2024 onwards, a whole new world for the Financial Action Task Force?

With the next round of country assessments starting, the new FATF President has a lot of work to do over the next two years.

• At the June plenary of the Financial Action Task Force (FATF), Elisa de Anda Madrazo succeeded Raja Kumar as president. Her appointment, a pivotal moment for the FATF, comes at a critical time as a new round of mutual evaluations with a new methodology has just started—the fifth round since the FATF came into existence.
• At the same time, the FATF is operating in an increasingly fragmented geopolitical environment, grappling with the continued impact of Russia’s illegal invasion of Ukraine and trying to manage tensions with countries in the Global South, many of which feel they are unfairly targeted or marginalised by the FATF. These challenges underscore the urgency and importance of the FATF's work. 
• Elisa de Anda Madrazo, the new FATF President, is no stranger to the organization, having served as vice president from 2020 to 2023. Her ratified priorities for the presidency, as outlined at the most recent plenary, demonstrate a deep understanding of the challenges facing the FATF. This sets a promising and optimistic course for how these challenges will be addressed over the next two years. 

New Decade, New Methodology 

The FATF unveiled its revised its fifth round methodology and universal procedures in May 2024.

• https://www.fatf-gafi.org/en/publications/Mutualevaluations/Assessment-Methodology-2022.html
• https://www.fatf-gafi.org/content/dam/fatf-gafi/methodology/Universal-Procedures-2023.pdf.coredownload.inline.pdf

This comprehensive methodology, which incorporates a number of significant updates, is a testament to the FATF's commitment to thorough and fair assessments. It's no surprise that effectiveness is at the heart of the new methodology, with detailed notes to assessors for almost all of the effectiveness criteria.

This comprehensive approach should provide clearer direction for assessors and help to ensure consistency across the scores of mutual evaluations that will take place over the next decade. Notably, the methodology includes a focus on effective outcomes in countering proliferation financing, offering a promising path for the FATF’s future success.

The FATF is operating in an increasingly fragmented geopolitical environment, dealing with the continued impact of Russia’s illegal invasion of Ukraine and trying to manage tensions with countries in the Global South

A significant change has also been made in separating out the assessment of the effectiveness of risk-based supervision of the financial (including virtual asset service providers) and non-financial sectors into two Immediate Outcomes.

Supervising sectors referred to in FATF language as Designated Non-Financial Businesses and Professions has always been challenging. The FATF’s recently published horizontal review of technical compliance with the relevant recommendations shows stark differences in compliance across FATF member states, with the US, Australia, and China all scoring a big fat zero.

While other countries may have scored full or nearly full marks in terms of their technical compliance, many have long-term issues with effectiveness.

• https://www.rusi.org/explore-our-research/publications/policy-briefs/anti-money-laundering-supervision-professions-uk-four-key-challenges-and-how-address-them

Unintended Consequences 

For those that have followed Elisa de Anda Madrazo’s career, it will come as no surprise that financial inclusion is one of the priorities for the new president. For many years, it has been a topic that she has advocated for, and she was vice president when the FATF published its initial work on mitigating the unintended consequences of the misapplication of its standards.

• https://www.fatf-gafi.org/en/publications/Financialinclusionandnpoissues/Unintended-consequences-project.html

One of the key projects underway within the FATF is the potential for changes to Recommendation 1, the cornerstone recommendation which sets out the risk-based approach.

This work aims to refine Recommendation 1 and encourage countries to apply reduced standards—including Simplified Due Diligence (SDD)—when the risk of money laundering, terrorist financing, and proliferation financing is low.

Overcompliance, or ‘gold-plating’ – whereby countries and/or institutions apply a higher level of due diligence than may be warranted based on the risk – is a key barrier to financial inclusion.

• https://rusi.org/explore-our-research/publications/occasional-papers/assessing-financial-action-task-forces-impact-digital-financial-inclusion

Incentivising greater use of SDD is a crucial step in bringing more people into the formal, regulated financial system. 

Global Cohesion 

One notable feature of the FATF architecture is the relationship between countries in the Global North, which are often full members of the FATF, and countries in the Global South, which – with a few exceptions – are generally members of one of the FATF-Style Regional Bodies (FSRBs).

Both the FATF and some of the FSRBs have appeared to be frustrated at times with the relationship.

• https://static.rusi.org/Future-of-FATF_web_final.pdfhttps:/static.rusi.org/Future-of-FATF_web_final.pdf

Some FSRBs feel that they continue to have little influence at the FATF level, especially compared to Global North countries with full member status. Countries in the Global South make up the vast majority of the FATF’s ‘grey list’, and the consequences of being placed on this can be far-reaching, particularly for developing economies.

• https://www.rusi.org/explore-our-research/publications/commentary/fatf-gains-momentum-breaking-africas-cycle-grey-listing

At the same time, the varying structures and levels of resource and expertise across the different FSRBs complicate the way in which the FATF can engage with them. 

Reinforcing partnerships between the FATF and the FSRBs was one of the previous president’s priorities too, and it will continue to remain one of the most significant issues that the FATF has to grapple with over the next few years. 

Keeping the Fire Alight 

Raja Kumar’s presidency brought welcome attention to asset recovery, all too often an afterthought and an area where success has been very limited to date – it is estimated that less than 1% of criminal proceeds are ever recovered.

• https://rusi.org/explore-our-research/publications/commentary/courage-its-non-convictions-fatf-review-asset-recovery

The new president has shown a commitment to continuing the focus that Kumar placed on improving the effectiveness of global asset recovery mechanisms; in the last round of mutual evaluations, the majority of countries only achieved low or moderate levels of effectiveness.

In 2023, changes were made to Recommendations 4 and 38 to enhance global efforts on asset recovery, including recommending that countries make it a national priority and introduce more flexible tools, such as non-conviction-based confiscations.

• https://www.fatf-gafi.org/en/publications/Fatfrecommendations/amendment-FATF-standards-global-asset-recovery.html

The successful implementation of the revised recommendations will go some way to addressing the poor rates of asset recovery, but it remains a thorny issue and one which it seems unlikely that the updated recommendations alone will solve. 

Beyond Anti-Money Laundering 

When the FATF was established in 1989, its sole focus was money laundering.

Over the last 35 years, its remit has expanded to include terrorist financing and proliferation financing. These have not always been an easy fit. 

When it comes to terrorist financing, the last few years have seen the FATF focus on the issue of emerging technologies, specifically crowdfunding platforms.

• https://www.fatf-gafi.org/en/publications/Methodsandtrends/crowdfunding-for-terrorism-financing.html

At the same time, the FATF has had to balance the threat of terrorist financing with the damage done to the non-profit sector by the misuse of FATF standards relating to terrorist financing.

• https://rusi.org/explore-our-research/publications/commentary/fatfs-recommendation-8-cure-worse-disease

The recent changes to Recommendation 8 are welcome, but the FATF will have to continue to walk this fine line, especially as terrorist financiers may seek to exploit other new forms of technology.

There is much to like in the new president’s priorities, particularly the commitment to enhancing the Global Network by fostering transparency, inclusiveness and unity

While targeted financial sanctions related to proliferation financing were added to the FATF’s mandate in 2012, the amendments to Recommendation 1 in 2020 have had the most significant impact.

They require countries and obliged entities to assess proliferation financing risks.

• https://www.fatf-gafi.org/en/publications/Fatfgeneral/Outcomes-fatf-plenary-october-2020.html

 Since 2020, however, the global sanctions landscape has changed beyond recognition, and the international counter-proliferation finance (CPF) system is at a turning point.

UN Security Council Resolution 2231 – which governed the Iran nuclear deal – expired in October 2023, and earlier this year, Russia vetoed a UN Security Council Resolution to extend the life of the North Korea UN Panel of Experts for another year.

The Panel of Experts has been the main source of information on North Korea's sanctions evasion activities since 2009 but issued its final report in March 2024, leaving a significant gap in our future understanding of proliferation financing threats.

The new president needs to demonstrate where and how the FATF will fit into the future CPF landscape and how this translates into the FATF’s expectations of countries, supervisors and the private sector.

The Future of the FATF 

There is much to like in the new president’s priorities, particularly the commitment to enhancing the Global Network by fostering transparency, inclusiveness and unity.

• https://www.fatf-gafi.org/en/publications/Fatfgeneral/outcomes-fatf-plenary-june-2024.html

Keen FATF-watchers may also have noted an increased willingness for the FATF to be more open and transparent in its public communications and to employ a more collaborative approach to working with stakeholders throughout the system. If the FATF can get this right, it will go a long way to strengthening its legitimacy. 

However, there is a long list of serious items on the new president’s agenda, some of which – such as the future of proliferation financing – have been overlooked for a number of years. Others, such as the interaction between the FATF and the FSRBs, have proved to be tricky issues for many of the recent presidents, with little evidence of any progress.

The ongoing FATF project to update Recommendation 16 (which sets out the FATF’s expectations in relation to transparency and traceability of payments) necessitates very careful consideration, as the changes will impact millions of financial transactions every day.

• https://www.fatf-gafi.org/en/publications/Fatfrecommendations/R16-public-consultation-Feb24.html

All of this coincides with an unstable geopolitical outlook and rapid advances in technology which may make it easier for malign actors to exploit the global financial system.

While the FATF may have its detractors, a more inclusive, outcomes-focused and risk-based FATF will only serve to benefit all. There is a lot of work to do, which Elisa de Anda Madrazo will no doubt be the first to admit – but for now, it appears that the FATF is focusing on all the right things.

SOURCE

https://www.rusi.org/explore-our-research/publications/commentary/whole-new-world-financial-action-task-force