Reinforcing the financial system

The Financial Action Task Force (FATF) is on a mission to help safeguard the international financial system and strengthen financial sectors across the globe that illicit actors aggressively seek to exploit. Under this year’s US presidency, top priorities for the FATF include work on preventing the financing of the proliferation of weapons of mass destruction (WMD), maintaining an emphasis on combatting terrorist financing and clarifying standards
related to virtual currencies.

Money laundering, terrorist financing and the financing of WMD proliferation can threaten a country’s economic stability and discourage foreign investment. The threat is not limited to one country, as today’s interconnected global financial system is only as strong as the country with the weakest safeguards.

Ineffective measures to keep funds with links to crime or terror out of the global financial system threaten international safety and security. Without a robust framework to detect and disrupt this activity, criminal groups can move and hide the proceeds of their crimes, and terrorists and terrorist groups can finance training and travel, purchase weapons to carry out attacks and fund the recruitment that they need to survive. Similarly, proliferation networks can clandestinely access the global financial system to obtain sensitive goods and materials that are essential to their weapons programmes.

Combatting these crimes is challenging for regulators, law enforcement and the private sector, as criminals, terrorists and WMD proliferators seek to circumvent the safeguards that countries have put in place. The FATF is the global standard-setter for anti-money laundering and countering the financing of terrorism (AML/CFT), and plays a pivotal role in protecting the integrity of the global financial system. It works to understand and raise awareness about evolving methods used to launder illicit funds and move funds in support of terror.

Effective frameworks

The FATF Recommendations provide countries with the tools to implement an effective legal and operational framework to detect, prevent and disrupt money laundering, terrorist financing and WMD proliferation activity. At the core is the risk-based approach that ensures that countries identify and understand the unique risks they are exposed to, allowing them to prioritise resources where risks are highest.

As the FATF approaches its 30th anniversary, it has made considerable progress. Today, 204 countries have committed at the highest political levels to implementing the global AML/CFT standards. The FATF’s process of publicly identifying jurisdictions with significant weaknesses in their AML/CFT regimes that present a risk to the international financial system has helped protect the integrity of the international financial system. Such public identifications have encouraged countries to make improvements swiftly – of the 66 countries identified since 2007, 55 have made the necessary AML/CFT reforms.

Most FATF members have the necessary laws and regulations to combat money laundering, terrorist financing or other illicit finance risks. However, the FATF’s evaluations of jurisdictions’ AML/CFT frameworks reveal that many countries do not use their legal authorities effectively. Some, for example, rarely use domestic sanctions regimes to freeze terrorists’ assets and prevent terrorists and their supporters from accessing the international financial system. Nearly half the countries assessed to date through the FATF mutual evaluation process have achieved a low level of effectiveness in preventing persons and entities involved in WMD proliferation from raising, moving and using funds, consistent with the relevant United Nations Security Council resolutions. Given the significant threat of proliferation to entire regions, it is a FATF priority to fully integrate proliferation financing within its standards and to assess countries against their effective implementation.

Refining standards

The FATF regularly strengthens and refines its standards so that countries can calibrate their AML/CFT tools to address changing and emerging illicit finance threats. With the support of the G20, the FATF was working to clarify by October 2018 how its standards apply to virtual currency and other digital asset service providers. Virtual currencies and related digital financial services can potentially transform the financial landscape. They may positively affect financial inclusion and spur innovation, but are also vulnerable to abuse by criminals, terrorists and other illicit actors.

Some countries have been quick to respond to the money laundering and other illicit financing risks associated with virtual currency and other digital assets, but the vast majority of jurisdictions neither regulate nor supervise digital assets activities, including virtual currency payments. The current patchwork of regulatory responses creates loopholes that criminals and other illicit actors can exploit. At its next plenary, the FATF will discuss how best to clarify the application of its standards to virtual currency and other digital assets activities.

All G20 members actively participate in the FATF’s various efforts, including those relating to terrorist financing, proliferation financing and virtual currency and other digital assets. G20 members, as representatives of the world’s most powerful economies, therefore play a crucial role by leading by example and fully and effectively implementing sound AML/CFT standards.