FATF LAW INSIDER IN

FINANCIAL ACTION TASK FORCE (FATF) RECOMMENDATIONS

By Sahib Gambhir

WHAT IS FINANCIAL ACTION TASK FORCE (FATF)?
The Financial Action Task Force (FATF) is an international and inter-governmental body which works as a watchdog for international money laundering and financing of terrorism.

The sole purpose of this body is dedicated towards preventing and combating global money laundering and terrorist financing. FATF sets international standards in order to stop and prevent these illegal activities which causes harm to the society.

FATF was founded in 1989 and was established by the ministers of its 37 member countries, now have more than 200 countries and jurisdiction committed to implement them.

The FATF in order to align international anti-money laundering/combating the finances of terrorism develops the FATF Recommendations/FATF Standards which makes sure a well-co-ordinated global response to prevent organized crime, corruption and terrorism[1].

One of the roles played by FATF is to review the money laundering and terrorist financing techniques in order to constantly strengthen their standards to address new risks, for example regulation of virtual assets (crypto currencies).

The FATF monitors member countries to make sure that they are implementing the FATF Recommendations and Standards effectively and efficiently, and countries are held accountable who do not comply[2].

SOME MOST IMPORTANT RECOMMENDATIONS BY FATF:

The FATF has given wide range of recommendations which ranges from introducing reporting to implementing international conventions. Some of the most essential FATF recommendations are discussed in brief below:

I. RECOMMENDATION 1: RISK-BASED APPROACH

The FATF recommends to the member countries that they should adopt risk-based approach to anti-money laundering and combating the financing of terrorism.

This means that each and every country must classify the level of money laundering and terrorism financing risk which they are facing, and then take appropriate action in response, these responses may include establishing national supervisory authorities and systems to monitor and reduce those threats.

This risk-based approach acts as a foundation of effective anti-money laundering and combating the financing of terrorism system and is very important for implementing other additional FATF recommendations.[3]

The risk-based approach is somehow measurable as higher level of risks means more robust measures, while lower level of risks are met by comparatively simpler measures.

II. REOMMENDATIONS 6/7/35: SANCTIONS

In order to conform with United Nations Securities Council resolutions, the FATF makes number of recommendations that the member countries implement targeted financial sanctions against any person or entity which may possess terrorism financing risks, may be they are engaging in the proliferation and financing of weapons of mass destruction.

The United Nation Securities Council resolutions requires the member countries to freeze the funds and assets immediately of those persons and entities which pose risk and also member countries should make sure that no further funds or assets are made available them.

FATF member countries make and issues sanction lists that should be consulted by the financial institutions before establishing business relationship with a client which may possess potential risk.

III. RECOMMENDATION 10: CUSTOMER DUE DIGILENCE

FATF in its recommendation recommends the countries must make sure that their financial institutions are putting appropriate due diligence procedures in place so that customers are prevented from opening anonymous accounts or accounts under fictitious or fake names.

Countries should observe these due diligence measures whenever any new business is started by a financial institution, or when certain types of transactions take place, and when they have any suspicion of money laundering and terrorist financing or when customer’s identity is in doubts.[4]

These due diligence measures should be an on-going measure which allows financial institutions to verify customer’s identity, help in identifying beneficial owners, and helps in clarifying the nature of business relationships reliably.

IV. RECOMMENDATION 12: POLIICALLY EXPOSED PERSONS (PEPs)

This recommendation of FATF recommends the financial institutions to implement anti-money laundering and combating the financing of terrorism measures in order to deal with foreign politically exposed persons (PEPs) and the risk which they possess.

These measures include taking a risk-based approach to single clients, it also includes identifying the sources from where the wealth and funds are coming, it also includes conducting on-going monitoring, and one of the important measures which is included is that it introduces a senior management approval process in order to commence PEP business relationships.

A financial institution establishes that which PEPs is presenting higher risks and then subjects those customers to a more robust level of screening. All the PEP measures taken by financial institution must also apply to family members and close associates of PEP.[5]

V. RECOMMENDATION 15: VIRTUAL ASSETS

On 21st June 2019, The FATF updated its international standards by issuing new recommendations “Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Provider”.

This recommendation concerns with new technologies and recently it has been informed by an Interpretive Note on Virtual Assets (basically means crypto currencies). This Interpretive note sets out new provisions for treating Virtual Assets by both financial authorities and entities which are obliged.

When we take a look in detail then it is clear that the FATF is recommending that the countries must apply risk-based anti-money laundering/combating the financing of terrorism approach to those virtual assets, and regulate, monitor and supervise the Virtual Assets Service Providers (VASPs), and helps in facilitating sharing of information between authorities.

These VAPS must be licenced in order to perform basic anti-money laundering/combating the financing of terrorism processes like customer due diligence, PEP screening, etc.[6]

VI. RECOMMENDATION 16: WIRE TRANSFERS

This recommendation is also known as the Travel rule. This recommendation requires the countries to collect identifying information from the originators and the domestic beneficiaries and information on wire transfer which is happening cross-border, so that a suitable anti-money laundering/combating the financing of terrorism audit trail can be created.

In actual practice, whenever transfer takes place then information is exchanged between parties and this information includes the submission of names, physical address and account numbers.

The FATF in 2019 updated the Travel Rule because the use of crypto currencies was increasing all over the world.

This Travel Rule now applies to Virtual Asset Service Provider, such as cryptocurrencies exchanges and wallets and make sure that they are subjected to same information exchange requirement as it is required by conventional financial institutions while transferring funds digitally.[7]

VII. RECOMMENDATION 19: HIGHER RISK COUNTRIES

Certain countries have a higher risk when it comes to money laundering or activities related to terrorist financing.

The FATF recommends that whenever business is being done with persons and entities that come from these high risk countries then that financial institution must apply enhanced due diligence measures.

This means that there will be enhanced reporting and audit mechanisms, and these measures also limits the business relationships within those countries.[8]

VIII. RECOMMENDATION 20: REPORTING OF SUSPICIOUS TRANSACTIONS

This recommendation of FATF recommends that financial institutions must report any suspicious transaction to the relevant financial intelligence unit at the appointed time.

These suspicious transactions involve the funds that are suspected to be proceeds of criminal activities or they are being used in terrorism financing. Here ‘criminal activities’ is primarily referring to offences of money laundering, the criteria for which are met according to FATF Recommendation 3.

This recommendation says that whenever the suspicious transaction occur then its reporting obligation is direct and mandatory, and amount of money involved doesn’t matter, it should be reported regardless. It should also be reported even if suspicious transaction is not completed successfully.[9]

CONCLUSION

A very comprehensive and reliable framework of measures is set out by the Financial Action Task Force Recommendations, which countries should adopt and implement in order to fight against money laundering and terrorism financing, which also includes financing of proliferation of weapons of mass destruction.

Usually countries have very wide and diverse legal, operational and administrative frameworks financial systems are also different, that’s why all cannot take similar measures to counter these threats.

Therefore, the FATF Recommendations sets an international standard for countries which they should implement by adapting the measures according to their particular circumstances.

It is important to note that countries are free to implement measures strictly according to the relevant activity in their respective jurisdiction.

  1. Fatf-gafi.org. 2020. About – Financial Action Task Force (FATF),.

  2. ComplyAdvantage. 2020. FATF Recommendations – What You Need To Know,

  3. Fatf-gafi.org. 2020. Documents – Financial Action Task Force (FATF), .

  4. Fatf-gafi.org. 2020. FATF Recommendations – Financial Action Task Force (FATF), <http://www.fatf-gafi.org/publications/fatfrecommendations/?hf=10&b=0&s=desc(fatf_releasedate)> (Accessed 17 August 2020).

  5. Fatf-gafi.org. 2020. Documents – Financial Action Task Force (FATF), <http://www.fatf-gafi.org/publications/fatfrecommendations/documents/peps-r12-r22.html>(Accessed 17 August 2020).

  6. Mondaq.com. 2020. FATF Publishes New Rules For The Regulation Of Virtual Assets – Finance And Banking – UK, https://www.mondaq.com/uk/financial-services/851992/fatf-publishes-new-rules-for-the-regulation-of-virtual-assets (Accessed 17 August 2020).

  7. Supra Note 4.

  8. Ibid.

  9. Supra Note 2.