Finance

What is FATF (Financial Action Task Force)?

The Financial Action Task Force was formed in 1989 to develop policies against money laundering. It is the international standard setter to fight terrorist financing and money laundering. As the threat of money laundering was growing across nations, FATF was set up to help eliminate this threat. In this article, we will understand the significance of FATF.

Understanding Financial Action Task Force (FATF)

FATF is an inter-governmental decision making body that was established by G7 summit held in Paris. It is a body that functions to produce national legislative and regulatory reforms in money laundering. The FATF Secretariat is situated in Paris, France.

Objective of FATF

FATF sets standards & promotes effective implementation of:

• Legal regulatory & operational measures for tackling money laundering;
• FATF identifies national level threat and vulnerability to protect the financial system from misuse.

Since the creation of FATF, it has taken measures to counter criminal attempts that threatened to use financial system for criminal and terrorist purposes. Notably, in 1990 FATF formed a series of money laundering recommendations, and in 2001, they established a series of special recommendations on the threat of terrorist financing called as the 40+9 recommendations, which aimed to unite anti-money laundering and terrorist financing efforts to single universal instrument.

The FATF scrutinizes techniques and measures and reviews if the present national and international policies are enough to tackle the threat. FATF monitors compliance with 40+9 recommendations using two-pronged strategy.

• Firstly member countries fulfill the annual self-assessment type questionnaire;
• Secondly, FATF conducts mutual evaluation report examinations on individual jurisdictions, thereby assessing the effectiveness of the national policies to deal with issues like money laundering and terrorist financing.

FATF Money Laundering Recommendations

Global efforts to tackle the menace of money laundering and terrorist financing have been made in a manner to dethrone criminal and terrorist organizations through financial operations. The strategy looks to deprive them of the means to know how their financial networks function to prevent future operations.

The recommendations are aimed to provide counter-measures against money laundering cover the criminal justice system, financial system and regulators with international cooperation. Further, they provide principles and minimum standards for action. Countries can choose to implement the details of these recommendations as per their likeness to fit them to their own constitutional framework. Various countries have come forward to implement them in order to tackle money laundering.

The recommendations were published in 1990 and then it was revised in 1996 and 2003. They are reviewed and updated to consider changes or anticipated changes in money laundering trends. In 2003, FATF made changes to the scope of recommendations and included designated non-financial businesses and professionals. The amendments of 2003 applied for the first time, customer/client due diligence and record keeping practices, to designated non-financial businesses and professionals.

They must report transactions that are suspected of being linked to money laundering to the concerned authorities.

Financial Action Task Force: Key Areas of Focus

The FATF focuses on 6 areas that can reduce the potential for the abuse of financial system as well as financial crimes. These areas are as follows:

• FATF Recommendations

The FATF issued its 40 recommendations with a view to protect the integrity of the international financial system^[1] and raise the international co-operation on AML/CFT by enhancing transparency and helping countries to take action against illicit use of financial system.

• High-risk and Non-cooperative Jurisdictions

FATF seeks to identify countries that do not comply with the FATF recommendations. Based on the reviews by International Co-operation Reviews Group, jurisdictions can be identified publicly in one of the two public documents of FATF, which is issued thrice a year. 

• Financing of Proliferation

FATF has updated its standards to include measures for implementing targeted financial sanctions pertaining to the proliferation of weapons.

• Mutual Evaluations

FATF performs peer reviews of every member on an ongoing basis with an objective to assess implementation levels of the FATF recommendations, extending an in-depth description and analysis of every nations’ system to prevent criminal abuse of financial system.

• Methods and Trends

FATF monitors and also updates the constant evolution of ways in which proceeds of criminal activities are laundered. The FATF surveyed the vulnerability of Hawalas to money laundering and terrorist financing due to their use of non-bank settlement methods. FATF surveyed vulnerabilities and risks of the diamond trade to money laundering.

• Corruption

FATF focuses on the link between corruption and money laundering as both are committed to obtain or hide financial increases.

What was the need of Financial Action Task Force?

Considering the threat posed by money laundering, it was necessary to form a body such as FATF. By its very nature, money laundering is a tainted tactic performed by criminals which happens outside of the normal range of economic and financial statistics.

If we look at the money laundering statistics as per UN, we realize that money laundering ranged between US Dollars 590 billion and US Dollars 1.5 trillion. This tells us the magnitude of money laundering, which can impact businesses, society and economies of nation. Money laundering is a threat to the functioning of financial system of a country therefore, it was imperative for nations to bring forth something like FATF.

Conclusion

In response to the growing concern of money laundering, the Financial Action Task Force on money laundering was formed by the G-7 Summit in Paris in the year 1989. One of the first tasks for FATF was to develop Recommendations that lays down measures that national government must take to implement anti-money laundering programme.

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