The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. A key part of its work involves monitoring the progress of the 206 jurisdictions who have committed to implementing the FATF 40 Recommendations to support anti-money laundering (AML), countering the financing of terrorism (CFT), and countering the financing of proliferation of weapons of mass destruction (CPF) systems.
In its recently released Report on the State of Effectiveness and Compliance with the FATF Standards (“the report”), the FATF outlines results from the fourth Round of Mutual Evaluations, which assessed the strengths and weaknesses of countries’ frameworks to combat money laundering and the financing of terrorism and proliferation.
Background to the mutual evaluation process
Mutual evaluations are peer reviews, in which experts from a number of governments review another country’s adherence to the FATF standards. These reviews are based on the FATF Methodology which outlines the assessment of two basic components:
- Effectiveness – in the context of the risks it is exposed to, does a country have an effective framework to stop criminals generating or hiding the proceeds of crime and to prevent the financing of terrorism?
- Technical compliance – to what extent has the country established the laws, regulations and operational framework required by the FATF?
The FATF identifies jurisdictions with significant weaknesses in their AML/CFT/CPF regimes and works with those countries to address their weaknesses.
There are currently 39 members of the FATF; 37 jurisdictions and two regional organisations. Additionally, there are nine FATF-style Regional Bodies (FSRBs). FSRBs are autonomous regional groups based around the world, which together count 190 jurisdictions as their members. FSRBs are “Associate Members” to the FATF and conduct evaluations of the AML/CFT/CPF systems of their member jurisdictions and make recommendations for their improvement using the same methodology applied to FATF members.
Overall, the report finds that countries have made significant progress in improving technical compliance by establishing and enacting a broad range of laws and regulations to better tackle money laundering, terrorist and proliferation financing.
However, many countries still face substantial challenges in taking effective action commensurate to the risks they face. This includes difficulties in investigating and prosecuting high-profile cross-border cases.
The report presents the findings relating to the key topics of understanding of risks, prevention and supervision, systems to monitor and enforce beneficial ownership and transparency, and criminal justice systems for ML/TF and the use of international cooperation.
Understanding of risks
While FATF Member countries demonstrated a good risk understanding and response with over 80 percent achieving substantial or high effectiveness, only 19 percent of FSRBs demonstrated substantial or high effectiveness.
Many countries are still in the initial stages of developing comprehensive, risk-based AML/CFT/CPF frameworks.
Prevention and supervision
The report found that while larger multinational financial institutions have generally put in place effective risk mitigation measures, smaller financial institutions and the non-financial sector, such as real estate agents, lawyers and accountants, generally struggle to mitigate risks.
97 percent of 120 assessed countries have low to moderate effectiveness ratings for preventing money laundering and terrorist financing in the private sector. The non-financial sector is a particularly poor performer.
While countries have made progress in enhancing the powers of supervisors, only 10 percent of countries’ supervisory systems demonstrated effectiveness.
Systems to monitor and enforce beneficial ownership and transparency
As anonymous shell companies are widely used in laundering proceeds of crime, key FATF Recommendations relate to transparency in beneficial ownership.
While approximately half of assessed jurisdictions were found to have adequate laws and regulatory structures in place, only nine percent of countries are effectively implementing these laws, leaving much room for improvement.
The FATF has strengthened Recommendation 24 to encourage tougher global rules for beneficial ownership of legal persons.
Criminal justice systems for ML/TF and the use of international cooperation
Most countries have criminal justice frameworks to tackle money laundering and terrorist financing, and are increasingly exchanging information with international counterparts. Nevertheless, ML/TF investigations and prosecutions remain rare in most countries, particularly for complex cross-border cases. Furthermore, only a tiny fraction of all proceeds of crime are recovered.
The report states that countries need to significantly improve the functioning of criminal justice frameworks by increasing specialised expertise, prioritising large-scale money laundering operations and targeting terrorist financing networks in-line with risks, as well as applying proportionate and dissuasive penalties.
In its recent report, the FATF assesses that most countries have made considerable progress in implementing the technical requirements of the FATF Standards, but greater effort is needed to ensure that effective implementation is taking place.
Countries need to make major improvements to their national responses to money laundering, terrorist financing and proliferation financing risks.