All About FATF, a Global Weapon to Fight Dirty Money

(Bloomberg) -- The world is awash in dirty money -- and criminals who are constantly finding new ways to hide their loot in real estate, art, securities, cryptocurrencies and old fashioned bank accounts. Policing the latest tricks in digital transfers and offshore shell companies falls to financial regulators in each country, but there’s also an obscure international group that’s exerting more influence: For the last 30 years, the Paris-based Financial Action Task Force has been quietly confronting the challenge of illicit finance. Recent reports focused on Turkey and Russia.

1. What is the Financial Action Task Force?

It’s an inter-governmental group that sets standards to curb money laundering. Created by the member states of the G7 at a summit in 1989, the goal was to protect their financial systems from criminal activity such as drug trafficking. The group, known as the FATF, is perhaps best known for pioneering the “know-your-customer” rules that require institutions to ascertain the true identities of accountholders. Those requirements are now commonplace in banks, investment houses, and payment processing firms. The FATF has also set guidelines for national laws and the best ways to manage account data. Following the attacks of September 11, 2001, the FATF developed standards for combating terrorist financing. It’s made up of 39 members, including the G7, China, Russia, Japan, and emerging economies in South America and Africa.

2. Why does it matter?

The FATF’s recommendations are taken quite seriously because no nation wants to be flagged for deficiencies that might cast doubt on the integrity of its banking system, or worse, be branded an underperformer. The FATF lists North Korea and Iran in its worst category, and designates Pakistan, Yemen, Panama, and Iceland as “monitored jurisdictions” working with the organization to improve their controls. Moreover, many countries fear the scrutiny of prosecutors and regulators in the U.S., an influential force in the FATF, which has slapped foreign institutions with billions of dollars in penalties and the threat of criminal prosecution for failing to prevent malfeasance inside their walls. Government officials facing an imminent FATF audit oftenscramble on multiple fronts to get up to snuff.

3. Is it making a dent in money laundering?

Hard to say. While experts welcome the group’s efforts, many contend its findings, which tend to focus on technical compliance, can be out of sync with the reality on the ground. The U.K. won high marks in its 2018 assessment but anti-corruption groups such as Global Witness point out that corrupt despots and oligarchs, especially from the Russian-speaking world, continue to be prolific users of Britain’s financial system. In October, Transparency International U.K. traced $418 billion in suspicious wealth through scores of banks, law firms, properties, and prestigious private schools such as Harrow School. Even as British prosecutors are increasingly freezing the assets of suspected money launderers they are still not winning convictions in high-profile cases, say anti-corruption experts. Turkey and Russia were the subjects of reports in late 2019 focused on how those countries have strengthened anti money-laundering efforts, and where they need to make improvements.

4. Does the FATF have real teeth?

Yes, to a degree. The job of adopting and enforcing anti money-laundering measures falls to a patchwork of national regulators and local law enforcement authorities that apply laws and standards differently. After a wave of scandals struck Nordic banks over their handling of dirty money in the Baltic nations, the European Union is exploring the creation of a centralized body with the power to clamp down on illicit finance in the bloc’s member nations. But a bad report card from the FATF can be a call to action. The Netherlands, for instance, was criticized by the FATF in 2015 for not doing enough to require banks to verify the identity of their accountholders. The Dutch government and the central bank have made a flurry of changes, including the approval of penalties for lenders that can amount to a fifth of their annual revenue, double the level mandated by the EU’s anti-money laundering law.

The Reference Shelf:

• QuickTake explainers on how money launderers operate and Russian money in Europe’s banks.
• The Financial Action Task Force’s portal for reports on money laundering practices in member countries.
• The organization’s standards and recommendations countries should follow to curb dirty money.
• Transparency International UK carries out statistical analysis to show the breadth of money laundering in the British property market.

To contact the reporter on this story: Edward Robinson in London at edrobinson@bloomberg.net

To contact the editors responsible for this story: Pierre Paulden at ppaulden@bloomberg.net, Leah Harrison Singer, Alan Katz

©2019 Bloomberg L.P.