What is FATF?
When we think of FATF (Financial Action Task Force), some compliance professionals or members of governmental bodies may experience a feeling similar to going to the dentist—preparing for a painful interaction involving a detailed look at a sometimes not-so-simple or pain-free issue.
FATF initially took shape after being established by the G7 back in 1989 to examine and develop measures to combat money laundering. It originally included the G7 countries, the European Commission, and eight other countries.
Over the years, the mandate of FATF has expanded to include examining and developing measures to combat terrorist financing and the proliferation of weapons of mass destruction.
The push for a far more rigorous set of controls regarding terrorist financing happened following the tragic events of September 2001.
It was at that point that several countries, including several UK overseas territories, began implementing anti-money laundering and terrorist financing legislation in earnest.
Importantly, it was also at that point that anti-money laundering and terrorist financing legislation began covering entities in both the financial and non-financial sectors.
Businesses such as law firms and accounting firms became part of the businesses now regulated and required to implement Know Your Client policies, including requesting and verifying customer due diligence, record keeping, staff training, and reporting suspicious transactions.
In 2012, FATF began to focus on the risks of the financing of the proliferation of weapons of mass destruction.
Over recent months, the issues surrounding the danger of the proliferation of weapons of mass destruction have come into the spotlight, in part because of the ongoing war in Ukraine.
The situation in Ukraine has also led to a series of sanctions being issued against designated individuals and entities. These individuals and entities come from a range of countries.
As a result, compliance with these sanctions, issued in part to help prevent weapons of mass destruction from falling into the wrong hands, has come to the forefront of legislative updates in several jurisdictions.
Compliance with sanctions means that it is illegal to trade or provide certain banking or investment services to any individual or entity subject to sanctions.
Why Does FATF Matter?
FATF is an independent intergovernmental body that has increasingly focused not just on promoting best practices in the fight against criminals abusing the financial system and jeopardizing its integrity but also on providing detailed guidance on the methodology most often used to launder money using a sector-by-sector approach.
As a result, the FATF Recommendations have been used as the basis, or framework, for the implementation of extensive cross-jurisdictional legislation on anti-money laundering, anti-terrorist financing, and anti-proliferation of weapons of mass destruction.
Evolution of FATF Recommendations
When we think of FATF, the 40 Recommendations are probably the first thing that comes to mind. Initially, in 1990, FATF issued a report containing a set of Forty Recommendations. The main aim at that time was to create a plan of action to fight money laundering.
As mentioned above, the Recommendations were revised several times, notably in October 2001 following 9/11, when the Eight Special Recommendations on terrorist financing were issued.
- In 2004, the Ninth Special Recommendation on terrorist financing was published.
- In 2003, the Recommendations were revised due to the continued evolution of money laundering techniques.
- In 2012, the Recommendations were revised again to cover issues such as the financing of weapons of mass destruction. The +9 Special Recommendations on terrorist financing were integrated with measures against money laundering, resulting in a very robust and comprehensive set of regulations.
- In 2019, FATF included measures for the regulation and supervision of the activities and service providers related to virtual assets, including cryptocurrency, due to the high risk of abuse.
- In 2022, FATF further strengthened the global beneficial ownership rules to deter criminals from hiding illicit activities and laundering money using corporate structures.
Key Areas of the FATF Recommendations
The FATF Recommendations are divided into seven key areas:
- AML/CFT Policies and Coordination
- Money Laundering and Confiscation
- Terrorist Financing and Financing of Proliferation
- Preventive Measures
- Transparency and Beneficial Ownership of Legal Persons and Arrangements
- Powers and Responsibilities of Competent Authorities and Other Institutional Measures
- International Cooperation
Notable FATF Recommendations
While all FATF Recommendations are significant, a few have stood out during mutual evaluations across multiple jurisdictions:
- Recommendation 10 & 11: Customer Due Diligence and Record Keeping.
- Recommendation 12: Politically Exposed Persons (PEPs).
- Recommendation 19 & 20: High-Risk Countries and Reporting of Suspicious Transactions.
- Recommendation 22: Customer Due Diligence for Designated Non-Financial Service Providers (e.g., law and accountancy firms).
- Recommendation 24 & 25: Transparency and Beneficial Ownership.
Many Recommendations must also be read alongside FATF Interpretive Notes and the Glossary attached to the Recommendations.
FATF’s Process for Identifying High-Risk Jurisdictions
FATF assesses jurisdictions through a process known as mutual evaluation.
The International Co-operation Review Group (ICRG) evaluates jurisdictions identified as having weak controls in combating money laundering, terrorist financing, and the proliferation of weapons of mass destruction.
FATF’s Grey List and Blacklist
- Grey List: Jurisdictions under increased monitoring that have committed to resolving their strategic deficiencies within an agreed timeframe.
- Black List: High-risk jurisdictions with significant deficiencies. FATF urges member states to apply enhanced due diligence and, in the most severe cases, countermeasures to protect the international financial system.
FATF Public Warnings
To protect the integrity of the international financial system, FATF issues public warnings about jurisdictions with strategic deficiencies.
These warnings serve as a deterrent and encourage jurisdictions to address deficiencies quickly to avoid reputational damage in the financial sector.
FATF plays a critical role in shaping global financial security and compliance standards. By issuing Recommendations, mutual evaluations, and public warnings, FATF ensures that jurisdictions worldwide remain vigilant in the fight against money laundering, terrorist financing, and financial crime.
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