitoring”. Government agencies and covered persons, including BSFIs, are also enjoined to provide assistance to the Anti-Money Laundering Council (AMLC) by reporting incidents of de-risking, changes in correspondent banking relationships, EDD or special measures imposed on Philippine-related accounts, or imposition of any countermeasures, as a result of the inclusion of the Philippines in the FATF Grey List. Accordingly, BSFIs are enjoined to (i) continue observing the risk-based approach in conducting customer due diligence as provided under Section 9, Rule 18 of the 2018 IRR of the AMLA, as amended, and (ii) report to the BSP, through the Financial System Integrity Department, and to the AMLC, any instances of de-risking and other observed effects of the grey listing. For information and strict compliance. Digitally signed by Chuchi G. Fonacier Date: 2021.12.31 16:54:50 +08'00' CHUCHI G. FONACIER Deputy Governor 31 December 2021 __ 6 Sec 8.1, Rule 19, 2018 IRR - High Risk Jurisdiction or Geographical Location. Covered persons shall apply EDD, proportionate to the risks, to accounts, transactions, and business and professional relationships with customers who are nationals or citizens from foreign jurisdiction or geographical location that presents greater risk for ML/TF or its associated unlawful activities, or is recognized as having inadequate internationally accepted AML/CFT standards, as determined by the relevant domestic or international bodies such as the FATF and the FATF-Style Regional bodies.