Financial Action Task Force (FATF)
The FATF issues guidelines for financial institutions to mitigate money laundering and terrorist activities
To properly address the mounting concerns related to financial crime, the FATF was formed in 1989 after a mutual agreement by the G7 countries in an annual summit. FATF was appointed to determine what various ways money launderers use, review the current regulatory landscape, and make a list of guidelines necessary to combat criminal activities. The 40 Recommendations by FATF, issued one year after the inception, is a state-of-the-art action plan to tackle money laundering.
What is the FATF?
The Financial Action Task Force is an inter-governmental entity that plays a key role in combating money laundering and terrorism financing. The financial watchdog based in Paris constitutes 37 member states and publishes policies and guidelines to fight financial crime. The guidelines by FATF help regulate financial business operations and mitigate corruption.
FATF on Terrorist Financing
The global state of security took a new turn on September 11, 2001, after the infamous World Trade Center incident. Law enforcement authorities and world governments became concerned about problems arising due to terrorist funding. In order to speed up efforts against financial crime and financing of bad actors, FATF updated its recommendations for member states.
For a detailed insight on how terrorist funding takes place, the FATF carried out comprehensive research on the sources of black money, how fraudsters avoid financial barriers and prepared an action plan to take them down. The FATF also highlights the potential threats of terrorist financing by Politically Exposed Persons (PEPs) and how they can be cut down.
What are the FATF Recommendations?
The 40 Recommendations by the FATF require participating states to make efforts in combating money laundering, corruption and other forms of financial crime. Money used for illicit purposes should be confiscated and authorities be allowed to enforce necessary changes. Financial organizations operating in member countries need to ensure Know Your Customer (KYC) standards before onboarding customers.
Customers that pose a higher risk of money laundering and corruption should be monitored and reported in case of any suspicious activity. FATF countries must have a financial body to investigate records of high-risk customers to coordinate with international authorities in combating cross-border terrorist financing.
Risk Assessment Measures
Recommendation 1 proposes participating countries to develop a risk-based approach to address AML/CFT concerns. It includes guidelines to identify money laundering risks in the country, assessing their impact, and following a sound methodology to counter them. In this regard, national law enforcement authorities should play an active role to mitigate the risks. The risk-based approach should align with the idea of effective AML/CFT compliance and be scalable to prevent future threats.
Due Diligence Standards
FATF’s Recommendation 10 states that financial entities in member states should practice Customer Due Diligence (CDD) to prevent individuals with fake identities from opening accounts. CDD procedures could take place at the time of customer onboarding, before initiating a business relationship with a partner entity, or during ongoing monitoring of high-risk customers.
High-risk Countries and Customers
According to Recommendation 19, some countries pose a higher money laundering risk which is why Enhanced Due Diligence is necessary for customers belonging to those regions. EDD measures may include ongoing AML monitoring, detailed audits or restricting the nature of relationships within the high-risk country.
Recommendation 12 suggests background checks for customers either entrusted with a public role or associated with a political party. These individuals, often termed as Politically Exposed Persons (PEPs), come with a greater risk of money laundering since they may misuse their authority at any time.
Suspicious Activity Reports
Recommendation 20 of the FATF prompts financial organizations to monitor and report any suspicious transactions on the customer’s end. A Suspicious Activity Report (SAR) should be submitted after completing the required trial by the financial intelligence unit of a company. These transactions might as well be used in criminal proceeds like terrorist funding or a large-scale corruption scheme. Suspicious activity must be monitored based on money laundering offenses defined in Recommendation 3 followed by a reporting obligation.
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