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Glossary

Financial Action Task Force (FATF)

November 21, 2023 - Around 4 mins mins to read

The Financial Action Task Force (FATF), also known as Group d’action financière (GAFI), is a global organization dedicated to combating money laundering and terrorist financing (AML/CFT). Established in 1989 by the G7, the FATF initially consisted of 16 members. However, it has since grown to include 39 members as of 2021. Following the 9/11 terrorist attacks, the FATF’s mandate was expanded in 2001 to encompass terrorist financing as well.

The FATF plays a crucial role in setting international standards and promoting effective implementation of measures to combat money laundering and terrorist financing. It achieves this through its main responsibilities, which revolve around monitoring money laundering trends, tracking legislative, financial, and law enforcement activities at both national and international levels, and issuing recommendations and standards to combat money laundering. Additionally, the organization provides reports on compliance in these areas.

One of the key documents developed by the FATF is the Forty Recommendations on Money Laundering, which sets out a comprehensive framework for countries to implement measures to prevent and detect money laundering. These recommendations cover areas such as customer due diligence, suspicious transaction reporting, and international cooperation. In addition, the FATF has developed Nine Special Recommendations on Terrorist Financing to address the specific challenges posed by terrorist financing.

It is important to note that the FATF’s recommendations are not legally binding, but they carry significant weight and influence. Member countries are expected to align their national legislation and regulations with these recommendations and undergo periodic assessments to evaluate their compliance with the standards set by the FATF. Non-compliant countries risk being subjected to international scrutiny and potential sanctions.

In order to promote global cooperation in combating money laundering and terrorist financing, the FATF has established a system of mutual evaluations. This involves member countries assessing one another’s compliance with the FATF’s standards and providing feedback on areas that need improvement. The outcomes of these evaluations are published in mutual evaluation reports, which allow for transparency and peer pressure to encourage countries to enhance their AML/CFT measures.

In addition to its standard-setting and evaluation functions, the FATF also identifies and monitors jurisdictions that exhibit a lack of cooperation in international efforts to combat money laundering and terrorist financing. The organization maintains a blacklist called the list of Non-Cooperative Countries or Territories (NCCT), which includes jurisdictions that have not demonstrated sufficient commitment to implementing effective AML/CFT measures. Being on this list can have severe reputational and economic consequences for a jurisdiction.

For example, a jurisdiction may be included on the FATF’s blacklist if it refuses to provide necessary information and cooperation, such as bank or brokerage account records, customer identification, beneficial ownership information, and details about shell companies commonly used for money laundering. Inclusion on the blacklist serves as a warning to the international community and encourages the jurisdiction to improve its AML/CFT regime.

With the rapid rise of digital currencies and virtual assets, the FATF has also adapted its standards to address the unique challenges posed by these emerging technologies. In June 2019, the FATF published guidance on “A Risk-based Approach to Virtual Assets and Virtual Asset Service Providers (VASPs).” This guidance outlines a risk-based approach for regulating virtual asset transactions and service providers, ensuring that they are subject to the same anti-money laundering and counter-terrorism financing standards as traditional financial institutions.

One notable requirement introduced by the FATF in this guidance is the Travel Rule, which mandates virtual asset exchanges to share user information with one another when conducting transactions. This is aimed at preventing anonymous transactions that could facilitate money laundering or terrorist financing activities. The Travel Rule has significant implications for the cryptocurrency industry, as it introduces a level of transparency and accountability to virtual asset transactions.

The FATF continues to adapt and evolve its standards and recommendations to keep pace with emerging technologies and evolving financial crime risks. In June 2021, the FATF is scheduled to convene to revise its recommendations concerning crypto assets, reflecting the organization’s commitment to staying ahead of the curve and ensuring that its standards remain relevant in the rapidly changing financial landscape.

In conclusion, the Financial Action Task Force (FATF) is a global organization dedicated to combating money laundering and terrorist financing. It sets international standards and issues recommendations for member countries to implement measures to prevent and detect financial crimes. The FATF’s work is crucial in promoting global cooperation and ensuring that countries have robust anti-money laundering and counter-terrorism financing frameworks in place.

Author

Coincu

Glossary

Financial Action Task Force (FATF)

The Financial Action Task Force (FATF), also known as Group d’action financière (GAFI), is a global organization dedicated to combating money laundering and terrorist financing (AML/CFT). Established in 1989 by the G7, the FATF initially consisted of 16 members. However, it has since grown to include 39 members as of 2021. Following the 9/11 terrorist attacks, the FATF’s mandate was expanded in 2001 to encompass terrorist financing as well.

The FATF plays a crucial role in setting international standards and promoting effective implementation of measures to combat money laundering and terrorist financing. It achieves this through its main responsibilities, which revolve around monitoring money laundering trends, tracking legislative, financial, and law enforcement activities at both national and international levels, and issuing recommendations and standards to combat money laundering. Additionally, the organization provides reports on compliance in these areas.

One of the key documents developed by the FATF is the Forty Recommendations on Money Laundering, which sets out a comprehensive framework for countries to implement measures to prevent and detect money laundering. These recommendations cover areas such as customer due diligence, suspicious transaction reporting, and international cooperation. In addition, the FATF has developed Nine Special Recommendations on Terrorist Financing to address the specific challenges posed by terrorist financing.

It is important to note that the FATF’s recommendations are not legally binding, but they carry significant weight and influence. Member countries are expected to align their national legislation and regulations with these recommendations and undergo periodic assessments to evaluate their compliance with the standards set by the FATF. Non-compliant countries risk being subjected to international scrutiny and potential sanctions.

In order to promote global cooperation in combating money laundering and terrorist financing, the FATF has established a system of mutual evaluations. This involves member countries assessing one another’s compliance with the FATF’s standards and providing feedback on areas that need improvement. The outcomes of these evaluations are published in mutual evaluation reports, which allow for transparency and peer pressure to encourage countries to enhance their AML/CFT measures.

In addition to its standard-setting and evaluation functions, the FATF also identifies and monitors jurisdictions that exhibit a lack of cooperation in international efforts to combat money laundering and terrorist financing. The organization maintains a blacklist called the list of Non-Cooperative Countries or Territories (NCCT), which includes jurisdictions that have not demonstrated sufficient commitment to implementing effective AML/CFT measures. Being on this list can have severe reputational and economic consequences for a jurisdiction.

For example, a jurisdiction may be included on the FATF’s blacklist if it refuses to provide necessary information and cooperation, such as bank or brokerage account records, customer identification, beneficial ownership information, and details about shell companies commonly used for money laundering. Inclusion on the blacklist serves as a warning to the international community and encourages the jurisdiction to improve its AML/CFT regime.

With the rapid rise of digital currencies and virtual assets, the FATF has also adapted its standards to address the unique challenges posed by these emerging technologies. In June 2019, the FATF published guidance on “A Risk-based Approach to Virtual Assets and Virtual Asset Service Providers (VASPs).” This guidance outlines a risk-based approach for regulating virtual asset transactions and service providers, ensuring that they are subject to the same anti-money laundering and counter-terrorism financing standards as traditional financial institutions.

One notable requirement introduced by the FATF in this guidance is the Travel Rule, which mandates virtual asset exchanges to share user information with one another when conducting transactions. This is aimed at preventing anonymous transactions that could facilitate money laundering or terrorist financing activities. The Travel Rule has significant implications for the cryptocurrency industry, as it introduces a level of transparency and accountability to virtual asset transactions.

The FATF continues to adapt and evolve its standards and recommendations to keep pace with emerging technologies and evolving financial crime risks. In June 2021, the FATF is scheduled to convene to revise its recommendations concerning crypto assets, reflecting the organization’s commitment to staying ahead of the curve and ensuring that its standards remain relevant in the rapidly changing financial landscape.

In conclusion, the Financial Action Task Force (FATF) is a global organization dedicated to combating money laundering and terrorist financing. It sets international standards and issues recommendations for member countries to implement measures to prevent and detect financial crimes. The FATF’s work is crucial in promoting global cooperation and ensuring that countries have robust anti-money laundering and counter-terrorism financing frameworks in place.

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