New Draft Law on Combating Terrorism Financing and Legalization (Laundering) of Proceeds of Crime is Adopted in the First Reading

Pursuant to clause 3(5) of Resolution No.1 on Urgent Measures for Combating Corruption in Judicial, Supervisory and Law Enforcement Authorities of the Kyrgyz Republic passed by the Kyrgyz Security Council on February 8, 2018, the State Financial Intelligence Service under the Government of the Kyrgyz Republic drafted new Law on Combating Terrorism Financing and Legalization (Laundering) of Proceeds of Crime (AML/CFT Law).

This draft law has been developed, inter alia, for implementing the international standards set out in the following international conventions acceded by the Kyrgyz Republic:

1) International Convention for the Suppression of the Financing of Terrorism of December 9, 1999;
2) UN Convention against Transnational Organized Crime of November 15, 2000;
3) UN Convention against Corruption of December 10, 2003.

The new law drafting process involved elimination of inaccuracies and refinement of the provisions of the existing Law (more than 70% of weaknesses have been identified). Besides that, the new draft law was developed with due consideration for the FATF 40 Recommendations adopted in 2012, which are the international standards for combating money laundering, terrorist financing and financing of proliferation of weapons of mass destruction recognized and observed by over 190 jurisdictions across the globe.
Under the international agreement, the Kyrgyz Republic, being the EAG member-country, is obliged to take active steps for development and application of the anti-money laundering and counter- terrorist financing legislation in line with the international standards and take part in the mutual evaluation programs.

Following the assessment conducted under the first round of the EAG mutual evaluations in 2007, the Kyrgyz Republic received low ratings, was placed in the EAG enhanced follow-up process and was included in the FATF “grey list”. As a result of the joint efforts, the Kyrgyz Republic was removed from the FATF “grey list” in 2014.

In 2017, the assessors of the Eurasian Group on Combating Money Laundering and Terrorist Financing conducted new mutual evaluation of the Kyrgyz AML/CFT system and prepared the relevant report. Due to inconsistency of the Kyrgyz legislation with the FATF Recommendations, the Kyrgyz Republic received low ratings of compliance with 13 of 40 Recommendations.

In this context, the Kyrgyz Republic was once again placed in the EAG enhanced follow-up process and has one year to eliminate the revealed deficiencies and demonstrate substantial progress.
As early as next year, the Kyrgyz Republic has to provide the follow-up report to the 30th EAG Plenary Meeting which will decide whether or not Kyrgyzstan should be included in the FATF list of high-risk countries (sanctioned countries list).
Failure to adopt the draft law will entail a range of undesirable consequences and implications for the Kyrgyz Republic, in particular:

- The Kyrgyz Republic will be indicated as the high-risk country that does not comply with the international standards, which will affect the image (reputation) and investment attractiveness of the country;
- Various sanctions, including financial ones, will be imposed against the Kyrgyz Republic, which will affect the financial and economic relationships of Kyrgyzstan with its foreign partners;
- International financial institutions will refuse to cooperate with the Kyrgyz financial institutions, which will result in decrease of incoming and outgoing flows of funds, reduction of profits of financial institutions and, hence, decline in tax/ budget revenues of the Kyrgyz Republic;
- The cost of the wire transfer services provided by banks will rise, and the operation of the banking system of the Kyrgyz Republic will impeded as a result of termination of direct correspondent relationships with foreign banks;
- The volume of incoming remittances sent by the Kyrgyz nationals from abroad to the Kyrgyz Republic will decline;
- The size of the shadow economy in the Kyrgyz Republic will grow.

Meanwhile, the new draft law contains a range of new provisions that are consistent with the international standards and regulations. In particular, the new draft law:

1) Defines the specific participants of the AML/CFT system, their objectives, powers and the interaction procedures;
2) Defines the process of assessment of risks posed by financing of terrorist activity and legalization (laundering) of criminal proceeds conducted at the national level, which is the key recommendation set forth in the international standards;
3) Establishes the procedure of compilation and application of the sanction list and the procedure of imposition of targeted financial sanctions against designated persons, groups and organizations with due consideration for the rights and freedoms of individuals and citizens;
4) Establishes the procedure of collection and publication of relevant information on beneficial owners of legal entities created and registered in the territory of the Kyrgyz Republic for ensuring transparency of legal entities and preventing criminals or their associates from holding, or being the beneficial owners, of a significant or controlling interest in legal entities;
5) Recommends to assess risks in the sector of non-profit organizations (NPO) and conduct outreach to NPOs in order to prevent their misuse for financing of terrorist and extremist activities;
6) Specifies situations and measures for conducting customer due diligence (identification and verification) with the application of the risk-based approach, and extends the CDD requirements to the national politically exposed persons for implementing the UN Convention against Corruption;
7) Defines 4 of 14 types of transactions that are subject to monitoring and reporting;
8) Establishes the procedure of effecting international and domestic wire transfers for combating and preventing terrorist and extremist financing;
9) Specifies regulations for establishing and developing international AML/CFT cooperation;

Besides that, the new draft law introduces such new concepts as “financial institutions and designated categories of persons”, “risk-based approach”, “customer due diligence” and “domestic politically exposed persons”.
In general, the daft law is intended for eliminating the existing deficiencies in the Kyrgyz legislation and achieving positive results in the fight against financing of terrorist and extremist activities, money laundering and corruption offences.

State Financial Intelligence Service under the Government of the Kyrgyz Republic