The revelations made by a former executive level insider at the Financial Action Task Force (FATF) have raised serious doubts about the effectiveness of the organization in combating money laundering and terrorist financing.
While the FATF has responded by stating that most countries now have the necessary legal and operational frameworks to deal with these issues, the former insider's claims about the organization's shortcomings are alarming and credible.
And, while the FATF has been successful in setting international standards, the former insider's revelations suggest that the organization needs to do more to ensure that these standards are being effectively implemented.
As a global strategy, diplomacy and public affairs, AML/CFT consulting firm, we believe that the current situation presents an opportunity for fundamental reform, both within the FATF and across the global AML/CFT network.
In this article, we discuss the implications of the former insider's revelations, the challenges faced by the FATF, and the steps that can be taken to improve the global AML/CFT network.
The Former Insider's Revelations
The former executive level insider's claims about the FATF's shortcomings are alarming but credible. Serious concerns were raised about the effectiveness of the FATF in combating money laundering and terrorist financing.
The FATF has been said to need political leadership, because genuine reform is difficult to achieve and can prove to be challenging with two to four countries typically blocking consensus, which makes it rare that any substantive change can be achieved.
The organization has been described as bureaucratic, lacking in transparency, with too much secrecy as plenary and working group meetings are held in private, biased against developing countries, suffering from a lack of political buy-in at the highest levels, and with a decision-making mechanism that is ineffective.
Attention was focussed on the standard setter’s structure and its legal personality as a Task Force, and the February 2021 findings of a United Nations panel that the FATF is not in fact, grounded in a legal convention or articles of agreement.
More harshly, FATF’s membership delegations were described as “mid-level bureaucrats” who often only held their posts for one to two years, and while comfortable dealing with the intricate technical details, were not as comfortable having big picture discussions,
The organization’s thirty-nine (39) member delegations were often stymied by political influence and intervention by being lobbied to have vacant positions at the Secretariat, filled by officials from their own countries, as opposed to an open democratic process.
Mutual Evaluation Reports - Global Performance
More than one hundred (100) country assessment reports and ratings are centrally located on the FATF website. These reports are often 7-10 years old, with a seventy five percent (75%) failure rate on effectiveness, requiring fundamental or substantial improvements.
The world’s efforts to combat money laundering have been inadequate, with leaders in most countries not having a proper understanding of, or are not genuinely motivated to act upon money laundering risks.
It was disclosed that jurisdictions at a political level do not fully understand the importance of tackling money laundering, are often motivated by trying to support their financial institutions, to stop them being fined, and do not fully understand that the challenge is rooted in the money that fuels serious crime and terrorism.
The former insider called for wider recognition of good AML/CFT practices and noted that there is a chasm between what the FATF recommends, what governments do, what the police are able to do, what regulators do and real-world implementation by firms.
Ultimately, no one is doing well, and no one is doing enough. Money laundering is not of high priority for countries and is not the primary focus. There appears to be a general complacency about AML/CFT risks.
Supervision
Additionally, the quality of supervision is not what it needs to be. Supervisors are generally not applying a risk-based approach but rather, are encouraging a zero-tolerance tick box approach to compliance.
Implementation of preventative measures by banks has a one hundred percent (100%) failure rate due to less than satisfactory understanding of the risks, with banks monitoring every transaction regardless of risk, priority, or intelligence, and Financial Intelligence Units (FIUs) struggling to keep records of millions of suspicious transactions reports on Excel spreadsheets.
Professional Enablers
In the private sector the former insider noted that insufficient focus is being placed on professional enablers, lawyers, accountants, and estate agents who have been overlooked by most governments. He stated that companies and trusts are used and often abused in most every money laundering case, but yet limited liability companies are established without any proof of identity and without verification of the information that goes into the register.
International Cooperation
Not much detail is provided in relation to the effectiveness shortcomings in terms of international cooperation, law enforcement and judicial performance on numbers of Money Laundering and Terrorist Financing investigations, prosecutions, convictions, and related sentencing, including confiscation of illegal proceeds, as well as the speed or otherwise with which these cases move through the criminal justice system.
The new Global AML/CFT Paradigm
After three decades, it is clear that the system is not achieving its desired objectives, and that money laundering continues to pose significant threats to the international financial system, with eight hundred (800) billion to two (2) trillion dollars, or between two and five percent (2-5%) of global Gross Domestic Product (GDP) being laundered globally, annually.
Illegal proceeds generated from drug trafficking continue to be a significant drain to global GDP, but the modus operandi has shifted to people trafficking, migrant smuggling, wildlife trafficking, illegal logging, cybercrime, corruption, fraud, and many, many, more predicate offenses.
Potential for FATF Evolution
There is a clear opportunity for the organization to take steps to address its challenges and work more closely with impacted stakeholders to ensure that the global financial system is protected from those with criminal intent.
The FATF has an opportunity to fully ventilate and potentially take on board the critical feedback from its former senior executive, and the suggestions that were made for bringing about change. Based on our review and assessment we have outlined some of these below:
- All countries should be assessed at the same time and should be more targeted, perhaps looking at beneficial ownership measures, which would facilitate a better understanding of the ownership structures of companies and trusts, which are frequently used to launder money.
- There is an opportunity for a better use of technology to tackle money laundering, which will serve for smarter, more efficient, and effective action.
- Foster a deeper dialogue with supervisors so that they can better understand what the FATF wants to achieve.
More of the Same
Based on the outcomes of the FATF February 2023 Plenary it is evident that many of the existing processes and protocols remain in place, so, moving forward to the Fifth Round of Mutual Evaluations, participants can expect business as usual, with minor tweaks around the edges.
Nonetheless, Important steps were taken in relation to beneficial ownership and corporate structures, revisions to Recommendation 25 for legal arrangements, disrupting financial flows from ransomware, improving implementation of the requirements for virtual assets and virtual asset service providers, and producing a report on Money Laundering/Terrorist Financing in the art and antiquities market.
The world was advised that the Fifth Round of mutual evaluations will start in 2024 and last for six years, with agreement on the sequence of the six countries that the FATF will assess during the first year, but no further details on which six countries will be assessed yearly thereafter.
Importantly, there is no indication, and it will be interesting to learn, as to which FATF member countries pose such risks to the global financial system, that they must be assessed during the first year, leading to the logical and inevitable question as to why they were not placed in the ongoing greylisting process.
FATF ICRG - The Uneven Playing Field Continues
FATF members also blocked the proposals to make entry level criteria for the attention of the grey and blacklisting listing FATF ICRG, non-compliance with Recommendations 24 and 25, failing to remediate within twelve months the deficiencies identified in the mutual evaluation reports, and scoring a low rating on any of the Immediate Outcomes.
Accordingly, it is expected that the small and developing countries of the FSRBs, will continue to be targeted, and subjected to negative listings, whilst the FATF continues to give preferential treatment to its members.
The FSRBs - FATF Associate Members
For the FSRBs, the outcomes of the FATF February 2023 Plenary noted that their preparations for the Fifth Round was discussed.
The Paper by Incoming President T Raja Kumar provides a glimpse as to what is in store here, namely, charting out a roadmap to assist FSRBs to complete the current round of mutual evaluations, formalizing regular dialogue, identify specific areas to improve and aid preparation for the Fifth Round, and support broader strategic cooperation.
Conclusion
The FATF faces several challenges in combating money laundering and terrorist financing and must address calls for reform. As no doubt, questions will continue to be raised as to whether the current AML/CFT architecture is the correct one.
The FATF Strategic Review was an opportunity to drive fundamental change, grasping the opportunity to facilitate, frank and open introspection, and equality in treatment for all countries in the global AML/CFT network.
Some of the issues that could be considered are as follows.
- The FATF must alleviate any belief there is a bureaucratic or opaque nature in its decision-making mechanism, which makes it difficult to achieve meaningful change.
- It should address the lack of political buy-in at the highest levels, which has prevented genuine reform from taking place.
- It should work to reduce bias against developing countries, which are disproportionately impacted by money laundering and terrorist financing.
- It must improve transparency, which will enable impacted stakeholders to better understand its decision-making process.
- Finally, in the spirit of democracy, the thirty nine members of the FATF should ensure that decisions made do not inadvertently and disproportionately impact in a negative way, the one hundred and seventy countries in the FATF Style Regional Bodies, who should be included in the FATF decision making process.
This last recommendation in particular is in line with the February 2021 recommendation of the United Nations, that the developing countries from the nine FATF Style Regional Bodies (FSRBs) that comprise the majority of the global AML/CFT network, “would benefit from a more formal establishment of the governing body, with appropriate rules for universal representation”.
Inevitably, a multitude of questions will continue to be asked of the FATF. Acknowledgement of these concerns, and the provision of thoughtful and inclusive solutions by the FATF, and the FSRB community would be prudent, because to do otherwise would not be in the best interests of the FATF itself, nor indeed the global network of FSRBs.