FATF (Financial Action Task Force)

The Financial Action Task Force (FATF) is the intergovernmental body that sets international standards for combating money laundering, terrorist financing and the financing of weapons proliferation. It assesses how well countries implement those standards and publishes lists of jurisdictions with strategic deficiencies, informally known as the grey list and the black list. These outputs feed directly into country risk ratings used by banks, payment firms and regulators throughout the world.

The FATF is not a treaty organization and its standards are not binding law. Their force comes from peer pressure, from their adoption into national legislation, and from the commercial consequences that follow when a country is publicly identified as deficient.

The FATF was established in 1989 at the G7 summit in Paris, initially to respond to the laundering of drug-trafficking proceeds. In 1990 it issued Forty Recommendations, revised in 1996 and 2003. After the attacks of 11 September 2001 its mandate expanded to terrorist financing, and it issued special recommendations on that subject. A comprehensive revision in 2012 merged everything into a single set of 40 Recommendations, added proliferation financing and placed the risk-based approach at the center of the standards. In 2019 the FATF extended its standards to virtual assets and virtual asset service providers.

The FATF has around 40 members, mostly national jurisdictions plus the European Commission and the Gulf Cooperation Council. Russia's membership was suspended in February 2023. Its secretariat is hosted by the OECD in Paris, and decisions are taken at plenary meetings held three times a year under a president who serves a fixed term. Most other countries participate through FATF-style regional bodies, such as MONEYVAL in Europe, the Asia/Pacific Group, the Caribbean FATF, GIABA in West Africa and MENAFATF in the Middle East and North Africa, giving the standards near-universal reach. For the organization's full profile, see the FATF industry body profile.

The 40 Recommendations cover national risk assessment, criminalization of laundering, confiscation, preventive measures for financial institutions and designated non-financial businesses, transparency of legal persons, powers of supervisors and financial intelligence units, and international cooperation. Among the provisions most relevant to payments are:

• Recommendation 10 on customer due diligence, the basis of know-your-customer rules.
• Recommendation 12 on politically exposed persons.
• Recommendation 13 on correspondent banking.
• Recommendation 14 on money or value transfer services, requiring them to be licensed or registered and to monitor their agents.
• Recommendation 15 on new technologies and virtual assets.
• Recommendation 16 on wire transfers, which underpins the FATF Travel Rule.
• Recommendation 20 on reporting suspicious transactions.

Each country undergoes a mutual evaluation by peer assessors, rating technical compliance with each Recommendation and the effectiveness of its system across a set of immediate outcomes. Countries with significant weaknesses enter follow-up processes. Those with strategic deficiencies that commit to an action plan are placed on the list of "jurisdictions under increased monitoring" (the grey list) until they complete it. Jurisdictions with serious deficiencies that are not cooperating are listed as "high-risk jurisdictions subject to a call for action" (the black list), against which members are asked to apply enhanced due diligence and, in the most serious cases, countermeasures. As of recent years, the black list has included the Democratic People's Republic of Korea, Iran and Myanmar.

Grey-listing has measurable effects: banks apply enhanced due diligence to the country, correspondent relationships become harder to keep, and transaction costs rise. Studies by the International Monetary Fund have found that grey-listing tends to reduce capital inflows. Remittance firms and banks use FATF status as a core input to country risk models, and supervisors expect it to be reflected in AML programs.

The FATF has been criticized for the unintended consequences of its standards, notably de-risking, in which banks withdraw from whole sectors or regions such as money transmitters, charities and small countries rather than manage risk case by case. It has acknowledged the problem and issued guidance encouraging proportionate application. Others argue that evaluations have historically favored member states and that technical compliance has not always translated into effective outcomes.

• Financial Action Task Force