Discourse at the Financial Action Task Force (FATF) Plenary held between February 22 and 24 saw the agency commit to intensified monitoring and a flurry of decisions aimed at curtailing money laundering and terror financing.
The FATF is the most widely recognised international standard-setting body on anti-money laundering and countering the financing of terrorism (AML/CFT) matters, including over 200 countries, jurisdictions, and observer organisations such as the Interpol, International Monetary Fund, United Nations and Egmont Group of Financial Intelligence Units. This February plenary was the second such event (the first was held in October 2022) held under the two-year Singapore presidency of T. Raja Kumar.
Twenty-three nations – including United Arab Emirates (UAE), Turkey, Jordan, and South Africa – are on what is referred to as the FATF’s ‘greylist’, implying that “the country has committed to swiftly resolve the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring”. Cambodia and Morocco were removed from the FATF’s increased monitoring. Termed “high-risk jurisdictions”, the FATF continued the black listing of Myanmar, Iran, and North Korea.
FATF suspended Russia’s membership, stating that Moscow’s war in Ukraine violated the organisation’s principles. The decision to suspend Russia was made at the behest of Ukraine, which repeatedly called for the exclusion of Moscow from the organisation. Russia still remains a member but has been barred from attending all meetings and accessing documents.
The FATF statement on Russia reads, “The Russian Federation’s actions unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system. They also represent a gross violation of the commitment to international cooperation and mutual respect upon which FATF Members have agreed to implement and support the FATF Standards.”
Placed on the greylist for the second time – first in 2011 and then again in 2021 – Turkey remained on the greylist. Turkey is subject to money laundering risks from drug trafficking, migrant smuggling, human trafficking, and fuel smuggling. It also faces significant terrorist financing risks from both national and international threats.
Turkey has had problems in curtailing the abuse of non-profit organisations (NPOs) for terrorist financing. It was found non-compliant in preventing the laundering of illicit funds or other predicate offences such as corruption or bribery by “politically exposed persons” and also on the risks associated with “new technologies” basically indicating that its Virtual Asset Service Providers are sufficiently being regulated for AML/CFT purposes.
Pakistan, which was removed from the ‘greylist’ in October 2022, continues to be monitored by the Asia Pacific Group (APG), an FATF-style regional body. Responding to questions about a viral video in which Hizbul Mujahideen chief and US-designated global terrorist Syed Salahuddin can be seen leading the funeral prayers of one of India’s most-wanted terrorists, Bashir Ahmad Peer, who was killed in Pakistan recently to the media, FATF president Raja Kumar of Singapore said: “I will not speculate on specific media reports. But I think what is important is to emphasise that there continues to be monitoring of Pakistan’s progress by the Asia Pacific Group.”
In the viral video, Salahuddin can be heard making a pledge to destroy India, with several Pakistani soldiers standing for his protection and the crowd cheering for him. Conventional wisdom on Pakistan correctly links militant sponsorship with the state’s military establishment and intelligence agencies, principally the Inter Services Intelligence (ISI).
The FATF president added, “I would urge Pakistan to continue to address its remaining Action Plan items to fully complete them, as well as to make sure that it sustains its commitment and continues to enhance its Anti-Money Laundering/Combating the Financing of Terrorism systems.”
Leading African nations – including G20 member South Africa, and a potential future member, Nigeria – have also been placed on the FATF greylist. South Africa was found non-compliant in ‘Recommendation 6: Targeted financial sanctions related to terrorism & terrorist financing’ which implies that South Africa needs to tighten efforts to freeze the funds or other assets of designated persons and entities quickly and effectively to comply with United Nations Security Council resolutions.
South Africa has been non-compliant with the regulation of new technologies and governance of non-profit organisations allowing their abuse for the financing of terrorism. It was also non-compliant with ‘Recommendation 17: Reliance on third parties’, because of the lack of legally binding obligations governing the identification carried out by third parties to perform Customer due diligence (CDD) measures.
Nigeria lacks the capability to investigate and prosecute money laundering and corruption and confiscate the proceeds of crime. The implications of the FATF greylisting for Nigeria are far reaching as this will affect its ailing economy.
Focus on ransomware attacks
In a significant development, FATF has recognised the increase in the magnitude of ransomware attacks, which are being exploited by criminals to target individuals, businesses and government agencies, across the world.
FATF report on disrupting the financial flows from ransomware notes, “The lack of regulation of virtual assets in many countries creates opportunities that criminals and terrorist financiers exploit.”
The plenary session concluded that many countries have failed to implement norms like the “travel rule”, which requires obtaining, holding and transmitting originator and beneficiary information relating to virtual assets transactions. The report also noted that strong crypto regulation is key to disrupting financial flows from ransomware exploits, adding that “criminals responsible are getting away undetected with large amounts of money, predominantly using virtual assets.”
The watchdog has decided to take stock of the levels of implementation of FATF standards on virtual assets and virtual asset service providers and thereafter a report in the first half of 2024 on the global state of regulate and supervise virtual asset service providers will be brought out.
The suspension of Russia – which has largely been compliant with recommendations and has an “in-depth understanding of its money laundering and terror financing risk” – marks an unsound expansion of the AML/CFT standard-setting body into the security realm. The FATF’s emphasis on technical compliance might result in taking a tick-box approach to AML/CFT concerns, which may not have led to an increase in effectiveness.
Pakistan’s approach to FATF recommendations is an example in which technical compliance has not translated to actual “effectiveness of implementation”. So, while Pakistan has demonstrated that it has the necessary frameworks and institutions in place, AML/CFT systems continue to be ineffective and the establishment plays a central role in Pakistan’s use of militant proxies. And contrary to presumptions, Pakistan’s civilian establishment by no means serves as a check against the state’s long-standing of policy militant sponsorship.
Compliance with the FATF recommendations, while not legally binding, is considered significant especially for emerging economies to retain access to the global financial system. Aside from the “reputational damage that the greylisting inflicts on a jurisdiction, there are negative implications for cross-border transactions in terms of correspondent banking services provided by foreign banks”.
Even though there are no direct economic implications, because FATF’s monitoring mechanism has become stricter, the greylisting process impacts foreign direct investment (FDI) and ease of business. Interestingly, the FATF review process is becoming subject to significant media scrutiny and this is forcing countries to deliver effective anti-money laundering and countering the financing of terrorism results.
Vaishali Basu Sharma is an analyst of strategic and economic affairs. She has worked as a consultant with the National Security Council Secretariat for nearly a decade.