The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. It sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
IFC: What is the raison d’etre and the ultimate objective of FATF?
Roger Wilkins: The ultimate objective of the FATF is to protect the international financial system from abuse for illicit purpose, thereby contributing to safety and security.
The world has changed significantly in recent years. FATF develops measures to combat money laundering and the financing of terrorism and proliferation of weapons of mass destruction. However, current developments have caused FATF’s primary focus to shift to terrorist financing. Now, more than ever, it is important that there is a global implementation of the FATF Recommendations: the legal, regulatory and operational measures aimed at preventing, detecting and prosecuting abuse of the financial system. Countries should not just establish laws and regulations, they must also ensure that they are working effectively to disrupt terrorist financing, and ultimately terrorism.
One of FATF’s roles is to identify the money laundering and terrorist financing vulnerabilities of particular business sectors, technologies or other developments, and, when necessary, to provide guidance on how to better regulate them. For example, there have been many reports about the potential illicit use of new financial innovations, such as new payment systems, mobile banking and virtual currencies. These tools provide opportunities to make financial transactions faster and easier, particularly for those with no access to the regular banking system. But like anything, such innovations can also be used for criminal purposes, including the financing of terrorism. New financial technologies that could impact traditional banking methods will continue to appear. Countries and financial institutions have no choice but to adapt to this changing environment if they wish to ‘stay in the game’. FATF will continue to identify and study potential new vulnerabilities and share its findings so that countries, and private sector, can manage the associated risks.
IFC: The EU has recently strengthened its money laundering rules based upon recommendations from the FATF, how significant is this development in the fight against money laundering?
RW: Although not yet entered into force, the political agreement on the Fourth EU AML Directive is a significant step. The Directive should ensure a more consistent application of anti-money laundering and counter-terrorist financing (AML/CFT) measures across all EU members. This is essential to the integrity of the financial system, particularly given the high volume of cross-border transactions within the EU membership.
IFC: Could you take us through some of the key recommendations?
RW: The FATF Recommendations cover a wide range of legal, regulatory, and operational measures. Each of them represents a key building block towards a robust AML/CFT system. While countries are required to comply with all of these Recommendations, some are of particular importance.
Recommendation 1 requires countries to carry out a national risk assessment to understand the money laundering and terrorist financing risks it faces. This understanding is crucial for a country to target and enhance its measures accordingly and build an AML/CFT system that is effective in responding to its risks and context.
The FATF Recommendations contain measures to improve transparency, which, implemented on a global basis, will make it harder for criminals and terrorists to conceal their activities. Countries should ensure that there is reliable information available about the beneficial ownership and control of companies, trusts, and other legal persons or arrangements which will prevent them from being misused for illicit purposes (Rec. 24 and 25). Countries should also ensure that accurate and complete beneficiary information accompanies wire transfers (Rec. 16).
With the increasing globalisation of money laundering and terrorist financing threats, international cooperation plays an important role. The FATF Recommendations require more effective exchanges of information for investigative, supervisory and prosecutorial purposes. This will also assist countries in tracing, freezing, and confiscating illegal assets.
Given the current rise of terrorist organisations such as ISIL, the FATF is particularly focused on ensuring that all countries implement recommendations 5 and 6, which will allow countries to freeze terrorist funds and stop terrorist financing. Terrorism is a global problem that concerns all countries, including those who have never been the victim of terrorist attacks on their own soil. Transactions in support of terrorism could originate from, and pass through, the financial system of any country without the necessary measures to detect and freeze them.
IFC: How receptive have governments around the world been to the legislative and compliance demands that your recommendations place on them? Have some regions been less responsive than others?
RW: The FATF acknowledges that some countries have taken longer to meet the requirements of the FATF’s recommendations. For the vast majority of these countries, this was not a case of unresponsiveness, but rather, a lack of resources or high-level political commitment to carry out the necessary reforms that often took years to complete.
In other cases, an incorrect interpretation or understanding of what they needed to accomplish led to further delays. Of course, there have been governments that have failed to respond to FATF’s calls to implement sound AML/CFT measures.
The FATF’s international cooperation review process, which identifies non-cooperative and high-risk jurisdictions, has proven to be a successful mechanism to effectively exclude these jurisdictions from the international financial system and at the same time, put pressure on them to implement the necessary measures. As of February 2015, the FATF had reviewed over 70 countries and publicly identified 57 as having serious AML/CFT deficiencies that posed a threat to the international financial system. Nearly all countries in the process have made some AML/CFT improvements. Many have made significant progress, and 40 have made sufficient progress so as to be removed from FATF review (ie ‘de-listed’), including 20 countries during the last year alone.
IFC: A key component of the FATF recommendations is the establishment of beneficial ownership registries, how much progress has been made on this front since the G20 Lough Erne summit in 2013?
RW: Establishing a registry of beneficial ownership information is one of the mechanisms that countries can use to meeting the FATF Recommendations. Since the G8 Lough Erne summit in 2013, the G8 countries have issued action plans for preventing the misuse of companies and legal arrangements. As well, the G20 issued High Level Principles on Beneficial Ownership Transparency that are also consistent with the FATF Recommendations, and G20 member states reported back at the 2014 G20 Leaders’ Summit on the steps taken to meet FATF standards in this area. The FATF has begun assessing its members for compliance with the FATF Recommendations in this area, and the results to date show that countries continue to make progress in this area.
IFC: Many of the IFCs that appeared to be the target of this proposal already collect information on beneficial ownership that can be requested from the relevant governments, are these proposals to enhance the existing legislation or to replace it?
RW: As demonstrated by the last round of FATF mutual evaluations, many countries still struggle with implementing the FATF standards in this area. The revised FATF Recommendations are aimed at strengthening the requirements so as to ensure that adequate and accurate beneficial ownership information is available to the competent authorities in a timely way. The FATF Recommendations include a requirement on countries to rapidly provide international co-operation by facilitating access to their company registries, exchanging information on shareholders, and using their investigative powers, in accordance with their domestic law, to obtain beneficial ownership information on behalf of their foreign counterparts.
IFC: There has been much concern in the industry regarding the cost and risk of implementing such a system, do you think the financial industry can succeed under these conditions?
RW: Depriving terrorists, and those involved in other forms of organised crime, of their assets is one of the most effective ways to stop their activities. The financial sector is at the forefront of the fight against money laundering and terrorist financing, and plays a crucial role in detecting and preventing cases of abuse of its sector. It is essential that they implement a certain number of safeguards. The FATF realises that the implementation of these measures comes at a cost. The FATF developed risk-based approach guidance for relevant sectors that will allow them to focus their resources on areas where the risks are highest. This will result in an efficient use of resources, while at the same time, preventing an overly cautious and indiscriminate exclusion of sectors or clients deemed ‘too risky’.
IFC: Do you think there is a level playing field of treatment when it comes to assessing the regulatory standards of ‘offshore’ and ‘onshore’ jurisdictions?
RW: The FATF has developed a Methodology for assessing effectiveness of AML/CFT systems and technical compliance with the FATF Recommendations to ensure a consistent assessment of AML/CFT measures. The same general objectives and principles that govern the FATF’s assessments also form the basis for the assessments conducted by the FATF-Style Regional Bodies, the IMF and the World Bank.
Each country faces slightly different money laundering and terrorist financing risks, each assessment will therefore be unique, with particular attention paid to the vulnerabilities that are specific to that country. However, the common methodology and guiding principles will result in a consistent approach to the assessments of the members of the FATF and the FSRBs, including ‘offshore’ and ‘onshore’ jurisdictions.
IFC: How effective have the FATF Anti Money Laundering standards been? Is there less money being laundered now than before?
RW: Given the illicit nature of money laundering, there are no reliable statistics available about the amounts of money laundered. Over the years, others have attempted to provide an estimate, but they are just that: their best guess of the magnitude of the problem. The FATF does not provide an estimate of the amounts of money laundered, however, the mutual evaluations that we have conducted since the first FATF Recommendations were created, show a rise in the number of suspicious transactions reported, and the number of successful prosecutions and convictions. It demonstrates that the measures are working, but there is room for improvement. FATF’s mutual evaluations demonstrated that the AML/CFT systems of certain countries, while technically compliant with the FATF’s standards, were not as effective as they should have been. For example, financial intelligence was collected but not effectively shared; suspicious transactions were reported, but rarely led to a prosecution and conviction. In its current mutual evaluations, the FATF places a greater emphasis on assessing the effectiveness of a country’s AML/CFT measures, in addition to the technical compliance with FATF’s Recommendations.
IFC: Do you agree that ‘offshore’ jurisdictions are proving to be more compliant regarding AML than ‘onshore’ counterparts? If so how is it being dealt with?
RW: The FATF’s global network, consisting of the FATF members and FSRBs respective members, counts over 190 countries and jurisdictions, including many ‘offshore’ and ‘onshore’ IFCs. Every country faces its own challenges in meeting our standards, and levels of compliance on the various measures vary from country to country. Given these variations, we can’t generalise and say that ‘offshore’ jurisdictions are ‘more compliant’. However, in recent years we have witnessed an increase in cooperation from ‘offshore’ jurisdictions. They have realised the need to be compliant with international AML/CFT standards and are more involved in FATF work through membership of FSRBs, or other observer organisations to the FATF such as the Group of International Finance Centres (GIFCS).
IFC: Do you think that small IFCs have comparatively higher and more crippling costs to contend with than larger financial centres and institutions when adhering to international standards? Can these costs be shown to be justified?
RW: Ensuring an effective AML/CFT system that meets the FATF international standards, requires resources. These are the costs of doing business, and they apply to large financial centres, as well as smaller ones. Smaller IFCs may not face the same risks as larger ones, which is why the risk-based approach in the FATF Recommendations gives countries some flexibility to focus their resources on the areas where the risks are highest. Any country, particularly an IFC, that fails to adequately implement AML/CFT standards, creates a dangerous weak link in the international financial system. Criminals can use this vulnerability to launder illicit assets or to conduct transactions in support of terrorism. The cost of the reputational damage to a country that is found to attract money launderers and terrorist financiers as a result of weak regulation, would far exceed the cost of developing sound AML/CFT measures.
IFC: How has the relationship between FATF and small IFCs evolved since the first FATF Blacklist?
RW: The FATF promotes global implementation of robust AML/CFT measures, in doing so it does not distinguish between small IFCS or any other country or jurisdiction: all must fully implement the FATF Recommendations to be considered compliant. However, the FATF recognises that smaller jurisdictions face resources and staffing constraints that will have an impact on the extent to which they can meet some of the technical requirements of the FATF Recommendations. In assessing compliance, FATF takes these limitations into consideration. Nevertheless, even these smaller jurisdictions must be able to demonstrate that they have put in place the necessary regulatory, legal and operational measures to effectively protect their financial system from abuse.
Roger Wilkins Mr Roger Wilkins AO from Australia assumed the position of President of FATF in July 2014. Mr Wilkins is Secretary of the Attorney-General’s Department, a position he has held since September 2008. Prior to his appointment as Secretary of the department, he was Head of Government and Public Sector Group Australia and New Zealand with Citi and was Citi’s global public sector leader on climate change from 2006–2008. From 1992–2006, Mr. Wilkins was the Director-General of the Cabinet Office in New South Wales. Mr Wilkins has chaired a number of national taskforces and committees dealing with public sector reform, including the Council of Australian Government Committee on Regulatory Reform, the National Health Taskforce on Mental Health and the National Emissions Trading Taskforce. He is a member of the Board of the Forum of Federations and advises different federal systems especially on fiscal issues. He was appointed an Officer of the Order of Australia in 2007 for service to public administration.