Important FATF Recommendations on Anti-Money Laundering, Sanctions, and Identity Verifications for Financial, Non-Financial Institutions

Contents

1. What is the Financial Action Task Force (FATF)?
2. FATF Member Nations and Observer Nations
3. FATF Blacklist and FATF Grey list
4. FATF 40 AML Recommendations
5. Recommendations IX
6. Performance evaluation procedures of the FATF member countries
7. FATF and Crypto Travel Rule (Recommendation 16)

What is the Financial Action Task Force (FATF)?

FATF is Groupe d’action financière (GAFI) in French. An intergovernmental body founded in 1989 in Paris, France, on the G7 initiative to combat money laundering. FATF is most known for its 40 recommendations on AML and nine special CFT recommendations adopted in the wake of the 11th Sept, 2001 terror attack. Currently, there are 39 FATF members, 37 jurisdictions, and two regional organizations (the Gulf Cooperation Council and the European Commission). The FATF Recommendations were first drafted in 1990, then revised in 1996, 2001, 2003, and, most recently, in 2012 to ensure they remain relevant and meet current global ML-TF threats.

FATF is a policy-making body that sets standards and promotes effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and threats to the integrity of the international financial system. As a policy-making body, it attempts to generate the necessary ‘political will’ to bring about national regulatory and legislative reforms to combat money laundering. One of its goals is to create a multi-government AML and counterterrorist financing (CTF) policy and procedural guidelines; the idea is to identify national-level vulnerabilities to set out standards applicable at an international level.

Since money laundering is a global problem, we need a reasonably unified approach for nations to combat the issues. The FATF is not a binding document, and member nations may not follow all the suggestions in totality; member nations, however, should generally be compliant with the recommendations.

FATF Member and Observer Nations

The FATF currently includes 37 member jurisdictions and 2 regional organizations, encompassing financial centers of the world.

FATF Observers (a non-member with participating privileges)

• Indonesia

FATF Blacklist and FATF Greylist

There are two sets of FATF non-abiding nations, and these have been listed under blacklist and greylist sets. The listed countries suffer heavy impediments in economic growth as major financial institutions tend to shift resource and investment interests away from the listed. Therefore, the enlistment has put a lot of political and economic pressure on the listed nations to amend their civil and regulatory structures to meet the FATF compliances.

January 2022 FATF Blacklist nations are –

• North Korea
• Iran

March 2022, the FATF greylist nations are –

FATF 40 AML Recommendations

The 40 recommendations include the criminalization of money laundering and the authorities’ right to confiscate money laundering proceeds. –

Essentials of 40 recommendations — Financial Institutions, designated non-financial businesses & professions must maintain Customer Due Diligence (CDD), Customer Identity Verification as part of CDD, Record Keeping, and Suspicious Transaction Reporting (STR) filings. Each member country has its own Financial Intelligence Unit (FIU); the FIU takes necessary action on SAR and STR filings. International cooperation amongst the FIUs to investigate and prosecute Money laundering crimes.

AML/CFT Policies and Coordination

Money Laundering and Confiscation

Recommendation 1: Each country assesses its AML-CFT risks and opts for preventive actions in response to the risk levels. The risk-based approach forms the foundation for implementing other FATF AML-CFT recommendations and makes the country-evaluation process fairly scalable.

Recommendation 2: National Co-operation & Co-ordination. Each country’s Financial Intelligence Unit (FIU), legal, corporate, and government authorities should work together and promote information and knowledge sharing to speed up the ML-TF deterrence process.

Terrorist Financing and Financing of Proliferation

Recommendations 6/7/35: Sanctions are the measures taken against certain individuals, groups, or countries to prohibit them from trade, economic, and financial activities because of their alleged threat-posing patterns, including terrorism financing and proliferation of weapons capable of mass destruction, and channelizing proceeds of crime, etc.

Preventive Measures

Recommendation 10: FATF’s 10th recommendation discusses risk assessment with Customer Due Diligence (CDD) on existing and prospective clients. Customer Due Diligence (CDD) forms the most crucial aspect of AML-CFT measures. Know-Your-Customer (KYC) is a part of CDD that controls anonymous/alias account openings from fraudulent customers.

Recommendation 12: FATF defines Politically Exposed Persons as high-risk customers more susceptible to huge bribes and money laundering with their influential position. Since PEPs are statistically more vulnerable to corruption/illegal proceeds, FATF recommends a more stringent AML/KYC approach with ongoing monitoring throughout a PEP’s customer lifecycle.

Recommendation 15: New Technologies & Virtual Assets. Before the official launch of new technological products or business practices, FATF’s 15^th Recommendation advises countries to bring preventive measures against the risks arising from the potential misuse of those new technologies. Within the same recommendation, in its interpretive note, the FATF outlines a risk-based AML-CFT approach for treating virtual assets/cryptocurrencies by the financial and other requisite authorities.

Recommendation 19: FATF recommends the enhanced due diligence practice for financial institutions while doing business with individuals or entities from high-risk countries. Each FATF member state should guide its financial institutions on enhanced reporting, corporate auditing, financial caps, and other prohibitory business practices applicable to high-risk nations, to combat ML-TF threats.

Recommendation 20: Suspicious Activity Report (SAR) and Suspicious Transaction Report (STR). The FATF recommends immediate SAR and STR filings from obligated institutions to FIUs and other relevant authorities. Any delay in SAR and STR filings may pose serious risks to AML-CFT safety standards of the nation. Therefore, irrespective of the amount and filing timeline, the institutes must report suspicious transactions at the earliest to avert serious money laundering or terrorism threats.

Recommendations 22/23: FATF defines Designated non-financial businesses and professions (DNFBPs) under ML-TF high risks and proposes Customer Due Diligence (CDD), suspicious activity filings, and timely record-keeping for proactive measures. FATF recommendations for various DNFBP vary in each business/profession, falling under the DNFBPs category. Currently, the FATF outlined DFNBPs are – casinos and other gambling service providers, company service providers, dealers in precious metals and precious stones, lawyers, notaries, independent legal professionals & accountants, real estate agents, and trusts.

Transparency And Beneficial Ownership Of Legal Persons And Arrangements

Powers And Responsibilities of Competent Authorities and Other Institutional Measures

Recommendation 32: In the wake of growing terrorist threats, nations must control the misuse of cash courier systems, says FATF 32^nd recommendation on cross-border currency smuggling. FATF suggests member nations put sanctions on laundering money and making false disclosure while physically transporting money across the borders.

International Cooperation

Recommendations 36-40: FATF is an international regulatory and AML-CFT policy-making body. International cooperation is the keystone of FATF. International cooperation involves — i. mutual legal assistance concerning AML-CFT proceedings and prosecutions; ii. external assistance in identifying, freezing, and confiscating of assets; and iii. execution of extradition requests to make certain a country doesn’t refuge individuals involved in financing terrorism.

Recommendations IX

In the wake of the 11th Sept 2001 terror attack, FATF adopted 9 Special Recommendations, also known as Recommendations IX. Recommendations IX works concurrently with other 40 Recommendations to detect, prevent and abolish terrorism financing.

Essentials of 9 recommendations — Combating terrorism financing forms the core of the nine recommendations set up post 9/11 terror attack. Especially targeting non-profit organizations (NPOs) to check whether they pose a threat to international peace and security. The NPOs, located around the conflict zones involving ‘suspect communities’ or ‘suspicious activities’ must be put under strict vigilance. This combined output was derived from intergovernmental organizations, including World Bank, Organization for Economic Co-operation and Development, and the International Monetary Fund.

These Recommendations IX are as follows–

Performance evaluation procedures of the FATF member countries

The decision-making body called FATF Plenary, comprising international stakeholders, meets a year thrice. FATF measures a country’s implementation progress, made in its policies and standards, via ‘mutual evaluation’ or ‘peer reviews,’ specifically the International Co-operation Review Group (ICRG). The review may identify jurisdictions that have strategic AML/CFT deficiencies.

1. Technical Compliance is to judge the legal AML-CFT framework setup, controls, and competence of the authorities.
2. Effectiveness assessment measures the extent to which the AML-CFT framework produces expected results.

FATF and BASEL Committee: BASEL Institute of Governance has established an AML-CFT risk assessment tool named Basel AML Index. The FATF data determines the standard of AML/CFT systems in the Basel AML Index.

FATF and Crypto Travel Rule (Recommendation 16)

In the coming years, FATF is planning a major overhaul in its AML/KYC and KYT regulations related to cross-border and local bank transfers to coincide with both fiat and crypto within the Travel Rule definition.

The 16^th AML-CFT Recommendation on DeFi cryptocurrencies has made identity verification of the registered user accounts and correct creator and beneficiary information compulsory. Therefore, the Virtual Asset Service Providers (VASPs), financial and other obligatory institutions must collect, record, and present information such as the national identity, customer ID with the correct name, address, physical address, etc. of both the originators and beneficiaries.

The above Personally Identifiable Information (PII) must be collected and shared for any transaction exceeding 1,000 USD/EUR to improve transaction traceability in SAR investigations. In addition, all suspicious activity/transactions must be filed to the reporting authority with identity and account details to initiate an immediate investigation and avert AML-CFT threats, if any. A couple of important measures to counter terrorist financing include withholding payments from sanctioned nations, organizations, and individuals and imposing subpoena laws to acquire transaction history.

Travel Rule Non-compliance consequences

Though FATF Travel Rule is evolving, its member nations are chalking out a method to implement the regulations without loopholes. Nevertheless, there are serious consequences, including FATF grey-list (high-risk watchlist) and blacklist enlistments for the Travel Rule non-compliance by local VASPs and other financial institutes.

Travel Rule and Privacy Risks

Implementation of the Travel Rule calls for advanced technological solutions from the RegTech industry; otherwise, the rule operation is not immune to its individual/organizational privacy risks. A few looming privacy threats are,

1. PII data leaks,
2. data hacks,
3. counterfeit VASPs veiled as genuine to hoard PII database,
4. weak security and
5. date misuse or date broking.

It is on the part of the originator or beneficiary to review that scalable, trustworthy, interoperable, and globally viable data encryption ethics are maintained by VASPs and other financial bodies regarding data storage and sharing to follow complete FATF Travel Rule guidelines.