This year, the Financial Action Task Force – the global standard setter in the fight against financial crime – will celebrate its 30th birthday. Given the constant stream of headlines revealing egregious cases of money laundering around the world, Tom Keatinge (Director of the Centre for Financial Crime & Security Studies at RUSI) asks whether FATF remains fit for purpose.
What started in 1989 as a ‘taskforce’ to tackle the laundering of the proceeds of the South American narcotics industry through US banks has experienced extreme mission creep. Following 9/11, its mandate was expanded to embrace terrorist financing; in 2012 it expanded again to cover the implementation of United Nations financial sanctions to counter the proliferation of weapons of mass destruction; and it regularly publishes reports alerting countries and their regulated sectors to different forms and methods of illicit finance including human trafficking, the abuse of beneficial ownership, and the threats posed by vulnerabilities in the charitable sector or the physical transportation of cash. Those present that day in 1989 at the G7 meeting in Paris wondered whether the institution they’d created would last three months, let alone 30 years.
The FATF (comprising 36 mainly rich countries) has driven tremendous – and generally positive – change in the global anti money laundering (AML) landscape. The regular assessment of countries’ implementation of its recommendations (something of a misnomer given the harsh consequences of ignoring them) has raised standards and capabilities around the world; its practice of naming-and-shaming countries that fall short of compliance has spawned a vast industry of consultants, donors and trainers who travel the world helping laggards address their shortcomings.
So far, so sensible.
But over time, the FATF realised that so-called ‘technical compliance’ with its standards brought no certainty of ‘effectiveness’. Having AML laws and a national financial intelligence unit (FIU) did not mean that a country would actually do anything to disrupt money-laundering on its patch.
And so, in a further and seemingly logical bout of mission creep, in 2012 the FATF decided that it would measure not only technical compliance but would also attempt to assess effectiveness. An assessment that had been objective became highly subjective and, as a result, open to influence.
With about one-third of the world’s nations having been scrutinised under this new methodology, it is reasonable to assess the FATF itself, and, in particular, the credibility and impartiality of its evaluation process.
Let’s start with the ‘naming-and-shaming’ list, the most visible tool of FATF influence. The list contains 13 ‘high risk and other monitored countries’, all but one of which (North Korea) are on a ‘grey list’ for their deficiencies. North Korea is on the ‘black list’ due to the ongoing and substantial risks it poses to the international financial system. Iran is in limbo – it’s a long story – between the two categories. But look closely at that list and there is a striking absence. Not one of the 36 FATF member countries is on the list, despite the calamitous AML failings of several. The 13 names in lights are members only of FATF’s regional bodies and are much less central to global finance than the FATF members themselves.
Consider the evaluation reports of Denmark and Austria – both FATF members. The former is beset by the scandal surrounding its national banking champion, Danske Bank. This catastrophe is perhaps unsurprising given the FATF’s 2017 report n the country revealed an uncoordinated national AML response, the lack of an AML strategy, and the ineffective functioning of its FIU. The 2016 report on the latter likewise reveals an uncoordinated AML response with a mixed and incomplete understanding of its money laundering risks. Yet it is hard to understand why neither has been consigned to the hall of shame, pending work to address these major shortcomings.
The recently published evaluation of the UK also raises credibility questions. Exhibiting selective reading of the report, HM Treasury declared that it showed ‘The UK is leading the world in the fight against illicit finance’. This despite the central role the country plays in many global money laundering schemes, the alarming state of the country’s FIU and noted supervisory shortcomings. Given the dominant position of the UK in the international financial system, such failings arguably threaten the integrity of the international financial system far more than the weaknesses of the countries on the list.
Where does this leave our assessment of the FATF? Global AML standards have certainly been raised and the effectiveness assessments are a logical addition to its work; but evidence suggests that the integrity of the financial system remains far from secure, even in leading and developed economies. Indeed, the FATF process has arguably globalised and entrenched a system that – whilst well-intended and initially effective – is no longer working, particularly for those advanced countries that have achieved technical compliance.
It is perhaps unfair to criticise the FATF itself as it is but a technical body, answerable to and directed by its members. But herein lie the critical issues. The FATF’s lack of inclusivity and transparency must be urgently addressed if it is to maintain credibility. Its vulnerability to horse-trading and political influence is highly damaging. Protecting the integrity of the financial system is critical; yet at a time when global norms are being acutely tested, any hint that the protectors favour their own or are susceptible to political interference may prove fatal to that very objective.