This paper puts forward some ideas for how the Financial Action Task Force (FATF), the body that sets the global standards designed to curb financial crime, can ensure that these standards are actually implemented effectively.
Over the last two decades the Financial Action Task Force (FATF) has become a powerful international body, not through formal legal or treaty powers, but by using peer pressure and the threat of blacklisting to get 180 jurisdictions to sign up to its standards. With some gaps, FATF has largely succeeded in getting countries to pass anti-money laundering (AML) and customer due diligence (CDD) laws. However, as FATF itself recognises, there now needs to be a similar effort to ensure that these laws are implemented effectively by governments, supervisors, law enforcement and financial institutions.
Renewing FATF’s mandate in Washington in April, ministers from member states said that: “Future evaluations will move beyond technical compliance of the standards and aim to understand how resources and sanctions are being applied in practice to meet desired objectives”. We think that this is very important.
Through Global Witness’ work we have seen numerous cases where CDD regulations are in place, but corrupt funds are still able to move freely around the financial system. In investigation after investigation we come across banks that are willing to do business with where there was a very high risk that their customers were money laundering. Recently Global Witness highlighted the case of former Nigerian governor James Ibori who has been sentenced to 13 years in prison in the UK for money laundering and fraud. He had six accounts at Barclays, one of which received £1.5 million between 1999 and 2006, much of it in cash, handed over the counter at a branch in the exclusive Knightsbridge district of London. It is unclear what due diligence Barclays could have done to reassure itself that these funds were not the proceeds of corruption.
This disconnect between having financial crime laws in place and ineffective implementation has also been demonstrated by the work of a number of regulators. In particular, the UK’s Financial Services Authority (FSA) review from 2011 of how banks handled money laundering risk associated with senior foreign officials, demonstrated how poorly banks were carrying out their AML responsibilities.
The current FATF Methodology does say that it is “essential that the competent authorities ensure that the whole system is effectively implemented”. However, we feel that the existing approach to measuring and ensuring effectiveness is neither systematic nor is it fully integrated into the mutual evaluation process.
FATF should use the opportunity of the development of a new methodology to better assess effectiveness. In this paper we provide some example indicators of what effectiveness looks like in practice.