Following the Money: Recent FATF Compliance Findings

Historically, Financial Action Taskforce (FATF) evaluations focused on their member countries having implemented the recommendations. Now, the evaluations focus much more heavily on the effectiveness of the implementation. This is a firm move away from it being acceptable to have simply put procedures in place; now, countries also have to demonstrate that these procedures are effective. In other words, FATF member countries can no longer get a tick in the box for being a member of the gym and agreeing to abide by the rules – they now have to show that they are actually getting fitter and healthier.

To monitor and measure this, the FATF published a Report (“the Report”) on the State of Effectiveness and Compliance with their AML/CTF & CPF Standards and Recommendations in April 2022. This report offers a comprehensive overview of the state of global efforts to tackle money laundering, terrorist, and proliferation financing. The report essentially offers a snapshot of the present-day technical compliance and effectiveness of regimes put in place by those FATF member countries (or FATF Style Regional Bodies (FSRB) member countries) which have been evaluated to date.

Aims and Objectives

The FATF’s mission is to set appropriate international standards (otherwise known as Recommendations) on Anti-Money Laundering, Combating the Financing of Terrorism, and Countering Proliferation Financing (AML/CFT/ CPF) and to keep updating and reviewing the appropriateness of these standards. They achieve the latter by continuously monitoring and assessing new and emerging risks and updating their standards accordingly. Additionally, the FATF focuses on measuring its member countries’ implementation and effectiveness of these standards through a peer-review process known as Mutual Evaluations Reports (MERs).

Compiling the Report

The State of Effectiveness and Compliance Report focuses on information collected by:

1. the FATF itself and its FSRB MERs since 2013
2. the data collected which has assessed the strengths and weaknesses of member country’s AML/CFT/ CPF frameworks.

At the date of finalization of the Report, 120 out of 205 jurisdictions had been evaluated. It is worth noting that all of the data collected and collated in this Report are from publicly available reports and publications.

Summary of Findings

Improvements can be seen

• Overall, the report shows that countries have made huge progress in improving technical compliance by establishing and enacting a broad range of laws and regulations to better tackle money laundering, terrorist, and proliferation financing. This has created a firm legislative basis for national authorities to ‘follow the money’ that fuels crime and terrorism.
• Significant improvements in technical compliance have been made in terms of laws and regulations, with 76% of countries now having satisfactorily implemented the FATF’s 40 Recommendations. This figure stood at just 36% in 2012, demonstrating the positive impact of the FATF Mutual Evaluation and Follow-up processes.
• FATF member countries demonstrate a good risk understanding and response with over 80% achieving substantial or high effectiveness.
• Nearly all (97%) of 120 assessed countries have low to moderate effectiveness ratings for preventing money laundering and terrorist financing in the private sector.
• Countries have made progress in the supervisory framework of laws and regulations and enhancing the powers of supervisors that monitor relevant entities.

More work needs to be done

• Only 19% of FSRB members demonstrate substantial or high effectiveness. Members need to improve their understanding of money laundering and terrorist financing risks, and strengthen the effective implementation of risk-based policies.
• Many countries are still in the initial stages of developing comprehensive, risk-based AML/CFT/CPF frameworks.
• The implementation and extent of supervision of laws and regulations remains inadequate: just 10% of countries’ supervisory systems demonstrate effectiveness in this area.
• At time of publication, only half (52%) of assessed jurisdictions have adequate laws and regulatory structures in place. However, few countries are effectively implementing these laws: only 9% of countries were found to be substantially effective in this area. This figure is evidence of why there is a need to monitor how the countries implement the regulatory framework. Simply adopting it is not enough.

Important Points to Note

The report contains several positive takeaways. Almost all member countries completed an initial assessment of their money laundering and terrorist financing risks, and some had done so multiple times. The FATF and FSRB evaluations have demonstrated that countries have begun taking actions or creating policies to mitigate their risks with appropriate policy and operational responses.

Additionally, members have initially agreed on tougher global rules for beneficial ownership of legal persons (Recommendation 24). The new rules are a major step forward to preventing illicit enrichment by ensuring that all countries will need to have a beneficial ownership registry or an equivalent system in place. For more detail on this, read our full FATF Plenary Meeting Summary.

Finally, criminal justice frameworks to tackle money laundering and terrorist financing are now in place. Most countries also have financial intelligence units, designated authorities for financial investigations, and specialists tasked with asset recovery (i.e., identifying and confiscating the proceeds of crime.) Countries are also exchanging more information and cooperating with international counterparts.

However, many countries still face substantial challenges in taking effective action equal to the risks they face. These challenges are made even harder to overcome by the fact that many countries conduct risk assessments and adopt risk-based approaches too late, or often at a slow pace. Whilst steps have been taken to apply regulations and FATF framework, governments need time to implement policies and co-ordinate with public and private bodies to respond effectively to the risks.

What’s more, investigations and prosecutions of money laundering and terrorist financing remain rare in most countries, particularly for complex cases or despite some strong international co-operation among countries on cases involving a cross-border element. Furthermore, only a tiny fraction of all proceeds of crime are recovered. As such, convictions for money laundering are often not in line with the major risks identified within each country.

Governments are not the only responsible bodies; private sector entities such as banks, money or value transfer services, lenders, and virtual asset service providers have a shared responsibility to help identify and prevent risks from money laundering and terrorist financing. This is nothing new, but it is emphasised in the FATF report, which suggests a lack of effort or action from the relevant bodies.

Relative to private sector entities, FATF findings show that larger multinational financial institutions generally have a clear understanding of the risks they face. As a result, they have put in place effective risk mitigation measures. In contrast, it was observed that small financial institutions, as well as the nonfinancial sector (including actors such as real estate agents, lawyers, and accountants) generally have a poorer understanding of risks. This often results in these entities struggling to mitigate them.

Changes and Further Recommendations

This Report fed into the FATF’s Strategic Review, which aims to make the next cycle of MERs timelier, risk-based, and effective. The next round of MERs will include:

• More frequent assessments of countries
• Greater emphasis on the major risks as well as the context, to ensure that the focus is targeted at areas where the risk is highest
• A result-oriented follow-up assessment process, encouraging specific action to tackle money laundering, terrorist financing and the financing of weapons of mass destruction.

The report also recommends the following actions for member countries:

• Prioritise the effective implementation of supervisory frameworks, particularly in the non-financial sector.
• Prioritise efforts and demonstrate improvements in recording, reporting, and verifying information regarding legal persons and arrangements.
• Significantly improve the functioning of criminal justice frameworks by:
  • increasing specialized expertise
  • prioritising large-scale money laundering operations
  • targeting terrorist financing networks in-line with risks
  • applying proportionate and dissuasive penalties
• Cooperate with and make available up-to-date national risk assessments and sectoral risk assessments to the relevant stakeholders.
• Consider adequately identifying and assessing ML/TF risks and contributing into the national risk assessment exercises to increase supervision
  • The key word here is adequately, and countries should make sure to invest in capacity building and staff training in order to aid the development and implementation of a comprehensive supervisory toolkit.

The report also observes that, in general, private sector entities need a change of culture in applying a true risk-based approach to conduct customer due diligence, keep records, and file suspicious activity reports.

Conclusion

The Report acknowledges that countries have made considerable progress in implementing the technical requirements of the FATF Standards, but greater effort is needed to ensure that effective implementation is taking place. Tangible results will only come following fundamental or major improvements to their money laundering and terrorist financing systems.

The FATF recognises that many countries continue to take a “tick box” approach to adopting laws and regulations but crucially, and wrongly, do not focus on results. It concludes that it is imperative for countries to set goals and aims to successfully achieve the 11 immediate outcomes of the FATF’s effectiveness-based peer reviews.

The 11 Immediate Outcomes are:

1. Money laundering and terrorist financing risks are understood and, where appropriate, actions co-ordinated domestically to combat money laundering and the financing of terrorism and proliferation.
2. International Co-operation delivers appropriate information, financial intelligence, and evidence, and facilitates action against criminals and their assets.
3. Supervisors appropriately supervise, monitor and regulate financial institutions, designated non-financial businesses and professions and Virtual Asset Service Providers (VASPs) for compliance with AML/ CFT requirements commensurate with their risks.
4. Financial institutions and Designated Non-financial Businesses and Professions adequately apply AML/CFT preventive measures commensurate with their risks and report suspicious transactions.
5. Legal persons and arrangements are prevented from misuse for money laundering or terrorist financing, and information on their beneficial ownership is available to competent authorities without impediments.
6. Financial intelligence and all other relevant information are appropriately used by competent authorities for money laundering and terrorist financing investigations.
7. Money laundering offences and activities are investigated, and offenders are prosecuted and subject to effective, proportionate, and dissuasive sanctions.
8. Proceeds and instrumentalities of crime are confiscated.
9. Ensure that terrorist financing offences and activities are investigated and persons who finance terrorism are prosecuted and subject to effective, proportionate, and dissuasive sanctions.
10. That terrorists, terrorist organisations and terrorist financiers are prevented from raising, moving and using funds, and from abusing the NPO sector.
11. Persons and entities involved in the proliferation of weapons of mass destruction are prevented from raising, moving and using funds, consistent with the relevant UNSCRs.

Following a meeting in Washington amongst FATF ministers on 21 April 2022, there was a strong consensus to commit to strengthening the FATF global network, enhancing beneficial ownership transparency, and increasing capabilities to effectively recover criminal assets. The members collectively emphasised the need to improve the FATF’s capacity to respond to money laundering and terrorist financing threats to countries and pledged to remedy significant compliance deficiencies where needed.

There is no “silver bullet” to resolving issues relating to money laundering, terrorist financing or proliferation financing and reaching immediate, successful outcomes. The FATF Report reveals a number of areas of progress but also highlights the major shortcomings and challenges that persist. All countries need to make substantial improvements to effectively implement the FATF standards and continue to build upon and sharpen the global AML/CFT/CPF systems and infrastructure.

Anti-Financial Crime Support – How can Complyport Help?

Our experienced Financial Crime and Forensics team led by Martin Schofield—one of the world’s leading specialists in the field—brings a wealth of experience to every project we are engaged in. Our highly experienced financial crime professionals and forensic experts, in subjects such as anti-money laundering, counter terrorist financing, anti-bribery and corruption and fraud and regularly help our clients navigate the complexities of the financial crime and money laundering environment. Services offered by Complyport include:

• Financial crime health checks and audits,
• Implementation of financial crime, AML, CTF, ABC, Fraud and market abuse controls and frameworks,
• Ongoing advice on financial crime, AML, CTF, market abuse and fraud prevention,
• Authoring/reviewing financial crime policies,
• Outsourced MLRO support
• Outsourced KYC and CDD support,
• Assistance in identifying Politically Exposed Persons (PEPs),
• Assistance in navigating international sanctions,
• Support with preventing market abuse and insider dealing,
• Expert Witness in Financial Crime cases
• Forensics and Investigations
• Design and/or delivery of online or face to face financial crime training

If this article has raised any questions, or you think your firm may require assistance, please contact either Martin Schofield via martin.schofield@complyport.co.uk or Jan Hagen via jan.hagen@complyport.co.uk to book in a free consultation.

About Complyport

Complyport is the City’s market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.

Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. Our vision is to be there for our clients every step of the way, helping them change, grow, and excel through expertise, insight, and innovation, and in so doing to become our clients’ most valued supplier and trusted advisor.

We have successfully assisted over 1000 firms to become authorised with the FCA and EU and are providing regulatory support to over 600 regulated firms on an ongoing basis globally. With presence in the UK and EU, as well as via our Associates Network, Complyport can assist firms across multiple jurisdictions.

Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers.

Day to day, we conduct audits and reviews of a firm’s products, processes, policies, and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Our clients tell us we live our values; we are driven, agile and collaborative.