The National Commission on Terrorist Attacks Upon the United States, or the 9/11 Commission, recommended that tracking terrorist financing "must remain front and center in U.S. counterterrorism efforts" (see The 9/11 Commission Report: Final Report of the National Commission on Terrorist Attacks Upon the United States, U.S. Government Printing Office, July, 2004. p. 382). As part of these efforts, the United States plays a leading role in the Financial Action Task Force on Money Laundering (FATF). The independent, intergovernmental policy-making body was established by the 1989 G-7 Summit in Paris as a result of growing concerns among the summit participants about the threat posed to the international banking system by money laundering. After September 11, 2001, the body expanded its role to include identifying sources and methods of terrorist financing and adopted nine special recommendations on terrorist financing to track terrorists' funds. The scope of activity of FATF was broadened as a result of the 2008-2009 global financial crisis, since financial systems in distress can be more vulnerable to abuse for illegal activities. More recently, the FATF added the proliferation of financing of weapons of mass destruction as one of its areas of surveillance. In April, 2012, the member countries adopted a remodeled set of Forty Recommendations and renewed the FATF's mandate through December 31, 2020. This report provides an overview of the task force and of its progress to date in gaining broad international support for its recommendations.
The Financial Action Task Force on Money Laundering is comprised of 34 member countries and territories and two regional organizations1 and was organized to develop and promote policies to combat money laundering and terrorist financing, referred to as anti-money laundering/ combatting the financing of terrorism (AML/CFT) measures.2 The FATF relies on a combination of annual self-assessments and periodic mutual evaluations that are completed by a team of FATF experts to provide information and to assess the compliance of its members to the FATF guidelines. FATF has no enforcement capability, but can suspend member countries that fail to comply on a timely basis with its guidelines. For instance, the FATF warned Turkey in early 2013 that its membership would be suspended unless it became more aggressive in criminalizing money laundering. The FATF is housed at the headquarters of the Organization for Economic Cooperation and Development (OECD) in Paris and occasionally uses some OECD staff, but the FATF is not part of the OECD. The presidency of the FATF is a one-year appointed position, currently held by Mr. Vladimir Nechaev of the Russian Federation, who will serve through June 30, 2014, when Mr. Roger Wilkins of Australia is to assume the presidency. At the ministerial meeting in April 2012, the member countries renewed the FATF's mandate through December 31, 2020.
The FATF focuses on six key areas that are intended to reduce the potential for the abuse of financial systems and financial crimes.
When it was established in 1989, the FATF was charged with examining money laundering techniques and trends, reviewing the actions which had already been taken, and setting out the measures that still needed to be taken to combat money laundering. In 1990, the FATF issued a report containing a set of 40 recommendations,3 which provided a comprehensive plan of action to fight against money laundering. Following the terrorist attacks of September 11, 2001, the FATF redirected its efforts to focus on money laundering and terrorist financing. On October 31, 2001, the FATF issued a new set of guidelines and a set of eight special recommendations on terrorist financing.4 At that time, the FATF indicated that it had broadened its mission beyond money laundering to focus on combating terrorist financing and that it was encouraging all countries to abide by the new set of guidelines. A ninth special recommendation was added in 2005. In 2005, the United Nations Security Council adopted Resolution 1617 urging all U.N. Member States to implement the FATF 40 recommendations on money laundering and the nine special recommendations on terrorist financing.
The FATF completed a review of its mandate and proposed changes that were adopted at the May 2004 ministerial meeting. In 2006, FATF adopted a new surveillance process, known as the International Cooperation Review Group, to identify, examine, and engage with vulnerable jurisdictions that are failing to implement effective AML-CFT systems. In addition, the FATF revised its mandate in 2008 to indicate that FATF "will intensify its surveillance of systemic criminal and terrorist financing risks to enhance its ability to identify, prioritize, and act on these threats." The FATF also expressed its support for the development of national threat assessments through best practice guidance and the establishment of stronger and more regular mechanisms for sharing information on risks and vulnerabilities. In addition, the FATF indicated its determination to remain at the center of international efforts to protect the integrity of the global financial system against new risks from criminals and terrorists.
At the G-20 (Group of 20) Summit in Pittsburgh in 2009, the national leaders affirmed their commitment to deal with tax havens, money laundering, corruption, terrorist financing, and prudential standards. They called on the FATF to improve transparency and exchange of information so countries can fully enforce their laws. The G-20 members also called on the FATF to issue a public list of high-risk jurisdictions. In 2010, the FATF published guidelines for insurance companies and the cross-border transportation of cash and bearer bonds. The FATF also adopted a set of guidelines regarding tax amnesty laws and asset repatriation. In 2010, the FATF also published a report on the vulnerabilities of free trade zones for misuse in money laundering and terrorist financing. At the conclusion of the November 2010 G-20 Summit in Seoul, the members urged the FATF to "update and implement" the FATF standards calling for transparency of cross-border wire transfers, beneficial ownership, customer due diligence, and due diligence for "politically exposed persons."
At the Cannes 2011 Summit, the G-20 leaders declared that "corruption is a major impediment to economic growth and development," and encouraged all jurisdictions to adhere to the international standards in the tax, prudential, and AML/CFT areas. The leaders also stated that, "We stand ready, if needed, to use our existing countermeasures to deal with jurisdictions which fail to meet these standards" (par. 36).5 The G-20 leaders also stated:
We support the work of the Financial Action Task Force (FATF) to continue to identify and engage those jurisdictions with strategic Anti-Money Laundering/Counter-Financing of Terrorism (AML/CFT) deficiencies and update and implement the FATF standards calling for transparency of cross-border wires, beneficial ownership, customer due diligence, and enhanced due diligence.
At the November 4-5, 2012, meeting of G-20 finance ministers and central bank governors in Mexico City, the officials reaffirmed their support for FATF by concluding that "We remain committed and encourage the FATF to continue to pursue all its objectives and notably to continue to identify and monitor high-risk jurisdictions with strategic Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) deficiencies."6 In addition, the final communique from the July 2013 meeting of G-20 finance ministers and central bank governors in Moscow concluded: "We reiterate our commitment to FATF's work in fighting money laundering and terrorism financing and its key contribution to tackling other crimes such as tax crimes, corruption, terrorism, and drug trafficking. In particular, we support the identification and monitoring of high risk jurisdictions with strategic AML/CFT deficiencies while recognizing the countries' positive progress in fulfilling the FATF's standards. We encourage all countries to tackle the risks raised by opacity of legal persons and legal arrangements...."7
On February 15, 2012, the FATF members adopted a revised and updated set of the FATF Forty Recommendations, which added the proliferation of financing of weapons of mass destruction to FATF's areas of surveillance. The new mandate is intended to: 1) deepen global surveillance of evolving criminal and terrorist threats; 2) build a stronger, practical and ongoing partnership with the private sector; and 3) support global efforts to raise standards, especially in low capacity countries. In addition, the revised recommendations address new and emerging threats, while clarifying and strengthening many of the existing obligations. The new standards strengthen the requirements for higher risk situations and allow countries to take a more focused approach to areas where high risks remain or where implementation could be enhanced. The standards also significantly strengthen requirements in the area of transparency regarding the adequate, accurate and timely information on the beneficial ownership and control of legal persons and arrangements to address issues of tax transparency, corporate governance, and various types of criminal activity.
The risk-based approach adopted by FATF encourages countries to identify, assess, and understand the risks posed by money laundering and terrorist financing and to adopt the appropriate measures to address those risks, providing for a more flexible set of measures for countries to target resources in the most effective way. In addition, the new standards address the challenge of terrorist financing by integrating standards for combating terrorist financing throughout the Recommendations, thereby eliminating the need for the nine Special Recommendations. In particular, the new standards recommend: that terrorist financing should be criminalized (Recommendation 5); that countries should implement targeted financial sanctions related to terrorism and terrorist financing (Recommendation 6); that countries should implement targeted financial sanctions related to the prevention, suppression, and disruption of proliferation of weapons of mass destruction and its financing (Recommendation 7); and that countries review their laws and regulations to ensure that non-profit organizations are not used to finance terrorism (Recommendation 8).
In addition to the revised and updated Recommendations, the FATF members adopted on April 20, 2012, a new mandate for the FATF and renewed FATF's mandate through December 31, 2020. The new mandate specifies a number of functions and tasks for the FATF, including:
An essential part of the FATF activities is assessing the progress of its members in complying with the FATF recommendations. As previously indicated, the FATF attempts to accomplish this activity through assessments performed annually by the individual members and through mutual evaluations. As part of an on-going process, the FATF completes mutual evaluations of all the FATF members. According to the FATF assessment of February 2014, only a few countries are considered to be non-cooperative countries. The countries in this group include Iran and the Democratic Peoples' Republic of Korea (North Korea), which FATF considers to have significant deficiencies in its anti-money laundering and terrorist financing regime and urged other jurisdictions to protect themselves by applying counter-measures. The FATF identified nine countries— Algeria, Ecuador, Ethiopia, Indonesia, Myanmar, Pakistan, Syria, Turkey, and Yemen—that have not made sufficient progress in addressing their deficiencies or have not committed to an action program developed with the FATF to address the deficiencies. Other countries that are improving their AML/CFT regimes, but are considered have strategic AML/CFT deficiencies for which they have developed an action plan with the FATF are: Albania, Angola, Argentina, Cuba, Iraq, Kenya, Kuwait, Kyrgyzstan, Lao PDR, Mongolia, Namibia, Nepal, Nicaragua, Papua New Guinea, Tajikistan, Tanzania, Uganda, and Zimbabwe. Jurisdictions that were assessed as not making sufficient progress are: Afghanistan and Cambodia. Finally, jurisdictions that are no longer subject to monitoring are: Antigua and Barbuda, Bangladesh, and Vietnam.
In addition to monitoring the progress of countries in meeting the FATF recommendations regarding AML/CFT, the FATF has taken a number of steps since the 2008-2009 financial crisis to protect the international financial system from abuse. These actions include identifying jurisdictions that may pose a risk to the international financial system and updating reports on such topics as: Best Practices on Confiscation (asset recovery); best practices on Managing the Anti-Money Laundering and Counter-Terrorist Financing Policy Implications of Voluntary Tax Compliance Programs; and Trade Based Money Laundering. In addition, FATF issued a statement on February 22, 2013 indicating that it intended to suspend Turkey's membership in the organization as a result of its "continued failure to take action to fully criminalize terrorist financing and establish an adequate legal framework for identifying and freezing terrorist assets consistent with the FATF Recommendations."8 The FATF encouraged Turkey to: 1) adopt legislation to remedy deficiencies in its terrorist financing laws; and 2) establish a legal framework for identifying and freezing terrorist assets consistent with the FATF Recommendations. In February 2014, FATF indicated that Turkey had taken steps towards improving its CFT regime by complying with the FATF standard on criminalizing terrorist financing through court decisions and, therefore, did not suspend Turkey's membership. The FATF indicated, though, that it remained concerned over Turkey's framework for identifying and freezing terrorist assets.9
The FATF faces a number of difficulties in determining how fully member countries are complying with the special recommendations. A large part of this difficulty arises from the challenges in reaching a mutual understanding of what the recommendations mean and how a country should judge its performance relative to the recommendations, since the recommendations are periodically revised and new methodologies for analyzing money laundering and terrorist financing evolve over time. In addition, a number of the recommendations require changes to laws and other procedures that take time for member countries to implement. To assist member countries in complying with the recommendations, the FATF has issued various interpretative notes to clarify aspects of the recommendations and to further refine the obligations of member countries.
In February 2004, the FATF adopted a revised version of the 40 recommendations that significantly broadened the scope and detail of the recommendations over previous versions. Also, the FATF adopted a new methodology to track and identify money laundering and terrorist financing that applied to the 40 recommendations and the eight (nine) special recommendations. As a result of the significant length and additional detail of these new requirements, the FATF decided that it would no longer conduct self-assessment exercises based on the previous method, but will initiate follow-up reports to mutual evaluations.
In 2005, the FATF issued revised standards related to wire transfers of funds. The new standards require financial institutions to include the name, address, and account number of the originator on all fund transfers. The standards also lower the reporting threshold from $3,000 to $1,000. Two FATF-style regional bodies were also created—the Eurasian Group and the Middle East and North Africa Financial Action Task Force. The first round of mutual evaluations for these two bodies was scheduled for 2006. In 2007, the FATF adopted new measures to protect the international financial system from abuse, including calling on Iran to strengthen its money-laundering and counter-terrorist financing controls and a new commitment to produce a regular global threat assessment detailing key issues of concern related to criminal and terrorist financing.
Since the start of the global financial crisis, the FATF has taken a number of steps to help governments guard against abuse of their financial systems by groups or individuals engaging in terrorist financing or money laundering. As part of these efforts, the FATF has:
As the FATF begins its fourth round of country evaluations, it adopted in 2013 a new methodology for countries to use in evaluating their compliance with the FATF Recommendations.21 The Methodology is comprised of two components:
Between 2002 and 2003, the International Monetary Fund (IMF) and the World Bank participated in a year-long pilot program to conduct assessments of national approaches to detecting and controlling money laundering and terrorist financing in various countries22 using the methodology developed by the FATF.23 In March 2004, the IMF and World Bank agreed to make the program a permanent part of their activities. The IMF has worked with the World Bank and the FATF to conduct over 70 AML/CFT assessment and has contribute to the design of AML/CFT-related program measures, and provided a large number of technical assistance and research projects, at an annual cost of approximately $6 million.24 The FATF has incorporated an AML/CFT evaluation as part of its annual Article IV country consultations,25 and country Financial Sector Assessment Programs (FSAP).26 In 2009, the IMF spearheaded a donor-sponsored trust fund to finance technical assistance in AML/CFT to strengthen AML/CFT regimes. In a public statement, the IMF indicated that:
...it is concerned about the possible consequences money laundering, terrorist financing, and related governance issues have on the integrity and stability of the financial sector and the broader economy. These activities can undermine the integrity and stability of financial institutions and systems, discourage foreign investment, and distort international capital flows. They may have negative consequences for a country's financial stability and macroeconomic performance, resulting in welfare losses, draining resources from more productive economic activities, and even have destabilizing spillover effects on the economies of other countries. In an increasingly interconnected world, the negative effects of these activities are global, and their impact on the financial integrity and stability of countries is widely recognized.27
The IMF's efforts are driven in part by its conclusion that money laundering, terrorist financing, and associated criminal activities are crimes that have real effects on the economy, on financial sector stability, and on external stability more generally. In general, the potential economic effects that arise from such financial crimes are:28
In 2011, the IMF published the results of its assessment of the effectiveness of the AML/CFT program.29 This survey concluded that:
As a result of the conclusions reached above, the IMF and the World Bank proposed two changes in the AML/CFT policy framework:
Following the 9/11 attacks, Congress passed P.L. 107-56 (the USA PATRIOT Act) to expand the ability of the Treasury Department to detect, track and prosecute those involved in money laundering and terrorist financing. In 2004, the 108th Congress adopted P.L. 108-458, which appropriated funds to combat financial crimes, made technical corrections to P.L. 107-56, and required the Treasury Department to report on the current state of U.S. efforts to curtail the international financing of terrorism. The experience of the Financial Action Task Force in tracking terrorist financing, however, indicates that there are significant national hurdles that remain to be overcome before there is a seamless flow of information shared among nations. While progress has been made, domestic legal issues and established business practices, especially those that govern the sharing of financial information across national borders, continue to hamper efforts to track certain types of financial flows across national borders. Continued progress likely will depend on the success of member countries in changing their domestic laws to allow for greater sharing of financial information, criminalizing certain types of activities, and improving efforts to identify and track terrorist-related financial accounts.
The economic implications of money laundering and terrorist financing pose another set of issues that argue for gaining greater control over this type of activity. According to the IMF, money laundering accounts for between $600 billion and $1.6 trillion in economic activity annually. Money launderers exploit differences among national anti-money laundering systems and move funds into jurisdictions with weak or ineffective laws. In such cases, organized crime can become more entrenched and create a full range of macroeconomic consequences, including unpredictable changes in money demand, risk to the soundness of financial institutions and the financial system, contamination effects on legal financial transactions and increased volatility of capital flows and exchange rates due to unprecedented cross-border transfers.30
| 1. |
The FATF members are Argentina, Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, India, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway, People's Republic of China, Portugal, Russian Federation, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States; the two international organizations are the European Commission, and the Gulf Cooperation Council. The following organizations have observer status: Asia/Pacific Group on Money Laundering; Caribbean Financial Action Task Force; Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures; Eastern and Southern Africa Anti-Money Laundering Group; Financial Action Task Force on Money Laundering in South America; other international organizations including the African Development Bank; Asia Development Bank; European Central Bank; International Monetary Fund; Organization of American States, Organization for Economic Cooperation and Development; United Nations Office on Drugs and Crime; and the World Bank. |
| 2. |
To be admitted to the FATF, a country must (1) be fully committed at the political level to implement the 40 recommendations within a reasonable time frame (three years) and to undergo annual self-assessment exercises and two rounds of mutual evaluations; (2) be a full and active member of the relevant FATF-style regional body; (3) be a strategically important country; (4) have already made the laundering of the proceeds of drug trafficking and other serious crimes a criminal offense; and (5) have already made it mandatory for financial institutions to identify their customers and to report unusual or suspicious transactions. |
| 3. |
For the 40 recommendations, see http://www.oecd.org/document/28/0,3343,en_32250379_32236930_33658140_1_1_1_1,00.html. |
| 4. |
FATF Cracks Down on Terrorist Financing. Washington, FATF, October 31, 2001, p. 1. |
| 5. |
Cannes Summit Final Declaration, G-20, November 4, 2011. |
| 6. |
Communique of Ministers of Finance and Central Bank Governors of the G-20, Mexico City, 4-5 November 2012, par. 20. |
| 7. |
Communique: G-20 Meeting of Finance Ministers and Central Bank Governors, Moscow, July 20, 2013, para. 20. |
| 8. |
Outcomes of the Plenary Meeting of the FATF, Paris, 17-19 October 2012, FATF, October 19, 2012. |
| 9. |
FATF Public Statement, February 14, 2014. |
| 10. |
Money Laundering Through the Football Sector, July 2009. |
| 11. |
Money Laundering Using New Payment Methods, Financial Action Task Force, October 2010. |
| 12. |
Money Laundering Using Trust and Company Service Providers, Financial Action Task Force, October 2010. |
| 13. |
Organized Maritime Piracy and Related Kidnapping for Ransom, Financial Action Task Force, July 2011. |
| 14. |
Laundering the Proceeds of Corruption, Financial Action Task Force, July 2011. |
| 15. |
APG Typology Report on Trade Based Money Laundering, Financial Action Task Force, July 20, 2012. |
| 16. |
Money Laundering Risks Arising From Trafficking in Human Beings and Smuggling of Migrants, Financial Action Task Force, July 2011. |
| 17. |
Anti-Money Laundering and Terrorist Financing Measures for Financial Inclusion, Financial Action Task Force, February 2013. |
| 18. |
Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals, Financial Action Task Force, June 2013. |
| 19. |
Politically Exposed Persons, Financial Action Task Force, June 2013. |
| 20. |
Money Laundering and Terrorist Financing Related to Counterfeiting of Currency, Financial Action Task Force, forthcoming. |
| 21. |
Methodology for Assessing Technical Compliance With the FATF Recommendations and the Effectiveness of AML/CFT Systems, Financial Action Task Force, February 2013. |
| 22. |
This group of countries is not the same as those surveyed by the FATF, although there is some overlap in coverage between the FATF and the IMF/World Bank assessments. |
| 23. |
Twelve-Month Pilot Program of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Assessments: Joint Report on the Review of the Pilot Program. The International Monetary Fund and the World Bank, March 10, 2004. |
| 24. |
Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) Report on the Effectiveness of the Program, International Monetary Fund, May 11, 2011, p. 37. |
| 25. |
An Article IV consultation, required by Article IV of the IMF's Articles of Agreement, is part of the IMF's surveillance program of member countries' economic and financial policies and includes discussions with government and central bank officials and representatives of business, labor, and civil society. |
| 26. |
The Financial Sector Assessment Program (FSAP) is a comprehensive and in-depth analysis of a country's financial sector. The assessment is comprised of two components: a financial stability assessment, and a financial development assessment. |
| 27. |
The IMF and the Fight Against Money Laundering and the Financing of Terrorism, International Monetary Fund. |
| 28. |
Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) Report on the Effectiveness of the Program, Annex 4. |
| 29. |
Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) Report on the Effectiveness of the Program. |
| 30. |
The IMF and the Fight Against Money Laundering and the Financing of Terrorism. IMF Factsheet, April 2003. http://www.imf.org/external/np/exr/facts/aml.htm. |