Financial Action Task Force (FATF)

What is the Financial Action Task Force?

The Financial Action Task Force (FATF) is a multilateral organization that develops and advocates for laws and regulations to combat financial crime. Money laundering, terrorist funding, and other risks to the international financial system are the focus of the Financial Action Task Force (FATF) recommendations. The FATF has its headquarters in Paris and was established in 1989 at the request of the G7.

To combat money laundering, terrorist financing, and other risks to the integrity of the global financial system, FATF aims to define standards and encourage the effective implementation of statutory, regulatory, and operational measures. As a "policy-making body", FATF aims to create the political will required to bring these national legal and regulatory reforms. FATF uses "peer reviews" (also known as "mutual assessments") of member nations to track the implementation of its recommendations.

The FATF blacklist (formerly known as the "call for action") and the FATF greylist (officially called "other monitored jurisdictions") have been maintained by FATF since 2000. Financial institutions have started to divert services and resources away from the names listed on the blacklist. This has prompted domestic business and political figures in the nations on the list to pressure their governments to implement FATF-compliant policies.

The concept behind the Financial Action Task Force

Financial crimes like money laundering have increased due to the global economy and commerce expansion. The Financial Action Task Force (FATF) examines member policies and practices, offers suggestions for preventing financial crime, and works to spread awareness of anti-money laundering laws worldwide. The FATF must revise its guidelines every few years because those who engage in money laundering and other illegal activities change their methods to escape from detection.

In 2001, a list of suggestions for preventing the funding of terrorism was included. In the later revised list, released in 2012, the suggestions were broadened to include financing the spread of WMDs (weapons of mass destruction) as a new concern. Additionally, suggestions were made to make transparency and corruption more explicit.

History of the Financial Action Task Force

The FATF was established in 1989 at the G7 Summit in Paris to fight the rising challenge of money laundering. The task group researched money laundering trends, kept tabs on national and international legislative, financial, and law enforcement initiatives, reporting on compliance, and developed guidelines and recommendations to combat money laundering. FATF was founded with 16 members, and by 2021, that number had increased to 39. FATF published a report in its first year with 40 suggestions for improving the fight against money laundering. To reflect changing money laundering trends and methods, these requirements were updated in 2003.

Following the September 11th terror attacks, the organization expanded its scope to cover terrorist financing in 2001.

FATF Recommendations

Creation and Ongoing Maintenance

Together, the Eight (formerly Nine) Special Recommendations on Terrorist activity Funding and the Forty Recommendations on Money Laundering established the global standard for anti-money laundering policies and the fight against the financing of terrorism and terrorist actions. They lay out the guiding principles for action and provide nations with some latitude in how they put these principles into practice based on their unique situations and constitutional frameworks. Both sets of FATF recommendations are meant to be implemented at the federal level through laws and other enforceable regulations. AML/CFT Policies and Management, Money Laundering and Seizure of property, Terrorist Funding, and Financial Proliferation are only a few groups that organize the recommendations.

The FATF consolidated its recommendations and Interpretation Notes into a single document in February 2012, which keeps SR VIII (now known as Recommendation 8), as well as additional regulations on WMD, corruption, and wire transfers (Recommendation 16, often known as the "travel rule").

The FATF published its initial guidelines on the risk-based strategy for virtual assets and service providers in June 2019. This guideline suggests how member states should regulate cryptocurrency firms, including imposing requirements on virtual assets (Vas) and virtual asset service providers (VASPs) about AML/CFT. Additionally, it included VASPs to Recommendation 16.

Forty Recommendations on Money Laundering

The FATF's Nine Special Recommendations (SR) on Financing of Terrorism and its Forty Recommendations on Money Laundering from 1990 are its main directives. The recommendations are widely regarded as the gold standard for anti-money laundering, and several nations have committed to implementing all forty of them. The criminal justice system, law enforcement, international cooperation, and the financial sector and its regulation are all addressed in the recommendations. In 1996 and 2003, the FATF entirely rewrote the forty recommendations. By 1996, it was necessary to amend the recommendations to take into account more than simply drug-related money laundering and to stay up with emerging practices.

Compliance Mechanism

The FATF issued a Reference Paper, Methodology for Assessing Compliance with the FATF 40 Recommendations and the FATF 9 Special Recommendations, in February 2004 (Updated as of February 2009). How to determine whether participating countries meet FATF requirements is set out in the 2009 Handbook for Nations and Assessors. Based on its assessment methodology, the FATF rates a nation's performance in terms of the following:

1. Technical compliance that addresses the legal and institutional framework as well as the authority and processes of the relevant authorities; and
2. Effectiveness assessment that examines the degree to which the legislative and judicial framework yields the desired results.

Different nations' legal and financial systems vary greatly, and the FATF has considered these variances accordingly. For each country's unique circumstance, minimal measures must be taken to achieve the criterion. This standard includes all activities a country should take in the context of its regulatory and criminal justice systems and the precautions certain enterprises, professions, and organizations should take.

The Basel AML Index, a tool established by the Basel Institute on Governance to measure the risk of money laundering and terrorist financing, uses FATF data as a primary indication of the effectiveness of AML/CFT systems.

In sectors that might provide lucrative possibilities for international criminal and terrorist networks, there are still problems with compliance. The increased likelihood of money laundering and terrorism funding, as well as waste brought on by the adoption of ineffective regulatory measures, can all negatively affect a nation's national security. The goal is to increase mitigation techniques to free up limited resources for threats from money laundering and terrorism funding.

Members of the Financial Action Task Force

The Financial Action Task Force had 39 members as of 2021, including the World Bank and the United Nations. A nation must meet certain criteria before it can join, including being a member of other significant international organizations, having a big population, a high GDP, an established banking and insurance industry, etc.

A nation or organization must agree to be reviewed by (and evaluated by) other members, support the most current FATF recommendations, and cooperate with the FATF in creating upcoming recommendations to become a member.

Many multinational organizations also participate in the FATF as observers, each involved in anti-money laundering efforts, such as Interpol, the World Bank, the International Monetary Fund (IMF), and the Organization for Economic Cooperation and Development (OECD).

Implications of FATF

To stop illegal money flows, the FATF has been praised for its success in influencing laws and regulations. Through its public non-compliant list, FATF encourages harsher rules, which causes financial firms to divert support and information away from the nations on the blacklist. This prompts domestic business and political figures in the nations on the list to pressure their governments to enact FATF-compliant legislation.

The FATF Blacklist has had a considerable impact and, perhaps, has been more crucial to global efforts to combat money laundering than the FATF Recommendations. Even while there isn't a specific penalty associated with the FATF Blacklist in terms of international law, countries that are included in it frequently deal with severe financial pressure.

Due to the tight FATF requirements, it is now challenging for non-governmental organizations (NGOs) in nations to acquire cash to help in crises. The FATF standards have mostly affected NGOs in Middle Eastern and terror-prone nations. Some claim that because NGOs are not directly subject to the FATF Recommendations, they frequently violate such recommendations.

Ronald Pol claims in a report from 2020 that although the FATF has been quite successful in getting its rules implemented globally, the actual impact of such regulations is rather minimal: Pol's calculations place the number of unlawful earnings that are recovered at less than 1%, with the expenses of executing the policies being at least a hundred times more. According to Pol, industry and governments often disregard this and evaluate initiatives using irrelevant success criteria.