The FATF finalised reports on technological innovation, environmental crime, and asset recovery. New guidance on PF risk and a white paper on beneficial ownership were also finalised.
The FATF (Financial Action Task Force) held its fourth Plenary under the German Presidency of Dr Marcus Pleyer on 21-25 June, during which delegates finalised work in a number of areas.
A key message for governments is that while it is important for them to focus on rebuilding their economies amid the continuing Covid-19 pandemic, they must continue to fully and effectively implement the risk-based FATF Standards and ensure that criminals and terrorists do not find new and emerging loopholes to exploit.
The FATF has finalised work on two reports as part of its project to explore the challenges and opportunities of technological innovation to make AML/CTF efforts more effective.
“New technologies can improve the speed, quality and efficiency of measures to combat money laundering and terrorist financing,” the FATF said. “They can help financial institutions and supervisors, assess these risks in ways that are more accurate, timely and comprehensive.”
According to the FATF, when implemented using a responsible and risk-based approach, new technologies and innovative products and services can also improve financial inclusion, bringing more people into the regulated financial system and thereby reinforcing the effectiveness of AML/CFT measures.
The first report that was finalised identifies emerging and available technology-based solutions, highlighting the necessary conditions, policies and practices that need to be in place to improve the efficiency and effectiveness of AML/CFT. The report also examines the obstacles that could stand in the way of a successful technology implementation.
The second report explores the use of data pooling and collaborative analytics to better understand, assess and mitigate AML/CFT risks, including to more effectively identify criminal activity, reduce false positives and prevent criminals from exploiting information gaps between FIs. The report also highlights the need to protect data and privacy, pointing to the potential use of privacy-enhancing technologies (PETs) to protect information.
Both reports will be published on 1 July.
Virtual assets and VASPs
The FATF has finalised a second 12-month review of progress by FATF jurisdictions to implement the revised standards on virtual assets and VASPs (virtual asset service providers). The report says 58 out of 128 reporting jurisdictions have advised that they have now implemented the revised FATF Standards, with 52 of these regulating VASPs and six prohibiting the operation of VASPs.
The report also notes progress by the private sector to develop technological solutions to enable the implementation of the ‘travel rule’. However, it notes that the majority of jurisdictions have not yet implemented the FATFs requirements, including the travel rule, which has the effect of disincentivising further investment in the necessary technology solutions and compliance infrastructure.
“These gaps in implementation also mean that we do not yet have global safeguards to prevent the misuse of VASPs for money laundering or terrorist financing,” the FATF says. “The lack of regulation or implementation of regulation in jurisdictions can enable continued misuse of virtual assets through jurisdictional arbitrage.”
The report highlights the need for all jurisdictions to implement the revised FATF Standards, as quickly as possible, and identifies potential future FATF actions to prevent the misuse of virtual assets for criminal activities, including by placing emphasis on actions to help mitigate the risk of ransomware-related virtual asset use.
The report will be published on 5 July.
The Plenary also agreed to finalise the FATF’s revised guidance on virtual assets and VASPs in October 2021, which is meant to help assist jurisdictions and the private sector to implement the revised standards as a priority.
The FATF has also finalised work on a report that details the financial flows linked to environmental crime. “Environmental crime is a significant criminal enterprise, generating billions in illicit profits each year,” the FATF said. “This includes illegal mining, illegal logging, illegal land clearing and waste trafficking.”
The report notes that there has been limited action by governments and the private sector to identify, investigate and prosecute laundering of proceeds from these crimes. As a result, environmental crimes have become “low risk, high reward” activities that provide a safe source of income for criminals, while causing devastating damage to the world’s ecosystem.
Building on the FATF’s work on the illegal wildlife trade, the new report will seek to raise awareness about the scale and money laundering techniques of environmental crimes, highlighting in particular the use of trade-based fraud and shell and front companies by criminals to launder their proceeds.
The proceeds often comingle legal and illegal goods early in the supply chain to make it harder to detect suspicious financial flows. The report stresses the need for AML authorities to collaborate with environmental crime investigators, environmental agencies and other non-traditional partners and foreign counterparts.
The report will be published on 28 June.
Ethnically or racially motivated terrorism
The FATF has finalised a report on the financing of ethnically or racially motivated, also referred to as extreme right-wing terrorism (ERW). While most ERW attacks were carried out by self-funded lone actors, they can also involve small and medium organisations, as well as transnational extreme right-wing movements, it said.
“Extreme right-wing attacks have increased in recent years, highlighting the need to raise awareness about this complex phenomenon and its financing. While ERW groups do obtain funding from criminal activity, most funding comes from legal sources, such as donations, membership fees and commercial activities.”
The report highlights the challenges in tackling the financing of ERW and preventing attacks. These include differences in how countries view the threat. The FATF notes that few countries have designated ERW groups as terrorists and there are differences in their legal regimes for addressing ERW activity.
“ERW groups are becoming increasingly sophisticated in the way they move and use funds and there are growing transnational links between the groups,” the FATF said. The report encourages countries to continue to develop their understanding of ERW activity, including by considering ethnically or racially motivated terrorism financing (EoRMTF) in their national risk assessments.
It also encourages public, private and international partners to work together to identify the threats and exchange best practices on combating EoRMTF.
The report will be published on 30 June.
The FATF has finalised a report for government authorities that identifies concrete actions to improve asset recovery outcomes, which it says will help increase assets returned to the victims of crime and remove the drivers for criminal activity.
“Asset recovery is one of the key tools of effective action against money laundering and terrorist financing,” it says. “By taking away the profits, authorities are removing the incentives that drive criminal activity.”
In addition, asset recovery provides compensation to victims of crime, keeps illicit funds out of the financial system and economy, disrupts criminal activity, reduces dangers to society, and builds trust in a fair society and rule of law.
While asset recovery is at the core of the FATF Recommendations, a large majority of countries assessed in the current cycle of mutual evaluations achieved only low or moderate levels of effectiveness in their ability to confiscate the proceeds of crime. The new report analyses the key obstacles to asset recovery and how governments can overcome them.
The FATF will consider how to follow-up on this issue at its October meeting.
Proliferation financing risk
The FATF has finalised new guidance and a revised interpretive note on measures to prevent the financing of proliferation of weapons of mass destruction.
This follows from revisions to the FATF standards in October 2020 to require countries, FIs and DNFBPs (designated non-financial businesses and professions) to identify, assess, understand and mitigate their proliferation financing risks.
The new guidance will help countries, FIs, DNFBPs and VASPs effectively implement the new mandatory FATF requirements, reflecting input from a public consultation in March 2021.
The guidance explains how the public and private sectors should conduct risk assessments in the context of proliferation financing, and how they can mitigate the risks they identify. It also includes advice for supervisors and self-regulatory bodies responsible for ensuring that proliferation financing risks are being properly assessed and mitigated.
The guidance will be published on 29 June.
The FATF has also updated the Interpretive Note to Recommendation 15 to clarify that the new obligations on proliferation financing risk assessment and mitigation also apply to VASPs. “Like financial institutions and DNFBPs, VASPs must now identify, assess, and take actions to mitigate their proliferation financing risks,” the FATF said.
The FATF has released a white paper for public consultation on the transparency and beneficial ownership of legal persons to strengthen measures that will prevent criminals from hiding illicit activity and proceeds.
“Transparency about the true beneficial ownership of companies is crucial to stop criminals from hiding their illicit activities and proceeds behind complex corporate structures,” the FATF said. “Front companies are used to hide criminal activities from law enforcement, including environmental crime and corruption.”
Improving beneficial ownership transparency has been on the FATF agenda since 2003 when it introduced the first global standards on this subject. However, mutual evaluations and major investigations have shown that countries are still not doing enough to ensure that beneficial ownership information is available and up to date, and to prevent the abuse of company structures by criminals.
Earlier this month, G7 Ministers acknowledged this problem and pointed to the effectiveness of beneficial ownership registries as a tool to tackle it. They also agreed to implement and strengthen their own national registries of company beneficial ownership information.
The FATF is considering amendments to strengthen Recommendation 24 on the transparency and beneficial ownership of legal persons, including a multi-pronged approach to ensure beneficial ownership information is available to competent authorities, as well as stronger measures to manage the risks of legal persons, and stricter controls on bearer shares and nominees.
The white paper released for public consultation, available here, is open for comment until 27 August 2021.
The FATF will discuss next steps at its October 2021 Plenary meeting.
Completed mutual evaluations
The FATF has completed its mutual evaluations of Japan and South Africa.
The FATF, following discussion with the APG (Asia/Pacific Group) on their joint assessment of Japan, found that the country is delivering notable results in certain areas, including in relation to its use of financial intelligence and international cooperation. However, the country needs to prioritise efforts in certain areas, including the supervision of and preventive measures by FIs and DNFBPs, the prevention of misuse of legal persons and arrangements, and investigating and prosecuting money laundering and terrorist financing.
The Plenary concluded that South Africa has a solid legal framework for AML/CFT but that it needs to address significant shortcomings, including to proactively seek international cooperation, detect and seize illicit cash flows, improve the availability of beneficial ownership information, and make better use of the financial intelligence.
The FATF will publish both reports in August, after a quality and consistency review.
Grey listed jurisdictions
In 2018, Ghana was listed by the FATF as one of the jurisdictions under increased monitoring (known as the ‘grey list’). Following the completion of its action plan and a successful on-site visit by assessors, Ghana has been removed from the grey list.
Botswana and Mauritius have also completed their action plans and will be subject to on-site visits before potentially being removed from the list.
New jurisdictions that have been added to the grey list include Haiti, Malta, the Philippines and South Sudan. Each has committed to working to address strategic deficiencies identified in their AML/CFT regimes.
In the case of the Philippines, the country was said to have made progress on a number of recommendations arising from its October 2019 mutual evaluation review, including by addressing technical deficiencies on targeted financial sanctions. However, 18 recommendations remain unaddressed – including those relating to DNFBPs, casino junkets, remittance operators, and the NPO sector.
Pakistan will remain on the grey list, with one remaining item on its action plan that needs to be completed, concerning the investigation and prosecution of senior leaders and commanders of UN-designated terrorist groups. However, a new action plan has been issued committing Pakistan to address additional deficiencies mostly related to money laundering risk. Both action plans must be completed for Pakistan to be removed from the grey list.