What is the Financial Action Task Force (FATF)?

The Financial Action Task Force is an intergovernmental organization that sets standards and promotes policies to combat financial crime. Thirty-eight countries are members along with associate members and observers. Members evaluate each other to ensure a coordinated response to fighting financial crime. The FATF stays on top of changing financial crime trends and regularly updates its recommendations accordingly so countries can effectively protect their financial systems.

Introduction

As the world has become more interconnected and financial systems have facilitated international trade and economic growth, those same systems have also become vulnerable to financial crime. From money laundering to terrorism financing to trafficking, illicit activities run rampant across the globe and – thanks to technological advancements – extend across borders.

In 1989, concerns over the rise of financial crime and money laundering in particular led the G7 to finally tackle the issue head on, and they created the Financial Action Task Force (FATF).

What is the FATF and why is it important to global AML efforts? Let’s jump in.

The FATF: What It Is and How It Works

The FATF is an intergovernmental organization that sets standards and promotes policies to combat financial crime. Since its creation at the 1989 G7 Summit in Paris, its scope has extended beyond preventing money laundering to also working to stop terrorism financing and proliferation. Thirty-eight countries are members of the FATF (there were 39 until Russia’s membership was suspended in February 2023), and there are a number of associate members and observers.

What are FATF Recommendations?

Recommendations are the standards that the FATF sets that FATF members must implement to ensure a coordinated, global response to fighting financial crime. These are updated regularly to stay on top of changing methods and technologies that criminals use to try and avoid detection.

The FATF recognizes that every country operates within its own unique set of laws and uses different financial systems, so their Recommendations are designed to set an international standard that countries can implement within their own operational frameworks.

How does the FATF ensure members remain compliant?

Members must commit to being evaluated to ensure they’re correctly implementing the FATF’s standards. These are called mutual evaluations.

Mutual evaluations are conducted by peers – members evaluating other members. They provide an in-depth analysis of a country’s AML and counter-terrorism financing systems, as well as recommendations for how to improve in any areas in which a country is lacking.

The country being assessed must demonstrate that the processes and policies it has in place to combat financial crime are effective and protect its financial systems from abuse. Efficacy looks different from one country to the next, depending on what risks it’s exposed to (i.e. a high risk of terrorism financing).

What happens if a member isn’t compliant?

The FATF maintains lists of member and non-member countries with weak AML or counter-terrorism financing measures. These are called High-Risk Jurisdictions Subject to a Call for Action and Jurisdictions Under Increased Monitoring, or the black list and gray list, respectively.

• Black list: High-risk countries or jurisdictions that have serious deficiencies in their AML, counter-terrorism financing, or anti-proliferation methods. The FATF will call on all of its members and even non-member countries to push for blacklisted countries/jurisdictions to make substantial changes to protect their financial systems from facilitating financial crime.
• Gray list: Countries that are actively working with the FATF to address the weaknesses in their AML, counter-terrorism, or anti-proliferation methods. The country has agreed to implement strategies to resolve these issues within a certain time frame and is subject to increased monitoring.

As of February 2023, the FATF reviewed 125 countries and publicly identified 98 of them. Of the 98, 72 implemented processes to address their issues and were removed from the lists.

Staying on Top of Changing Trends

As compliance professionals know all too well, financial criminals are constantly developing new schemes. The FATF is aware of this and works to stay abreast of emerging trends in money laundering, terrorism financing, and proliferation. Examples of trends the FATF is currently researching include:

• Risks of money laundering and terrorism financing arising from the increase of migrant smuggling
• Money laundering stemming from environmental crime, such as wildlife smuggling and illegal logging
• Cryptocurrency-related crime, or “virtual assets”

When the FATF updates their Recommendations every few years, they take into account these changing trends and provide guidance on steps countries can take to protect their financial systems from getting caught up in related schemes. Being proactive is more effective than being reactive, and the FATF works to help countries stop financial crime before it happens.

Wrap Up

While the FATF creates the global standards that will help countries and jurisdictions effectively fight money laundering, terrorism financing, and proliferation financing, it’s up to the countries and jurisdictions themselves to implement them. While the FATF’s black and gray lists have been effective in spurring countries to action, there are many other countries that have been on those lists for years and have done nothing to address the serious risks they face in facilitating financial crime. It’s up to governments – and the compliance professionals within them – to take the steps necessary to create and enforce policies and processes that will stop financial criminals from abusing their countries’ financial systems.