by InScope-AML
February 13, 2023
There are different types of crimes that are funded by illicit money or whose monetary proceeds can only be made clean through exploiting weaknesses in AML practices. These include human trafficking, environment crime, drug-related crime, terrorism and weapon proliferation. One common element between these crimes is their international aspect. No country alone can make a dent in combatting these global issues.
This is why a number of countries came together in 1989 to set up the Financial Action Task Force (FATF), or Groupe d’Action Financière (GAFI) in French. The FATF carries out research on money laundering trends, sets global standards and best practices, provides training and assesses the effectiveness of countries in combatting money laundering.
The organisation has 39 direct members. These are mostly individual countries including the United Kingdom, United States, Brazil, China and Japan. The members also include the European Commission, which represents the 27 countries within the European Union and the GCC, an alliance of six Middle Eastern countries.
In order to ensure global reach, the FATF is supported by a network of nine FATF-Style Regional Bodies (FSRB), with each body adding members from their region to the global FATF network, bringing the total number of countries committed to implement the FATF AML recommendations to over 200. These FSRBs include MONEYVAL in Europe, the ESAAMLG in Eastern and Southern Africa and the CTATF in the Caribbean.
The FATF recommendations are a set of standards that are intended to serve as a guide for member countries to develop their own anti-money laundering laws, regulations, and guidelines. While they are not legally binding, countries are encouraged to adopt them.
The FATF recommendations are divided into two categories – the general requirements and the special requirements. The general requirements include guidelines that are aimed at governments, supervisors and regulators, as well as guidelines for financial institutions and designated non-financial businesses and professionals (DNFBPs) such as accountants, auditors, lawyers, trust and company service providers (TCSPs), tax advisors, etc…
Some of the recommendations provide guidelines for authorities, including the importance for countries to enact laws and regulations aimed at combating money laundering and terrorist financing within their jurisdiction, while facilitating international cooperation with other governments and international bodies. The guidelines also highlight the need for each country to have a financial intelligence unit (FIU) that receives and analyses suspicious transaction reports and other information related to money laundering and terrorist financing, and sectorial supervisors who can oversee the implementation of AML measures within financial institutions and DNFBPs.
On the other hand, other recommendations define the importance for businesses to have internal controls in place to detect and prevent money laundering and terrorist financing. The recommendations specify that businesses should carry out customer due diligence (identify their customers and understand the purpose and nature of their business relationship), maintain customer and transaction records for a specified period of time and report suspicious activity and transactions to their local authorities.
The FATF also publishes special recommendations that are additional measures aimed at combatting money laundering within specific sectors and situations, with specific recommendations for sectors such as accountants and auditors, legal professionals and trust and company service providers (TCSPs), as well as guidelines on the treatment of non-profit organisations and politically exposed persons (PEPs).
Another important role that the FATF takes on, is assessing countries for their level of compliance with the FATF Recommendations. This is done through an evaluation process, the findings of which are documented in a Mutual Evaluation Report (MER) for that country. The report is based on an assessment carried out by a team of experts and includes an on-site visit to the country, a review of the country’s laws, regulations and practices and interviews with relevant government officials and representatives of the private sector.
The report identifies the strengths and weaknesses of the country’s AML regime and provides recommendations for improvement. The FATF provides governments with a certain amount of time to address any deficiencies identified in the report and schedule follow up re-evaluation assessments to track progress made in addressing these issues.
The FATF maintains a list of countries that are deemed to be high-risk in terms of money laundering and terrorist financing. These countries are considered to be vulnerable to financial crime and are subject to increased scrutiny and monitoring by the international community. Governments of countries placed on this list are encouraged to act quickly and effectively to bring their country back in line with the FATF’s recommendations.
Moreover, this list is also an important tool used by the private sector – financial institutions and DNFBPs are recommended to consider that business and individuals from these countries will pose a higher money laundering risk. In fact, these lists are usually used as one of the determining factors when deciding whether to apply enhanced due diligence (EDD).
Currently the FATF maintains two such lists, dividing high-risk countries into a “blacklist” and a “grey list”. The blacklist, officially known as “High-Risk Jurisdictions subject to a Call for Action” includes countries that are considered to be non-cooperative in the global fight against money laundering and terrorist financing. The “grey list”, officially known as “Jurisdictions under Increased Monitoring” includes countries that were identified by the FATF as having strategic deficiencies in their AML/CFT regimes but are making significant efforts to improve and are working with the FATF to resolve these issues within the agreed timeframes.
These lists are updated periodically, with changes usually published at the end of the FATF plenary sessions.
FATF plenary sessions are events organised by the FATF during which delegations from member countries come together to discuss, make decisions, and get updates on the FATF’s work including updates to recommendations, publications, research, and country assessments. The FATF holds three such meetings every year, usually in February, June and October.
Outcomes of the plenary session include approvals of research reports carried out by the FATF, or changes to the FATF recommendations or other guidance documents. An important aspect of these sessions includes the review of progress made by countries that have been identified as high-risk or non-cooperative in the fight against money laundering and terrorist financing. In fact, the list of such “high-risk countries” is usually updated at the end of the plenary session.
As with all inter-governmental organisations, the decisions, publications and actions taken by the FATF may not seem to necessarily have a direct impact on the individual AML compliance officer or the Money Laundering Reporting Officer (MLRO) of a financial institution or an organisation within the DNFBP sector. However, this is not the case. Here are four ways in which the FATF directly impacts your day-to-day job:
Different countries have financial and DNFBP sectors that vary in size and the AML risk that firms in these sectors are exposed to differs from one jurisdiction to another. As a result, the AML legislative framework and sectorial guidelines will differ considerably. However, whether you operate in a large country such as the United Kingdom or South Africa, or whether your business is based in a small jurisdiction such as Malta, the Cayman Islands or the Isle of Man, your AML obligations stem from the same FATF recommendations. From the Caribbean islands of Barbados and Bahamas, to Jersey, Mauritius and Seychelles, AML compliance teams are obliged to comply with the same AML principles. And whether you work for an international bank or a small accountancy firm, the key AML requirements maintain a common theme.
This is because, the 200+ member countries of the FATF are bound to enact legislation and implement sectorial supervision that ensures that the businesses operating within their jurisdiction follow the FATF recommendations. A case in point is the UK government’s review of their AML regime, published in June 2022. This document sought feedback from key players within the industry, including the public sector, around the country’s AML regulatory and supervisory regimes. The government was open to update regulations based on feedback received but consistently drew a line on making any changes that go against FATF recommendations.
Countries are put on the grey list for different reasons and in some cases, the deficiencies identified for a particular country result in enhanced pressure on the sector within that jurisdiction.
For example, Gibraltar was grey listed in June 2022 for two reasons, one of which was related to not using a “a range of effective, proportionate, and dissuasive sanctions for AML/CFT breaches”. In particular, the FATF highlighted the need for more effective penalties within the legal sector. Seven months later, two law firms were fined for breaches to AML laws with at least one of the law firms penalized for not keeping accurate records and not carrying appropriate customer due diligence.
Tracking the blacklist and grey list is also important in order to ensure your AML processes are aligned with local legislation. In some jurisdictions, AML law specifies that enhanced due diligence is mandatory when dealing with FATF high-risk countries.
The United Kingdom’s AML regulations, for example, dictates that firms must apply EDD measures for countries listed as high-risk, with the list of published high-risk countries mirroring both the FATF blacklist as well as the grey list.
Another example is Mauritius, which takes a different approach but still mandates the application of EDD for high-risk countries. This is specified in regulation 17H of the Financial Intelligence and Anti-Money Laundering Act of 2022, which states that the Minster is empowered to list a jurisdiction as being high-risk once it is added to the FATF blacklist.
Finally, the FATF list of high-risk countries can be used as a tool in implementing the Risk-Based Approach (RBA) – an approach that is proven to improve the effectiveness and efficiency of your AML risk processes. The RBA specifies that clients are classified into categories based on their risk level and more scrutiny carried out on clients that are deemed as high risk. The definition of high-risk may vary depending on a number of factors but one dimension is looking at whether the jurisdictions associated with your client are considered as having a higher risk of money laundering by the FATF.
The FATF plays an important role in advancing the world-wide war against money laundering and terrorist financing. With more than 200 jurisdictions within its global network, the FATF has the support of most of the world’s governments, all of which have committed to the FATF recommendations. This, together with its ongoing country assessments, mean that the decisions and publications taken by the FATF have a significant impact on your AML compliance obligations.
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