What Nodar Khaduri Is Not Saying

Ana Iashvili

Conflict of interests

The issue of transferring the Financial Monitoring Service of Georgia, the entity responsible for investigating illegally obtained income and money laundering, from under the management of the National Bank of Georgia to the Ministry of Finance has recently become a topic for debate. Davit Onoprishvili, a majority MP and Head of the Parliamentary Budget Committee, envisaged such a transfer of responsibility when he initiated amendments to the Law on the Legalization of Illicit Income. Since then, at every public appearance made by Finance Minister Nodar Khaduri questions have been asked about this draft law by at least one reporter. The proposed amendments essentially change the institutional structure of the financial monitoring service currently operating in Georgia.

A large portion of the amendments concern the issue of locating the financial monitoring service under the governance of the finance ministry; drawing up and approving an annual budget for the service; rules for hiring and firing the head of the service; and entrusting the power for determining the number of personnel and the size of their wages to the prime minister.

The above mentioned changes will put the levers for determining the policy and funding of the financial monitoring service into the hands of the executive branch – the finance ministry (and not an independent entity). Without the prior consent of the finance minister, the financial monitoring service will be unable to either appoint a head of the service or determine its annual budget to perform its functions independently.

As the author of the draft law explained within that document, these amendments are aimed at ensuring the efficiency of the financial monitoring service. However, Davit Onoprishvili has said nothing about what, in his opinion, impede the independent and effective implementation of the current service's functions.

Moreover, the draft law does not mention a single international organization, for example, the International Monetary Fund (IMF), the Financial Action Task Force (FATF), Moneyval or the Egmont Group, as having questioned the efficiency of the financial monitoring service in their various reports. It is worth noting that the evaluation reports concerning Georgia of 2007 and 2012 from the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (Moneyval), which were drawn up based on IMF standards, did not contain a negative assessment of the operations of the financial monitoring service.

Standards of the international organizations

The methodology for establishing and determining the rules for the operations of the financial monitoring service – or, as it is generally known, the financial intelligence unit – are drawn up by the inter-governmental Financial Action Task Force. The FATF adopts principles and methods in the form of recommendations that countries must consider when establishing financial monitoring services and in the subsequent stages of their operations. The recommendations made by the FATF are, in fact, international standards and the incorporation of these standards into national legislation positively affects the international financial image of a country.

According to international standards and FATF recommendation 29D, a state must adopt laws that ensure the confidentiality of the information obtained, handled and stored by the financial monitoring service and obey the rules governing such information. Moreover, the state must ensure a strictly limited access to the facilities and information technology systems of the financial monitoring service to ensure the maximum protection of the confidentiality of information.

One of main functions of the financial monitoring service is to keep information confidential. The need for security and stability of banking sector information is an internationally acknowledged protected good associated with the observance of human rights and the facilitation of economic growth in a country.

According to FATF recommendations 29E and 29F, a financial monitoring service must be independent and autonomous in order to:

  • Be able to take decisions free from any undue influence from other state or non-state interest groups when initiating investigations into money laundering, terrorism and other crimes, as well as when requesting information from different bodies about various financial operations and legal entities.
  • Improve the practice of monitoring by cooperating with the financial monitoring services of other countries and international organizations. In the event that the service is located within the existing structure of another authority, the service must have distinct core functions and powers from that other authority so as not to compromise the political and financial independence of the service.
  • Be able to carry out financial monitoring independently of state or other authorities, and to plan the budget of the service independently, free from the influence of other authorities. At the same time, the law must prohibit any political, government or industry influence on the planning and expenditure of the annual budget of the financial monitoring service.

In a number of West European countries, financial monitoring services operate jointly with other investigative services or are located within a government authority. However, such different arrangements have no adverse effects on the independence and efficiency of the services in these developed countries because they benefit from institutional traditions that have been formed over decades. Such traditions contribute to the independence and efficiency of their financial monitoring services. These institutional traditions, first and foremost, imply a long-time practice of public administration in which courts and civil society, in a joint effort, establish the principles of professional independence, equality and collaboration. Consequently, the risk that a finance ministry will try to influence the policy and functions of a financial monitoring service is greatly lessened in such developed countries, as compared to the situation in developing countries where such traditions are only beginning to be established.

When it concerns developing countries with undeveloped institutional traditions, the requirements for the independence and autonomy of financial monitoring services are necessarily tougher. In Georgia's neighboring countries – Azerbaijan and Armenia – as well as in Eastern European countries, financial monitoring services have been created and operate under the national banks. This contributes to the independence and autonomy of the services; because, in contrast to a finance ministry, a national bank is an entity independent of state politics that has its own aims and functions that essentially differ from those of a financial monitoring service. Consequently, it thought that national banks are less interested in interfering with, or influencing, the political and financial independence of financial monitoring services.

According to the above mentioned FATF recommendations, when establishing a financial monitoring service, a state must ensure the adoption of such laws that will guarantee that the financial monitoring service protects confidential information; that the service is structurally independent of the state authority within which it is located; that the service has financial independence in the form of its own budget; and, most importantly, that the service is independent and autonomous, capable of carrying out its functions free from any undue political, government or industry influence or interference.

The draft law initiated by the majority MP Davit Onoprishvili does not conform to this internationally acknowledged practice as established in the world's leading countries. According to the draft law, the currently independent and autonomous financial monitoring service of Georgia will be placed under the governance of an interested authority – the finance ministry.

If the draft law is executed, the protection of the secret and confidential information of the banking system, a prerequisite for the stability of the financial market and system, will be jeopardized. The finance ministry, as an entity interested in financial institutions and tax policy, will have more legal levers to influence and interfere with the operations of the financial monitoring service by means of planning its policy and budget. In particular, according to legislative amendments, upon the submission of the finance minister alone, rather than from an independent body – the council of the national bank – the prime minister will:

  • Appoint the head of the financial monitoring service;
  • Determine the budget of the financial monitoring service;
  • Subordinate the financial monitoring service to the finance ministry;
  • Approve the personnel and payroll of the financial monitoring service.

These legislative amendments bear the risk that – when the current head of the financial monitoring service is replaced and its budget is approved by, and the service subordinated to, the finance ministry – the service will not longer have the institutional and financial independence and autonomy to take decisions and carry out its functions free from undue influence or interference from political and interest groups. Consequently, the initiated draft law clearly conflicts with the international practice and established standards.

A new head of the financial monitoring service as appointed by the prime minister in agreement with the finance minister, as the initiated amendments envisage, will be legally obliged to take into account the position of the finance ministry on a number of issues. The amendments explicitly state that the service will not be an independently operating body, but an entity under the governance of the finance ministry, which will determine the budget and personnel of the service. Consequently, the general provision of the law requiring the independence of the financial monitoring service will acquire only a symbolic meaning.

Even more, there is no ground for adopting the draft law. Even though the current financial monitoring service is an independent body, both structurally and financially, it is not equipped with unlimited discretion and freedom. According to the existing law, the financial monitoring service is accountable (but not subordinated) to the government of Georgia (since the October 2013 presidential elections – it was previously accountable to the President of Georgia) and is required to submit annual reports on the activities it has performed and its future plans.

The currently existing institutional form of the financial monitoring service meets the standard of being independent from the undue influence of political, financial and other interest groups, as well as the necessary standards of efficiency. The service has also actively cooperated with international organizations, including FATF, Moneyval, and the Egmont Group, and with the relevant services of various other countries.


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