How do you know if a country or financial institution has an effective AML program? The FATF can probably tell you. The Financial Action Task Force, or FATF, is an international organization that coordinates global efforts to prevent money laundering. In addition, it aims to curb the financing of both terrorism and trafficking in weapons of mass destruction.
To this end, the Financial Action Task Force sets recommendations for countries and their financial institutions to follow in their fight against the financing of crime. These standards cover topics like how to monitor transactions, give authorities sufficient investigative powers, and develop coordinated national and international AML systems.
We’ll start by recapping in more detail what FATF is, as well as what FATF stands for.
“FATF” stands for “Financial Action Task Force.” In French, it’s known as “GAFI,” which stands for “Groupe d’Action Financière.”
The Financial Action Task Force is an intergovernmental organization that develops recommendations and techniques for identifying and preventing the financing of criminal activities. It also lobbies national governments to adopt legislative and regulatory reforms to comply with its standards.
The original purpose of the FATF, when it was created in 1989, was to address growing concerns about money laundering’s impact on financial institutions and national/international banking systems.
Based on the FATF’s 40 Recommendations, the organization continues to do so by studying new forms of money laundering, as well as new hotspots for the activity. It also reviews the effectiveness of national and international regulatory measures designed to prevent money laundering and lays out recommendations for next steps in this area.
After the terrorist attacks on the US in September of 2001, the functions of the Financial Action Task Force expanded to include developing techniques to prevent the financing of terrorism. The Financial Action Task Force’s functions were broadened again in 2012 to confront financial crime being used for new threats, such as trafficking in weapons of mass destruction.
Three times per year, the FATF publishes lists of countries separated based on their level of adherence to FATF standards. There are three lists colloquially known as the blacklist, greylist, and whitelist.
The purpose of the blacklist and greylist is to serve as a public warning about the potential for being victimized by financial crime when dealing with the listed countries. Also, in doing so, these lists incentivize the named countries to strengthen their AML/CFT programs to improve the reputations of their national economies.
The Financial Action Task Force’s crypto standards were first implemented in June 2019. This was after the FATF adopted the term “virtual asset” (VA) to refer to tradable digital representations of value (such as cryptocurrencies), and “virtual asset service provider” (VASP) to refer to any person or business that exchanges, transfers, safekeeps, or facilitates the sale of virtual assets.
The FATF has two main concerns regarding virtual assets. The first is that conventions commonly used with virtual assets, such as peer-to-peer transactions that avoid regulated intermediaries, reduce transparency in financial flows. This can make virtual assets more vulnerable to being used to finance criminal activities.
The second is that the potential mass adoption of virtual assets – especially as alternatives to national fiat currencies – could amplify these issues. For example, it could make it very easy to launder illicit money through multiple different types of virtual assets if one or more of those currencies don’t have sufficient regulatory oversight.
The FATF aims to have VAs and VASPs subject to AML regulations, either as their own class of entities or lumped together with traditional financial entities. These controls include the so-called FATF “travel rule,” which states that VASPs must collect, store, and exchange information regarding parties involved in virtual asset transactions.
This information must be available to be turned over to the appropriate authorities when necessary.
The Financial Action Task Force’s 40 Recommendations are a set of guidelines for countries to follow in order to prevent money laundering, including for the financing of both terrorism and the trafficking of weapons of mass destruction. Generally, they are designed to direct countries in:
Financial institutions should have a vested interest in cooperating with their national governments to adhere to these standards. Failure to develop and enforce effective AML policies can lead to a country being put on the Financial Action Task Force’s greylist or blacklist.
This can make it more difficult for a financial institution in that country to do business. The institution will likely be under increased international oversight and may lose customers as the FATF warns the public against doing business in the institution’s home country. The institution may also find its business obstructed by sanctions and other proactive AML countermeasures.
For financial institutions, complying with the FATF’s standards (and cooperating with federal governments in doing so) has a positive ripple effect. It builds and maintains trust with clients, especially internationally, allowing for smoother business dealings without punitive obstructions or oversight.