Financial Action Task Force (FATF)

• The Financial Action Task Force (FATF) was launched in 1989 by the G-7 nations during their annual economic summit in Paris to combat international money laundering.
• Originally named the G-7 Financial Action Task Force, FATF now leads in providing AML guidance to governments worldwide.
• The International Monetary Fund (IMF) and the World Bank also contribute significantly to the AML field.
• FATF has influenced changes in financial organizations, businesses, laws, and governmental operations globally.
• Located at the Organisation for Economic Co-operation and Development (OECD) in Paris, FATF has its own secretariat and is accessible online.

FATF Objectives

• FATF's objectives include establishing standards and promoting effective measures against money laundering, terrorist financing, and related threats to the international financial system.
• It monitors countries' progress in implementing FATF Recommendations, reviews money laundering and terrorist financing techniques, and promotes the adoption of FATF Recommendations globally.
• FATF focuses on spreading the AML message worldwide, monitoring the implementation of its recommendations among members, and reviewing money laundering trends and countermeasures.
• FATF aims to establish a global AML and anti-terrorist financing network through expanding its membership, developing regional AML bodies, and cooperating with other international organizations.

Monitoring Implementation of the FATF Recommendations

• FATF's fourth round of mutual evaluations assesses technical compliance with recommendations and the effectiveness of a member's AML/CFT system.
• The methodology integrates technical compliance and effectiveness assessments to analyze a country's adherence to FATF Recommendations and its AML/CFT system's strength.

Technical Compliance Assessment

• The technical compliance assessment evaluates specific FATF Recommendation requirements and how a member integrates them into legal and institutional frameworks.
• Assessors determine compliance with FATF standards, resulting in a rating across five levels: compliant, largely compliant, partially compliant, noncompliant, and not applicable.

Effectiveness Assessment

• The effectiveness assessment evaluates a member's implementation of FATF Recommendations, ensuring evidence of achieving outcomes central to a robust AML/CFT system.
• Effectiveness is defined as "the extent to which the defined outcomes are achieved."
• Effectiveness is evaluated based on 11 Immediate Outcomes which feed into three Intermediate Outcomes.
• Assessors rate effectiveness based on how well core issues are addressed, using ratings: high, substantial, moderate, or low.
• Countries not achieving a high level of effectiveness receive recommendations for improvement.
• Follow-up assessments are conducted after five years under FATF's fourth round of mutual evaluations.

FATF Compliance

• FATF cannot impose fines or penalties on non-compliant member nations.
• In 1996, FATF introduced a graduated approach to manage non-compliance, enhancing peer pressure through progress reports at plenary meetings or membership suspension.
• In September 1996, Turkey faced peer pressure for failing to criminalize money laundering despite being a member since 1990, leading to a warning about financial dealings with Turkish entities.
• Turkey was the first country added to FATF's list of Jurisdictions under Increased Monitoring, also known as the "greylist".
• Countries on the greylist are committed to resolving strategic deficiencies and are subject to increased monitoring.

Reviewing Money Laundering Trends and Countermeasures

• Criminals adapt laundering techniques to countermeasures due to the financial system's global and continuous operation.
• FATF members gather information on money laundering trends to keep Recommendations current.
• In October 2013, FATF and the Egmont Group released a report on money laundering and terrorist financing through the diamond trade.
• Since 1989, FATF operated under five-year mandates until 2019, when members adopted an open-ended mandate.

FATF's Ongoing Mission

• The open-ended mandate acknowledges enduring concerns for financial system integrity and the need for sustained commitment against money laundering, terrorist financing, and proliferation financing.
• Since its establishment, FATF's core activities are standard setting, ensuring effective compliance, and identifying money laundering and terrorist financing threats and will continue by building on that work and responding to new and emerging threats.

FATF 40 Recommendations

• FATF's key effort is its detailed standards list for countries to implement, outlined in the 40 Recommendations and Interpretative Notes.
• After 9/11, FATF adopted the IX Special Recommendations on terrorist financing, later merged into the 40 Recommendations.
• FATF’s Recommendations serve as blueprint for effective AML/CFT controls.
• The IMF and World Bank recognize the FATF Recommendations as the international standard for combating money laundering and terrorist financing, using a common methodology to assess compliance.The FATF 40 Recommendations covers the following elements:
• Identification of risks
• Development of appropriate policies
• Criminal justice system and law enforcement
• Financial system and its regulation
• Transparency of legal persons and arrangements
• International cooperation

Recommendations

• The Recommendations set minimum standards for countries to implement based on their circumstances.
• The 2012 revision introduced risk assessment as the first recommendation, emphasizing its importance in combating money laundering and terrorist financing.
• The 2003 revisions expanded the scope to include terrorist financing and widened the categories of businesses covered by national laws.
• They Specified compliance procedures on issues such as customer identification and due diligence, including enhanced identification measures for high-risk customers and transactions.
• They Adopted a clearer definition of money laundering predicate offenses
• Urged improved transparency of legal persons and arrangements
• Included stronger safeguards, notably regarding international cooperation in, for example, terrorist financing investigations

Revision in 2012

• In 2012, the Recommendations were revised again, to incorporate the IX Special Recommendations on terrorist financing. The most important changes in this revision were:
• Creation of a Recommendation on implementing a process to identify, assess, monitor, manage, and mitigate AML/CFT risks using a risk-based approach
• More information on assessing risks and applying a risk-based approach to all AML/CFT efforts
• Creation of a Recommendation for targeted financial sanctions related to the proliferation of weapons of mass destruction (WMD)
• More attention on domestic PEPs and individuals entrusted with prominent functions by international organizations
• New requirement for the identification and assessment of risks of new products prior to their launch
• New requirements on obtaining and sending accurate originator, intermediary, and beneficiary information in wire transfers (travel rule)
• New requirement for financial groups to implement group-wide AML/CFT programs and establish procedures for sharing information within the group
• Inclusion of tax crimes within the scope of designated categories of offenses for money laundering

Key highlights of the 40 Recommendations include:

• Risk-based approach: Countries should assess money laundering and terrorist financing risks and take measures to mitigate them.
• Designated categories of offenses: Specified crimes that are considered money laundering predicates, and provisions for confiscating proceeds of crime.
• Terrorist financing and financing of proliferation: Criminalization of terrorist financing and implementation of sanction regimes to freeze assets of individuals designated by the United Nations Security Council for involvement in terrorism or the proliferation of WMD.
• Knowledge and criminal liability: the knowledge required for money laundering may be inferred from objective factual circumstances.
• Customer due diligence measures: Financial organizations should conduct CDD when they establish business relations, carry out occasional transactions above the specified threshold (US$15,000 and €15,000) or for a wire transfer in circumstances covered by the FATF Interpretive Note to Recommendation 16, have a suspicion of money laundering or terrorist financing, and have doubts about the veracity or adequacy of previously obtained customer identification information.
• Recommendation 16 applies to cross-border wire transfers and domestic wire transfers, including serial payments, and cover payments (transactions between financial institutions and certain debit/credit card transactions are exempted).
• Countries may adopt a de minimis threshold for cross-border wire transfers (no higher than USD/EUR 1,000), below which less stringent requirements apply.
• In particular, in countries deciding to apply a threshold, for wire transfers below the threshold financial institutions must include: the name of the originator, the name of the beneficiary; and an account number for each, or a unique transaction reference number.
• FATF requires verifying the accuracy of this information if there is a suspicion of money laundering or terrorist financing.

Using a risk-based approach, financial organizations must:

• Identify the customer and verify the customer’s identity using reliable, independent source documents, data, and information.
• Take reasonable measures to verify the identity of the beneficial owner.
• Understand and obtain information on the purpose and intended nature of the business relationship.
• Conduct ongoing due diligence to ensure transactions are consistent, and maintain records of customer information and all transactions to enable compliance with requests from competent authorities.
• Rely on other parties to conduct CDD in certain circumstances and establish a group-wide AML/CFT program for financial groups.

Additional CDD on specific customers and activities

• PEPs: Appropriate steps must be taken to identify PEPs, including obtaining senior management approval of such business relationships, taking measures to establish the sources of wealth and funds, and conducting ongoing monitoring.
• Cross-border correspondent banking: Appropriate steps must be taken to understand the respondent institution’s business, reputation, supervision, and AML/CFT controls
• Money or value transfer services (MVTS): Countries should ensure that MVTSs are licensed or registered and subject to appropriate AML/CFT requirements.
• New products, delivery mechanisms, and technologies: Countries and financial organizations should assess the risks associated with the development of new products
• Wire transfers: Countries should require financial institutions to obtain and send required and accurate originator, intermediary, and beneficiary information with wires transfers and related messages (travel rule). Financial institutions should monitor wires for incomplete information and take appropriate measures.
• Suspicious activity reporting: Financial organizations must report to the appropriate FIU when they suspect or have reasonable grounds to suspect that funds are the proceeds of a criminal activity or are related to terrorist financing.
• Derisking: Derisking refers to the phenomenon of financial organizations terminating or restricting business relationships with customers and categories of customers to avoid, rather than manage, risk.
• Expanded coverage of industries: The Recommendations expand the fight against money laundering by adding new nonfinancial businesses and professions to the list of financial institutions that are the usual focus of AML/CFT efforts, they include:
• Casinos when customers engage in financial transactions equal to or above a designated threshold.
• Real estate agents when they are involved in transactions for clients concerning buying and selling properties
• Dealers in precious metals and stones when they engage in any cash transaction with a customer at or above a designated threshold
• Lawyers, notaries and independent legal professionals and accountants when they prepare or carry out transactions for clients concerning buying and selling real estate
• Trust and company service providers when they prepare or carry out transactions for a client concerning certain activities

Transparency and Beneficial Ownership

• Countries should take measures that prevent misuse of legal persons for money laundering and terrorist financing, including ensuring that information about the beneficial ownership and control of such legal persons is available to competent authorities.

Powers and Responsibilities

• Supervisors should be given sufficient resources and powers to effectively oversee financial organizations within their jurisdictions.
• Countries should establish FIUs and provide law enforcement and investigative authorities with sufficient resources and powers to investigate money laundering and terrorist financing
• Several Recommendations address strengthening international cooperation and Countries should ratify United Nations conventions against significant crimes and terrorism.