FATF Extends Measures on Anti-Money Laundering

The Report on the State of Effectiveness and Compliance with the FATF Standards of April 2022 is based on data from FATF and FSRB mutual evaluation reports since 2013, which assessed the current efforts of national legislations to tackle crimes in the spheres of anti-money laundering (AML) and terrorist financing.

Overall, the report finds that countries have made progress in improving technical compliance by establishing and enacting regulations in the spheres above stated. In terms of laws and regulations, 76% of countries have now satisfactorily implemented the FATF’s 40 Recommendations. In 2012, this number was only 36%, so the positive impact of the FATF Mutual Evaluation and Follow-up processes is evident.

However, the report also highlights that many countries still face challenges in taking effective action in terms of combating the risks, such as investigating and prosecuting cross-border cases and preventing use of shell companies and trusts being for illicit purposes.

Thus, the FATF’s Strategic Review aims to make the next cycle of FATF assessments more timely, risk-based and effective. The next (fifth) round of assessments will take significantly shorter mutual evaluation time, so that countries get assessed more frequently, have a greater emphasis on the major risks and their context, and a results-orientated follow-up assessment process, which will focus on specific actions to tackle problem areas.

Key Findings

Financial institutions, in particular larger multi-national financial institutions, generally put in place more effective risk mitigation measures. In contrast, small financial institutions and the non-financial sector, such as real estate agents, lawyers and accountants, generally struggle to mitigate them.

Nearly all (97%) of 120 assessed countries have low to moderate effectiveness ratings for preventing money laundering and terrorist financing in the private sector, which calls for a more risk-based approach to customer due diligence, record keeping, and suspicious transaction reporting.

Countries have made progress in creating the supervisory framework of laws and regulations that monitor relevant entities. However, only 10% of countries’ supervisory systems demonstrated effectiveness. Countries must prioritize the effective implementation of supervisory frameworks, particularly in the non-financial sector.

FATF standards cover requirements for transparency in beneficial ownership due to the widespread practice of anonymous shell companies. According to the report, just 52% of assessed jurisdictions implement adequate laws and regulatory structures to tackle the issue.

Among these, only 9% of countries are substantially effective in this area. Countries need to demonstrate improvements in recording, reporting and verifying information regarding legal persons and arrangements. Prompt access to accurate and up-to-date information by relevant authorities is vital in order to mitigate high-risk activities such as bearer shares and involvement of nominees.

Structure of the New Evaluation Approach

The fifth cycle of assessments will have a different structure to that of the fourth and will be limited to six years. The factors which will constitute the basis for the fifth round evaluations will include risk-related elements such as time which has passed since the last evaluation, general risks in the country and size of the economy and financial sector.

Recommendations from the mutual evaluation reports will be more results-oriented, focusing on specific actions and timelines. There will also be a greater focus on effectiveness, to ensure that countries are implementing AML laws, regulations and policies.

Each jurisdiction will have to report to FATF three years after adoption of its mutual evaluation report. During this period, they it is expected to have fully or largely addressed all strategic key recommended actions (KRAs) and improved technical compliance with all recommendations on which it was rated non-compliant or partially compliant. If the country fails to meet correspondent KRAs, FATF’s “enhanced measures” will be triggered automatically. These enhanced measures will evaluate political commitment of the country and may stipulate for the publication of the FATF public statement to address it.

The next round of mutual evaluations is expected to begin in 2025.

What Changes Will Take Place in the Methodology?

1) Significant focus on effectiveness to ensure that countries are implementing and making use of the laws, regulations and policies.

2) A greater emphasis on the major risks and context. Countries and evaluators shall focus on the areas where the risks are highest, not just lower-risk areas where it is comparatively easier to launch investigations.

3) Mutual evaluations in the next round will assess the effectiveness of the financial sector and the non-financial businesses/professions separately. This will provide a clearer overview of the level of effectiveness and help to formulate specific recommendations for improvement of these sectors.

4) Recommendations from the mutual evaluation reports will be more results-oriented, focusing on specific actions and timelines to tackle money laundering, terrorist financing and the financing of weapons of mass destruction.

5) The next round of mutual evaluations will be a six-year cycle, significantly shorter than earlier rounds, which lasted 10 years on average.

What Changes Will Take Place in the Assessment Procedures?

1) The assessment sequence will be risk-based: the countries with the lowest scores, which face the highest risks, will be prioritized.

2) The next round of mutual evaluations will be a six-year cycle, as compared to the previous ten-year cycle.

3) Following their mutual evaluation, countries will have three years to take action and address the deficiencies. If they fail to do so, they will automatically face a range of measures, including the possibility of the FATF publicly raising concerns about outstanding issues of this country.

4) Assessments in a supranational context, such as the EU context, will be elaborated upon.

5) The follow-up assessment process will also be more results-oriented.

6) To improve transparency, a single set of efforts to combine the procedures to identify countries with serious deficiencies in their legal frameworks and the corresponding follow-up procedures will be created.

Sources:

Report on the State of Effectiveness and Compliance with the FATF Standards (April 2022)  https://www.fatf-gafi.org/publications/fatfgeneral/documents/effectiveness-compliance-standards.html

Information note – 5th Round FATF Methodology https://www.fatf-gafi.org/media/fatf/documents/methodology/Handout-5th-Round-Methodology.pdf

Information note – 5th Round FATF Procedures https://www.fatf-gafi.org/media/fatf/documents/methodology/Handout-5th-Round-Procedures.pdf