The Financial Action Task Force (FATF): an overview

The Financial Action Task Force is an intergovernmental agency set up to prevent money laundering and terrorist financing at a global level.

The Financial Action Task Force (FATF) sets the international standard for stopping financial crime, including the regulation of virtual assets and anti money laundering. The FATF monitors regulation and operations in every financial institution within the jurisdiction of its member countries. The overall goal is to protect the public from criminal activity but the organization’s mission continues to evolve as threats do, with a recent focus on terror financing and weapons of mass destruction. FATF recommendation hinges on current trends and the mutual evaluation of its members.

History of the FATF

Founded in 1989, the FATF was born out of a G-7 summit meeting in response to increasing concerns over threats to banking and the international financial system.

The initial purpose of the group was to implement the necessary measures to prevent money laundering, which had only just been declared a crime in the US. Increased drug use among Europeans, as well as Americans, led to the establishment of the FATF in a bid to prioritize the end of money laundering in the drug trade.

The FATF made a public statement in 1990 by creating a set of 40 recommendations. This is secured by the Vienna Convention and includes standards such as:

• Financial institutions should follow a specific process to obtain information around the true identity of an account owner
• Financial institutions should flag unusually large transactions and establish their legitimacy through audit and background checks
• Financial institutions should develop anti-money laundering (AML) employee training programs
• Individuals and account owners should not be informed of their increased monitoring to protect the integrity of the investigation

Today, the regulatory body has extended its focus from money laundering towards terror funding, cyber crime, trafficking, environmental crime, proliferation financing and related threats.

Terrorist financing

In response to the 9/11 attacks in 2001, the FATF redefined its purpose. Effective implementation of measures against the financing of terrorist activity and weapons of mass destruction became a priority.

Following extensive research, the FATF issued a report on how terrorists are typically financed, as well as proposed detection measures and prevention tactics. For example, wire transfers have been identified as one of the most popular terrorist financing techniques.

In 2003, the original 40 recommendations were increased by eight for more specialized anti terrorist financing recommendations. The FATF revised their standards once again in 2012, this latest version aimed at keeping up with the evolving technology acquired by criminals.

FATF International Standards: Key features

Plenary meetings: The committee meets three times per year in order to discuss current recommendations and to audit at least one member country. The FATF currently comprises 37 members, with two further FATF style regional body members (the European Commission and the Gulf Cooperation Council).

FATF Recommendations: Each meeting discusses the most relevant recommendations with reference to current trends and the organization’s desired outcomes. One of the 40 original recommendations relates to the know your customer (KYC) framework in order to build risk profiles and flag suspicious activity. Alternatively, the February 2020 meeting highlighted the risk associated with virtual assets such as cryptocurrency and peer-to-peer (P2P) transactions.

Assessment: FATF members are regularly evaluated for how well they adhere to the revised recommendations promoted by the inter governmental body. For example, the UK was most recently evaluated alongside Israel in October 2018. This particular meeting also engaged discussion on the measures taken by Austria, Denmark and Malaysia towards tackling money laundering and terrorist financing.

Who must comply?

Countries and organizations from all member states must follow the FATF standards. There is also a list of 23 observer organizations who are bound to comply with the regulations set by the intergovernmental body, including:

• African Development Bank
• Asian Development Bank
• Interpol
• United Nations

Some member states are flagged for their strategic deficiencies. Consequently, increased monitoring by the FATF ensues to protect against against money laundering and terrorism financing.

Any suspicious activity relating to financial crimes comes directly under the control of the FATF to investigate. Of the original 40 recommendations, the sixth states that members are subject to international financial sanctions to directly suppress terrorism.

The work of the FATF directly reduces money laundering and terrorist financing in its member countries. In fact, the UK’s evaluation in 2018 indicated an effective system, highlighting the legal and prosecution frameworks as particular strengths.

CUBE solves complex compliance for your key business areas – from cyber to AML and everything in between.