Good Intentions: The FATF Faces Its Own Unintended Consequences

The Financial Action Task Force’s unin­tend­ed con­se­quences study will point to nec­es­sary reforms that the watch­dog will be unwill­ing to undertake.

Earlier this year, the Financial Action Task Force (FATF) – the glob­al anti-finan­cial crime stan­dard set­ter – launched a new project to study and mit­i­gate the unin­tend­ed con­se­quences stem­ming from the incor­rect imple­men­ta­tion (pur­pose­ful­ly or oth­er­wise) of its anti-finan­cial crime standards.

In numer­ous cas­es, this seems to stem from occa­sions where imple­men­ta­tion of the stan­dards devi­ates from the FATF’s insis­tence on a risk-based approach – where mea­sures applied are com­men­su­rate with the lev­el of threat – lead­ing to cir­cum­stances where over­ly restric­tive reg­u­la­tions are enact­ed under the pre­tence of com­bat­ting illic­it finance. This results in infringe­ments on the legit­i­mate activ­i­ties of those such as not-for-prof­it organ­i­sa­tions (NPOs) that are sub­ject to FATF-direct­ed scruti­ny; mar­gin­alised peo­ple being exclud­ed from the for­mal finan­cial sys­tem; and states dis­cov­er­ing nov­el chan­nels to cur­tail human rights for polit­i­cal pur­pos­es. Those that track the impact of FATF stan­dards on civ­il soci­ety, the finan­cial­ly exclud­ed and human rights advo­cates wel­comed the FATF’s initiative.

Since then, while the FATF has pro­vid­ed brief­in­gs to inter­est­ed groups in civ­il soci­ety on its ini­tial find­ings, its ‘stock­take’ report – based on evi­dence gath­ered regard­ing unin­tend­ed con­se­quences – remains unpub­lished. And the poten­tial impact of this work is still unclear.

At the same time, the FATF is well under­way with its ‘Strategic Review’, through which it seeks to deter­mine how its coun­try eval­u­a­tions ‘can bet­ter pro­mote and enable more effec­tive and effi­cient AML/CFT mea­sures’. Optimists might hope that this review will pro­vide a vehi­cle for accom­mo­dat­ing the learn­ings of the FATF’s unin­tend­ed con­se­quences project; but reg­u­lar FATF-watch­ers will, unfor­tu­nate­ly, be aware that the nature of FATF deci­sion-mak­ing – and the lim­it­ed inde­pen­dent gov­er­nance and over­sight of its activ­i­ties – do not encour­age rad­i­cal change.

With this in mind, dur­ing July, RUSI’s Centre for Financial Crime and Security Studies host­ed a webi­nar series that con­sid­ered the issue of FATF-relat­ed unin­tend­ed con­se­quences from three per­spec­tives: lessons from pre­vi­ous occa­sions when the FATF has respond­ed to the neg­a­tive con­se­quences of the appli­ca­tion of its stan­dards; the present impact the FATF stan­dards have on finan­cial inclu­sion; and the ris­ing abuse of the stan­dards for politi­cised pur­pos­es, notably to tar­get human rights defend­ers and polit­i­cal opponents.

Some pos­i­tive out­comes were also explored: for exam­ple, the con­sid­er­able progress made by the FATF in acknowl­edg­ing the impact its stan­dards have had on the NPO sec­tor, includ­ing the intro­duc­tion of a ded­i­cat­ed pro­gramme of engage­ment with NPOs; and the grow­ing recog­ni­tion by the FATF of the poten­tial impact of its stan­dards on finan­cial inclusion.

Yet, a uni­fy­ing thread through all three dis­cus­sions was the lack of any sort of con­se­quence or penal­ty for coun­tries where the FATF stan­dards are mis­used: the process is asym­met­ric. Put sim­ply, there is no down­side if stan­dards are over­ap­plied in the pur­suit of the best pos­si­ble eval­u­a­tion out­come or, worse still, if they are active­ly abused for polit­i­cal purposes.

Thus, while the FATF should be con­grat­u­lat­ed for recog­nis­ing that its stan­dards often have unin­tend­ed con­se­quences, it is not clear whether it has the mech­a­nisms in place to take respon­si­bil­i­ty for these con­se­quences and respond to misapplication.

But, if the FATF were to embrace the required account­abil­i­ty, what might this look like?

The Imperative of Greater Accountability

Improved gov­er­nance and greater oper­a­tional trans­paren­cy must be at the core of any response. As the February 2021 report from the Financial Accountability, Transparency and Integrity Panel – formed at the invi­ta­tion of the UN General Assembly – observed, the FATF ‘oper­ates with­out a legal con­ven­tion or arti­cles of agree­ment at its core’. This reminds us that the FATF, often play­ful­ly ref­er­enced as ‘the most impor­tant inter­na­tion­al organ­i­sa­tion you have nev­er heard of’, lacks the legit­i­ma­cy-enhanc­ing under­pin­nings enjoyed by com­pa­ra­ble institutions.

Lacking a legal con­ven­tion that out­lines its man­date and the extent of its pow­ers also means that the FATF’s oper­at­ing pro­ce­dures can appear to exhib­it a ‘behind closed doors’ way of work­ing that has become out­dat­ed and unac­cept­able. For those coun­tries that are not direct mem­bers of the FATF, or those that believe they are neg­a­tive­ly affect­ed by its stan­dards, the lack of oper­a­tional trans­paren­cy and gov­er­nance is espe­cial­ly problematic.

Although the FATF (and specif­i­cal­ly the Paris-based Secretariat) has shown increas­ing will­ing­ness to engage with those out­side of its mem­ber­ship, such as finan­cial insti­tu­tions, mem­bers of civ­il soci­ety and aca­d­e­mics, much of its process and deci­sion-mak­ing is opaque, punc­tured only by the social media posts of those that are ‘in the room’ and frus­trat­ed by its actions.

A New Framework

Thus, first­ly, the FATF needs to com­mit to sig­nif­i­cant­ly greater trans­paren­cy in its delib­er­a­tions and deci­sion-mak­ing. Those impact­ed by its stan­dards need to see clear­ly how their input and con­cerns are being addressed, if the FATF is to extract legit­i­ma­cy and pop­u­lar buy-in in the absence of strict legal foundations.

Secondly, and con­nect­ed, the FATF needs to intro­duce inde­pen­dent gov­er­nance and over­sight. An Ombudsperson (and staff), fund­ed by FATF mem­bers, should be set up to inves­ti­gate and rep­re­sent relat­ed griev­ances, not dis­sim­i­lar­ly to how the Ombudsperson of the 1267 sanc­tions com­mit­tee of the UN Security Council is man­dat­ed to offer an impar­tial voice when it comes to de-list­ing requests from indi­vid­u­als who believe they have been wrong­ly tar­get­ed by the UN’s sanc­tions regime relat­ed to al-Qa’ida and Islamic State. This office should pro­duce an annu­al, pub­lic report on iden­ti­fied abus­es of the FATF stan­dards and be guar­an­teed a speak­ing slot at every FATF ple­nary meet­ing. Countries iden­ti­fied in the Ombudsperson’s report as hav­ing over­stepped the mark should be required to respond to the report as part of the reg­u­lar fol­low-up report­ing that coun­tries are already oblig­ed to provide.

The FATF’s assess­ments of coun­tries’ finan­cial crime fail­ings – notably its ‘grey’ and ‘black’ list­ing process – have an evi­denced impact on invest­ment received by coun­tries, and thus rep­re­sent the body’s chief source of influ­ence over its mem­bers. Therefore, third­ly, the cri­te­ria for inclu­sion on the FATF’s grey list should be expand­ed. Where the Ombudsperson iden­ti­fies that FATF stan­dards are being abused by coun­tries, they should be added to the grey list until the mis­use – such as over­bear­ing leg­is­la­tion – is addressed. Recognising the dras­tic eco­nom­ic impli­ca­tions, coun­tries take every mea­sure to avoid being added to the FATF’s black/grey lists. Leveraging this strong aver­sion in order to com­bat abuse of the FATF’s stan­dards should there­fore be con­sid­ered. Countries should know that mis­use of the stan­dards will car­ry consequences.

Lastly, where the con­se­quences of FATF stan­dards are gen­uine­ly unin­tend­ed, the FATF must act much more swift­ly than it has done pre­vi­ous­ly. It is notable that where new risks are iden­ti­fied – for exam­ple, the emer­gence of new finan­cial instru­ments such as cryp­tocur­ren­cies – the FATF can expe­dite deci­sion-mak­ing; yet when unin­tend­ed con­se­quences are iden­ti­fied, progress is glacial, at best (just ask those, such as one of the authors, involved in the years-long process to amend fail­ings in Recommendation 8 on NPOs). The Ombudsperson should be man­dat­ed to mon­i­tor and eval­u­ate the FATF’s response to iden­ti­fied failings.

At the heart of this issue are trans­paren­cy, legit­i­ma­cy and respon­si­bil­i­ty. The pow­er wield­ed by the FATF and the impact of its stan­dards and assess­ments have undoubt­ed­ly improved the integri­ty of the glob­al finan­cial sys­tem. But, for those coun­tries that are not core mem­bers of the FATF and feel they are unfair­ly treat­ed by an organ­i­sa­tion that is dom­i­nat­ed by rich nations, or for those groups that are incon­ve­nienced or (at worst) per­se­cut­ed as a result of the FATF’s influ­ence, its lack of account­abil­i­ty and mech­a­nisms through which it can take respon­si­bil­i­ty for the actions it directs or inspires sig­nif­i­cant­ly under­mines its legitimacy.

While the unin­tend­ed con­se­quences project is wel­come, if the project is cred­i­ble it is almost cer­tain to cre­ate its own unin­tend­ed con­se­quences, con­fronting the FATF with reme­di­al steps which, in its cur­rent incar­na­tion, it will be unwill­ing or unable to take. Failing to take the rad­i­cal action this project is like­ly to demand will rein­force the argu­ments of those that already ques­tion the FATF’s legitimacy.

RUSI.Org by Tom Keatinge, Stephen Reimer and Isabella Chase