The Financial Action Task Force (FATF), established in 1989, is the global money laundering and terrorist financing watchdog that sets international standards that aim to prevent illegal activities and the harm they cause to society.
At the recent virtual G20 Summit in November 2020, the G20 leaders reaffirmed their support for the FATF as the global standard-setting body to prevent money laundering, terrorist financing and proliferation financing, especially with the ongoing increase of illicit activity during Covid-19.
According to the FATF, “the crisis has severely impacted the ability of some governments and the private sector to detect, prevent and investigate money laundering and terrorist financing.”
To this end, the FATF continues to evaluate countries around the globe, even in politically challenging areas, to ensure that governments are fully and effectively implementing their standards.
FATF Mutual Evaluations
FATF mutual evaluations, which are peer-reviewed by members of another country, provide an in-depth country report that analyses the implementation and effectiveness of measures required to combat money laundering and terrorist financing. The results of these evaluations determine whether a country gets on the grey or black list.
- FATF Blacklists: Officially known as Non-Cooperative Countries or Territories (NCCTs), it includes countries that are considered deficient in their anti-money laundering and counter-financing of terrorism regulatory regimes. These countries are highly likely to be subject to economic sanctions and other prohibitive measures by FATF member-states and other international organisations. The first FATF blacklist was issued in 2000 with an initial list of 15 countries but presently only Iran (wef 2008) and North Korea (wef 2010) are in the FATF Blacklist.
- FATF Greylists: Officially known as: Jurisdictions Under Increased Monitoring, it includes countries that represent a much higher risk of money laundering and terrorism financing but have formally committed to working with the FATF to develop action plans that will address their AML/CFT deficiencies. The inclusion in this list is not as severe as inclusion in the blacklist and is generally considered a precursor to sanctions and blacklisting. Presently, there are a total of 18 countries in this list.
The assessment is not limited to the FATF members, and the current cycle includes evaluations for more than 100 countries. Mutual Evaluations have two basic components, effectiveness, and technical compliance.
Below are the seven sections of the 40 FATF recommendations:
- AML/CFT Policies and Coordination (R01 – R02)
- Money Laundering and Confiscation (R03 – R04)
- Terrorist Financing and Financing of Proliferation (R05 – R08)
- Preventive Measures (R09 – R23)
- Transparency and Beneficial Ownership of Legal Persons and Arrangements (R24 – R25)
- Powers and Responsibilities of Competent Authorities and other Institutional Measures (R26 – R35)
- International Cooperation (R36 – R40)
Together, the assessments of both technical compliance and effectiveness present an integrated analysis of the extent to which the country is compliant with the FATF standards. They also indicate how successful the country is in maintaining a strong AML/CTF system as required by the FATF Recommendations and strengthening the country’s system by preventing criminal abuse of the financial systems. The assessment calendar can be viewed here.
As an example, Iceland has been in an enhanced follow-up process following the adoption of its mutual evaluation in 2018, and was recently removed from FAFT’s greylist in September 2020 after the country took a number of actions to strengthen its framework. However, some deficiencies remain, and Iceland will continue to report back on its progress.
A complete mutual evaluation takes up to 18 months and includes 10 stages, beginning with assessor and country training through to final quality review and follow up.
The three “dimensions” underpinning the 11 immediate outcomes are:
- Policy, coordination and cooperation (outcomes 1 & 2)
- Proceeds of crime and funds in support of terrorism are prevented from entering the financial and other sectors or are detected and reported by these sectors (outcomes 3 to 5)
- Money laundering threats are detected and disrupted, and criminals are sanctioned and deprived of illicit proceeds. Terrorist financing threats are detected and disrupted, terrorists are deprived of resources, and those who finance terrorism are sanctioned, thereby contributing to the prevention of terrorist acts (outcomes 6 to 11)
The slippery slope of being added to an Increased Monitoring list?
Considered an active instrument of modern-day foreign policies, being included on the greylist or blacklist can have a detrimental effect on an economy. These actions usually have a varying impact across the jurisdiction and will be felt on a long-term basis. The impact may also vary depending on the reasons for inclusion. For example, if terrorist financing is a reason, the impact will be more severe, leading to
- Economic sanctions from the IMF, World Bank and ADB making it problematic in securing these organizations and other countries
- Reduction in international trade / investment / aid / foreign currency inflows
- De-risking of FIs in the region from global counterparties and the reduction of trust in the country’s financial institutions
- Delay in payments, impacting supply chains and trade
- Increase in cost of cross-border transactions
- Sovereign credit & business ratings being downgraded by rating agencies
- Restrictions on nesting/downstream correspondent banking relationships
Coincidentally, when a country is put under increased monitoring, illegal channels of moving money may rise and money laundering increases because the formal/regulated financial system is cut off gradually by the world and correspondent relationships.
High-risk countries and regions – leverage risk-based approach and regtech
It is important to understand the country risk while doing business internationally. Customers from any of these places, and transactions to or from these places, require careful monitoring. Institutions should have risk-based systems and controls/systems in place for these customers and transactions.
There are several AML country lists (notably the latest EU Commission list of high-risk third countries) that are used in day-to-day risk assessment by global financial institutions (FIs) to implement their risk-based approach (RBA), such as to decide whether to continue a relationship, apply Enhanced Due Diligence (EDD) measures or file Suspicious Transaction Reports (STR) as needed.
Regulators and international AML bodies will continue to encourage improvements, especially as international banks ramp up pressure on correspondent networks to improve and automate financial crime prevention processes.
Digitised data and automated financial crime screening have become the accepted best practice in the international fight against money laundering and financial crime. It is these tools that will help organisations complete rapid and effective screening against comprehensive and up-to-date databases, without delaying the customer journey, while maintaining the organisation’s credibility in the financial ecosystem.