FATF Recommendations Bring Countries Under Scrutiny

In a bid to combat money laundering and terrorist financing, countries are voluntarily submitting themselves to a rigorous assessment process led by the Financial Action Task Force (FATF). This assessment involves a thorough review of their legislative framework, as well as an on-site visit to evaluate the effectiveness of their anti-money laundering systems.

The FATF: A Global Anti-Money Laundering Organization

The FATF has grown from its initial 16 member countries to now include 39 members, including two supranational bodies. In total, more than 200 jurisdictions are part of the FATF and/or one or more of its regional affiliate bodies, known as Financial Sector Regulatory Bodies (FSRBs).

The Assessment Process

When a country is assessed, experts from member countries and the FATF’s secretariat conduct a technical review of its legislation to see how well it implements the FATF recommendations. Each recommendation is graded on a four-point scale, with two higher grades indicating a pass and the two lower grades signaling a fail. The assessors then conduct an on-site visit to evaluate the effectiveness of the country’s anti-money laundering system, grading it on an 11-outcome basis.

The Follow-Up Process

The assessment process can be lengthy, taking up to two-and-a-half years to complete, as was the case for Sweden in 2017. Countries are required to submit extensive documentation and translations of relevant laws and regulations, demonstrating their technical compliance with the FATF recommendations.

Depending on the ratings received, countries enter one of three follow-up processes:

• Regular Follow-Up: Countries that successfully implement the majority of the FATF recommendations and receive a high effectiveness rating may be placed in this process, where they will not face significant pressure from the FATF.
• Enhanced Follow-Up: Countries that fail to meet these standards may be placed in this process, requiring more frequent reporting and rapid reforms.
• Observation by the ICRG: In extreme cases, countries receiving poor ratings may be put under observation by the FATF’s International Cooperation Review Group (ICRG), requiring them to implement specific reforms within 18 months. Failure to comply can result in sanctions and restrictions on international transactions.

The Consequences of Non-Compliance

To avoid these consequences, countries typically make a high-level political commitment to cooperate with the FATF and implement the required reforms. Refusal to do so may result in being placed on the FATF’s grey list or even the black list, which has only been done twice, for Iran and North Korea.

Conclusion

While the process can be lengthy and demanding, countries are willing to submit themselves to the assessment process in order to demonstrate their commitment to combating money laundering and terrorist financing.