In April, the Financial Action Task Force (FATF) released the first report of its kind on the State of Effectiveness and Compliance with the FATF Standards.
Below, we have summarised the highs and lows of this detailed 50+ page report, which is based on data extracted from mutual evaluation reports from a total of 120 FATF and FATF-style regional bodies (FSRB).
In short, while the assessed Member and Global Network countries have made progress in implementing the technical requirements of the FATF Standards, greater effort is needed to ensure effective implementation is taking place.
The report identified that many countries have a “tick box” approach to adopting laws and regulations, and don’t focus on results.
There are therefore considerably more lows than highs, with major shortfalls and challenges persisting.
Most states demonstrated satisfactory implementation of FATF’s recommended standards
Overall, the states analysed by the report 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 financing, and proliferation financing.
- 76% have now satisfactorily implemented the FATF’s 40 Recommendations.
- Almost all have completed at least an initial assessment of their money laundering and terrorist financing risks and are demonstrating a good risk understanding and response, with over 80% achieving substantial or high levels of effectiveness.
- 75% of all assessed jurisdictions have a solid legal framework for assessing risk and applying a risk-based approach for combatting money laundering and terrorist financing.
FATF found that states are generally cooperating and sharing information effectively with international counterparts. Half of all jurisdictions are demonstrating a satisfactory level of effectiveness for technical compliance and effectiveness.
Supervisors of banks and other financial institutions have largely demonstrated a risk-based approach to supervision, with 60% demonstrating a strong understanding of risks.
Financial institution secrecy laws have the highest compliance rate across all preventive measures. 100% of FATF member countries and 99% of FATF-style regional body countries have either fully implemented the FATF’s technical requirements, or have implemented with only minor shortcomings.
Areas identified by FATF as lacking
Despite good areas of progress, FATF’s assessment noted that many countries face substantial challenges in taking effective action commensurate to the risks they face. Designated non-financial businesses and professions in more than 70% of countries assessed were found to be implementing risk mitigation measures poorly.
This includes difficulties in investigating and prosecuting high-profile cross-border cases and preventing the illicit use of anonymous shell companies and trusts.
Many countries are still slow to conduct risk assessments and to adopt a risk-based approach, which can lead to gaps in authorities’ abilities to mitigate money laundering and terrorist financing risks.
Similarly, across both the financial and non-financial sectors, supervisors are struggling to implement a risk-based approach effectively with just 17% of supervisors in financial institutions’ and 3% in designated non-financial business and practices (DNFBP) having done so.
Small financial institutions and the non-financial sector- such as real estate agents, lawyers, and accountants- generally have a poor understanding of risks and therefore struggle to mitigate them. 97% of the assessed countries have low to moderate effectiveness ratings for preventing money laundering and terrorist financing in the private sector.
The level of ‘very good’ or ‘good’ risk understanding of private sector stakeholders is low, ranging from just 2% for the real estate and precious metals or stones dealing sectors, up to 28% for casinos.
Reporting entities in most sectors are not filing risk-based suspicious transaction reports, particularly in non-financial businesses and professions. Of the sample group, just 6% of countries’ trust and company service providers and notaries, and 10% of real estate agents, notaries, and accountants filed suspicious transaction reports in a manner consistent with the country’s risk profile. The only exception to this trend appears to be banks, which demonstrated 72% effectiveness.
Only 24% of supervisors covering designated non-financial business and professions were noted to have a strong risk understanding. This is an issue which has persisted over the past decade. Moreover, just 10% of countries’ supervisory systems demonstrated effectiveness.
Despite having the legal and regulatory framework required for preventive measures for financial institutions, 97% of those assessed are not yet achieving a high level of effectiveness.
While anonymous shell companies are one of the most widely used methods for laundering the proceeds of crime and corruption, only 52% of assessed jurisdictions have adequate laws and regulatory structures in place to address the problem, and only 9% of countries are effectively implementing these laws.
Investigations and prosecutions of money laundering and terrorist financing remain rare in most countries. Unsurprisingly, only a tiny fraction of all proceeds of crime are recovered. What’s more, few countries make it a priority to confiscate assets or make asset seizure and confiscation a strong deterrent to crime. Even more disappointingly, the current level of international cooperation has little to no impact on successful or effective ML/TF investigations and asset recovery.
The top 3 FATF recommendations to improve effectiveness and compliance
Despite areas of progress, the FATF concluded, “it is clear that nearly all countries need to make substantial improvements regarding the effective implementation of the FATF’s standards.”
The report helpfully details how to improve effectiveness for each of the 11 immediate outcomes of the peer-based reviews that it promotes. Here are some of the key recommendations it makes:
- Countries must prioritise the effective implementation of supervisory frameworks, particularly in the non-financial sector.
- To apply a truly risk-based approach, financial institutions and designated non-financial businesses and professions need a change of culture to enact supervisory systems for customer due diligence, record keeping, and suspicious transaction report filing. The transition from a rule-based to a risk-based approach takes time. It also requires a change in supervisory culture, investment in capacity for the building and training of staff, and the development and implementation of a comprehensive supervisory toolkit.
- Countries need to significantly improve the functioning of criminal justice frameworks by increasing specialised expertise, prioritising largescale money laundering operations, and targeting terrorist financing networks in line with risks, as well as applying proportionate and dissuasive penalties.
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