This article is authored by Akash Krishnan, a law student from ICFAI Law School, Hyderabad. It discusses in detail the evolution of FATF and its role in combating money laundering and terrorist financing activities. It also discusses the recent amendments to the FATF recommendations.
Table of Contents
Introduction
In a globalized world where technology allows money to move quickly anywhere, fighting money laundering is more urgent than ever. Trillions of dollars are laundered each year and this money is used to fuel serious crimes like drug deals, sexual exploitation, human trafficking, etc. Money laundering harms society in more ways than one could possibly imagine. The Financial Action Task Force (FATF) is a leading global action task force that has set the international standards for several countries to regulate their financial industries and has helped authorities to find, freeze and confiscate the money that has been laundered by financial criminals.
The FATF tackles the issue of money laundering by investigating how terrorist acts and drug smuggling is being financed. It also aids in the prevention of funding for building or procuring weapons of mass destruction. From time to time, it publishes the best standards that countries should follow and assesses how well the countries are doing in practice and the areas in which they could improve. The FATF’s work covers many areas, including helping authorities trace the funds behind environmental crimes, taking the illicit profits out of human trafficking, exploring the use of new technologies to prevent money laundering etc. It also trains officials in anti-money laundering and counter-terrorist financing techniques.
As of now it has a global network of over 200 countries and has almost 40 members and 20 observer organizations. The regional anti-money laundering bodies include the United Nations, The Egmont Group of Financial Intelligence Units, the International Monetary Fund and many other international organisations. More than 200 countries have committed to the FATF’s global standards.
Now that we have understood the role and functions of the FATF in brief, let us explore these aspects in detail.
Formation of the FATF
The Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989. The summit discussed the threats posed to the banking system across the world due to money laundering activities, the Task Force was convened from the G-7 member States, the European Commission and eight other countries.
Role of the FATF
At the time of its formation, the FATF was assigned the following tasks:
- Examine money laundering techniques and trends.
- Review the actions which had already been taken at a national or international level against money laundering practices.
- Provide measures that could be taken to combat money laundering.
In furtherance of the assigned responsibilities, the FATF in April 1990 issued its first Report in which it provided 40 recommendations. These recommendations were regarding the steps that need to be taken to combat money laundering to stop such practices from happening in the future.
Additional responsibility was added to the FATF’s list of responsibilities in 2001. This responsibility was to develop appropriate standards so as to combat terrorist financing. In furtherance of the same, later that year, the FATF issued 8 special recommendations to combat terrorist financing.
In 2003 and 2004, the FATF revised its previously issued recommendations on combating money laundering and suggested some new measures to combat the modern techniques that were used by the money launderers across the world. In furtherance of the same, it published a new recommendation into the existing standards thereby taking the total number of recommendations to 49.
The standards were reviewed comprehensively in the year 2012 and new measures were suggested to combat new threats like the financing of proliferation of weapons of mass destruction. These measures also sought to tackle the issue of corruption by establishing a uniform and transparent standard across the world.
Recent changes made to the FATF recommendations
October 2021 : Revision to Regulation no. 23
Regulation 23 of the FATF Regulations deals with the application of the principles of reliance, control and financial groups and the reporting standards of suspicious transactions on all designated non-financial businesses and professions. It lists the qualifications for the designated non-financial businesses and professions as follows:
- Lawyers, notaries, other independent legal professionals and accountants should report suspicious transactions of the clients who engage their services or report any such transactions on behalf of their clients.
- Dealers of precious metals and stones should report suspicious cash transactions of the high value of their clients.
- Trust and company service providers should report suspicious transactions for and on behalf of their clients.
The Amendment in October 2021 stated that this provision will be made applicable to everyone who is part of the group, i.e., small and big independent lawyers, law firm associates, professional accountants etc.
October 2021 : Designated categories of offences
The glossary definition of designated categories of offences include the following:
| Participation in an organised criminal group and racketeering | Illicit trafficking in narcotic drugs and psychotropic substances | Fraud |
| Terrorism, including terrorist financing | Illicit arms trafficking | Counterfeiting currency |
| Trafficking in human beings and migrant smuggling | Illicit trafficking in stolen and other goods | Counterfeiting and piracy of products; murder, grievous bodily injury |
| Sexual exploitation, including sexual exploitation of children | Corruption and bribery | Kidnapping, illegal restraint and hostage-taking |
| Robbery or theft | Smuggling | Tax crimes |
| Forgery | Piracy | Insider trading and market manipulation |
In 2021, a new kind of offence was added to this definition, i.e., environmental crime. This includes instances of criminal harvesting, extraction or trafficking of protected species of wild fauna and flora, precious metals and stones, other natural resources, or waste etc.
June 2021 : Revision of Interpretive note no. 15
Interpretive note no. 15 stated that if a country is not prone to higher risks of money laundering or terrorist financing, they can introduce a simple mechanism to ensure that the risks, if any, are avoided or mitigated.
In the June 2021 Amendment, the scope of this provision was expanded and it was stated that the national policies against money laundering or terrorist financing should include provisions for the examination and investigation of the virtual assets of the citizens and the activities of virtual service providers.
October 2020 : Revision of Recommendation no. 2
Recommendation no. 2 deals with the concept of National Cooperation and Coordination. It states that every country should have a national anti-money laundering policy, a national countering the financing of terrorism policy and a national proliferation of weapons of mass destruction policy. Every country should have designated authorities to periodically review and enforce these policies.
It further provides that all the authorities involved in the law-making and the law enforcement process should coordinate among each other for the exchange of information domestically so as to ensure the development and implementation of the policies.
The amendment in October 2020 added that there should be national cooperation regarding the exchange of information for the enforcement of the national proliferation of weapons of mass destruction policy.
An interpretive note was also added that stated that the countries should adopt a mechanism for the facilitation and exchange of information domestically so as to fulfil the objective laid down under Regulation 2.
October 2020 : Revision of Recommendation no. 1
Recommendation no. 1 deals with assessing risks and applying a risk-based approach. It states that every country should take measures to identify money laundering and terrorist financing risks and designate authorities to deal with potential risks by following a risk-based approach. It further states that countries with higher risks should maintain more stringent policies compared to countries with lower risks.
The Amendment in October 2020 included a provision hereunder that stated that all countries and financial institutions should identify and assess the risks of potential breachers and non-implementation or evasion of the targeted financial sanctions related to proliferation financing. It further stated the appropriate authorities should take steps to mitigate these risks and avoid them if possible.
June 2019 : Addition of Interpretive note to Recommendation no. 15
Recommendation no. 15 deals with risks associated with the development of new technologies. It states that all countries and financial institutions should assess the risks relating to terrorist financing and money laundering in the light of the advancing technologies. It further states that with the advent of new technologies, new practices and new methods for terrorist financing and money laundering will emerge. Thus, countries should develop new techniques to assess the risks associated with new technologies and new products before launching them in the market so that they can be prepared for any form of misuse.
The Amendment in June 2019 inserted an interpretive note for this recommendation wherein it was stated that countries should extend the application of the FATF standards to virtual asset activities and the activities of virtual service providers.
October 2018 : Revision of Recommendation no. 15
Recommendation no. 15 deals with risks associated with the development of new technologies. It states that all countries and financial institutions should assess the risks relating to terrorist financing and money laundering in the light of the advancing technologies.
The Amendment in October 2018 inserted a new aspect to Recommendation no. 15. The Amendment stated that countries should assess the risks that are emerging from the use of virtual assets and should also look into the activities of the virtual asset service providers so as to ensure their compliance with the FATF standards.
February 2018 : Revision of Recommendation no. 2
Recommendation no. 2 deals with the concept of National Cooperation and Coordination. It states that every country should have a national anti-money laundering policy, a national countering the financing of terrorism policy and a national proliferation of weapons of mass destruction policy. Every country should have designated authorities to periodically review and enforce these policies.
It further provides that all the authorities involved in the law-making and the law enforcement process should coordinate among each other for the exchange of information domestically so as to ensure the development and implementation of the policies.
The Amendment in February 2018 stated that the exchange of information between the domestic authorities regarding money laundering and counter-terrorist financing should be in compliance with the national and international data protection and privacy rules.
November 2017 : Revision to the Interpretive note to Recommendation no. 18
The Interpretive note to Recommendation no. 18 deals with mitigating the proliferation financing risks. It states that financial institutions should create a framework to manage and mitigate risks related to proliferation financing effectively. If the country can be subject to higher risks, then the financial institutions should introduce enhanced control mechanisms for detecting possible breaches, non-implementation or evasion of targeted financial sanctions.
The Amendment in November 2017 clarified that financial institutions should coordinate for the sharing of information regarding suspicious transactions. It also stated that the financial institutions should share the information with their own branches and subsidiaries as well.
November 2017 : Revision of Recommendation No. 21
Recommendation No. 21 deals with activities related to tipping-off and confidentiality. This provision protects the financial institutions, their directors and their employees from any suit or proceedings against them in cases where they had disclosed confidential information relating to suspicious transactions in good faith. It also prohibited the practice of tipping off the individual about a report filed against him.
The Amendment in November 2021 was a clarification regarding the application of this provision to the branches of a domestic bank that are situated in foreign territories.
Conclusion
The FATF is a task force that was created by Governments across the world for helping them to combat the undesirable consequences of money laundering and terrorist financing. The standards and rules that are set by the FATF have to be included in the national systems of the participating countries. India has been a member of the FATF since 2010.
Crimes do not differentiate between countries and are not bound by border restrictions. With the advent of technology, money laundering and terrorist financing can be undertaken from any part of the world. National laws will have their limitations while dealing with such cases. Thus, there is a need for a multilateral treaty to combat financial crimes more efficiently. The FATF should take an initiative for the creation and enforcement of such a multilateral statute. Only time will tell if this idea transforms into reality.
References
- https://www.fatf-gafi.org/media/fatf/documents/reports/1990%201991%20ENG.pdf
- https://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf
- https://www.fincen.gov/resources/international/financial-action-task-force#:~:text=The%20Financial%20Action%20Task%20Force%20(FATF)%20is%20an%20inter%2D,and%20the%20financing%20of%20terrorism
- https://www.business-standard.com/about/what-is-fatf.
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