16 Jan 2020

An Overview of the FATF Recommendations

The Financial Action Task Force (FATF) was founded in 1989 after a G7 summit. The initial purpose of the task force was to analyze money laundering trends and evaluate the combative steps that global governments have taken to prevent it.

Since then, the FATF has expanded to fight terrorist financing, the funding of weapons of mass destruction, and corruption. Almost all developed countries are members of the FATF, and the task force has a list of 40 recommendations that governments should follow. While we encourage you to look at the full list yourself, we’ve highlighted some of the most important ones for you here.

Recommendation 1: Risk-based approach

First and foremost, the FATF recommends that countries take a risk-based approach to anti-money laundering (AML) and counter terrorist financing (CTF). Essentially, this means that each country should assess the risks that it faces and take appropriate preventative action in response.

A risk-based approach is considered to be the foundation of an effective AML and CTF program and for implementing other FATF recommendations. The risk-based approach can also be scalable, meaning that higher risk levels will need more rigorous measures and lower risk levels may require less.

Recommendation 2: National cooperation and coordination

Another important foundational aspect of AML and CTF is for countries to implement a national policy. This means that businesses, government bodies, and more will need to follow the same rules. There should be a designated authority for regulation purposes.

It is also vital that law enforcement, financial intelligence units, government bodies, and others cooperate with one another. The sharing of knowledge and information ultimately leads to further prevention and means that criminals can be spotted sooner rather than later. 

Recommendations 6/7/35: Sanctions

In order to comply with the United Nations Security Council (UNSC) resolutions, the FATF makes several recommendations regarding financial sanctions. It is recommended that member states implement targeted financial sanctions against people or entities that pose terrorist financing risks, or that engage in the financing and proliferation of weapons of mass destruction.

The UNSC regulations require that member states freeze the funds and assets of the listed individuals and groups immediately, and ensure that no further funds or assets be made available to them in the future. FATF member countries should create their own sanctions lists that financial institutions can consult prior to establishing a relationship with prospective clients.

There are thousands of individuals and groups that are currently under sanctions from the UNSC. Some countries, including Syria, Iran, and Cuba, are completely or partially sanctioned. Any companies that offer financial services should closely analyze sanction lists before accepting new business.

Recommendation 10: Customer due diligence

Customer due diligence (CDD) is the process of assessing risks posed by potential and current customers. Most AML and CTF measures fall under CDD, as does Know Your Customer (KYC). KYC helps prevent people from opening accounts anonymously or under a false name.

Additionally, CDD not only applies to potential customers, but also current customers. Customers should be ranked based on how high risk or low risk they may be and monitored accordingly. Due diligence measures should be observed whenever a financial institution begins a new business relationship, when specific types of transactions take place, when there are doubts surrounding the customers’ identity, and when there is suspicion of money laundering and/or terrorist financing.

Recommendation 12: PEPs

Politically exposed persons (PEPs) are individuals who are entrusted with a prominent public position and therefore may be more susceptible to acquiring money through illegal means, which also means that they are statistically more likely to launder money. The FATF recommends that financial institutions implement AML/KYC for foreign PEPs and the risks that they present.

All PEPs should be actively monitored during their customer lifecycle, and that also includes any family and close associates. Financial institutions should take a risk-based approach with PEPs, including identifying their sources of wealth, regular monitoring, and introducing senior management approval. 

Recommendation 15: New technologies and virtual assets

The FATF recommends that countries be aware of how criminals may make use of new technologies and new business practices that arise, particularly in the financial sector. A risk assessment should take place prior to the official release of any new products, business practices, or technological developments. Appropriate measures should be taken to manage and prevent any risks that may pop up.

Recommendation 15 is also accompanied by an interpretive note regarding virtual assets. Essentially, this section covers cryptocurrency. The note outlines an incoming provision for the treatment of virtual assets by financial authorities and any other obliged entities. The FATF recommends that countries apply a risk-based AML/CTF approach to these assets. 

Recommendation 19: Higher risk countries

Some countries are at a higher risk for money laundering and terrorist financing activities. When doing business with individuals or entities from higher risk countries, the FATF recommends that financial institutions apply enhanced due diligence measures. 

Enhanced due diligence measures include enhanced reporting and auditing, limiting business relationships within those countries, and prohibiting any new branch or office openings. Additionally, the FATF recommends that member states should advise their financial institutions about the AML and CTF weaknesses of higher risk countries.

Recommendation 20: Reporting of suspicious transactions

If the relevant authorities don’t receive any reports, then it’s almost impossible for them to catch financial crimes. The reporting of suspicious transactions is vital to making AML and CTF measures work efficiently. The FATF recommends that financial institutions report any suspicious transactions to the relevant authorities immediately.

Suspicious transactions should have a mandatory reporting obligation, and should be reported regardless of the amount or if the transaction is completed. Different member states have different reporting timelines, but generally they should be reported sooner rather than later in order to effectively stop criminal activity.

Recommendations 22/23: DFNBPs

Designated non-financial businesses and professions (DNFBPs) are also required to follow many of the customer due diligence and record keeping guidelines outlined by the FATF. DNFBPs are defined as the following: casinos, real estate agents, dealers in precious metals and precious stones, trust and company service providers, notaries, lawyers, other independent legal professionals and accountants. 

Each profession has their own set of recommendations as outlined by the FATF. Some DFNBPs are required to perform additional measures, depending on their profession.

Recommendation 32 - Cash couriers

The FATF recommends that countries should have adequate measures in place to detect the physical cross-border transportation of currency and other items of value. Countries should ensure that the relevant authorities have the legal means to stop or restrain anyone conducting this activity illegally. 

The relevant sanctions should be placed upon those who make false declarations or disclosures, especially if it is tied to money laundering and terrorist financing activities. 

Recommendations 36-40: International cooperation

One of the main reasons the FATF was created was to have an international regulatory body for AML and CTF measures. International cooperation is a cornerstone of the FATF, and as a result is extremely necessary for the FATF to work efficiently.

A large part of the internal cooperation recommendations involves mutual legal assistance. The FATF recommends that countries should provide the widest possible range of mutual legal assistance in relation to money laundering, terrorist financing, investigations, prosecutions, and related proceedings. Additionally, the FATF also recommends that countries should have relevant treaties in place to facilitate cooperation. 

There are also recommendations regarding the freezing and confiscation of assets. The FATF recommends that countries should have the authority to take swift action in response to foreign countries requesting assistance. This action includes the identifying, freezing, and confiscating of assets.

Extradition is also an important aspect of these recommendations. The FATF recommends that countries should effectively execute extradition requests in relation to money laundering and terrorist financing as quickly as possible. Countries should also do their best to ensure that they are not a safe haven, in particular for individuals tied to terrorist financing.

Conclusion

While we have outlined some of the most important aspects of the FATF recommendations here, we do recommend that you take a look at the whole list as we’ve covered less than half of them. For businesses working in the financial services industry, the recommendations the FATF makes are extremely relevant.

Despite the fact that this list only consists of recommendations, countries and officials should treat them like they are the law. Getting on the wrong side of the FATF can lead to being publicly called out; the task force is not afraid to name and shame. The FATF regularly monitors member states to ensure that they are following the outlined recommendations.

Meeting all the FATF recommendations may seem like a daunting task. Luckily, compliance systems have emerged to help make the process easier and more efficient. If you’re looking to get started, you can download our free AML risk assessment to get an idea of what you need to work on.

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