Understanding FATF recommendations is essential for countries aiming to fortify their financial systems against money laundering, terrorist financing, and other illicit activities.
International bodies, such as Financial Action Task Force (FATF), also proposed recommendations to strengthen the financial system to combat money laundering, terrorist financing, and related activities. Such necessitates the evolution of performing monitoring regularly, especially of high-risk customers and transactions.
In this lesson, you will learn about the FATF guidance over trade-based money laundering. The FATF is an inter-governmental global policy-making body to combat money laundering terrorist financing and other threats to the international financial system. FATF sets international standards, the FATF Recommendations, to help countries implement a comprehensive and consistent framework of measures to combat money laundering and terror financing. Countries can implement international standards through measures adapted to their particular circumstances. More than 200 countries and jurisdictions have committed to implementing the FATF Recommendations.
To implement the adequate measures countries are required to identify, assess, and understand their individual national money laundering/terror financing risks and implement subsequent preventative and mitigating measures commensurate with the identified risks.
Countries often meet this requirement by developing National Risk Assessments or NRA for ML/TF, some of which are publicly available in full or sanitized form. These are primarily driven by public sector bodies but can incorporate feedback from the private sector as part of the assessment development process. While there are multiple ways of assessing ML/TF risk exposure to create the NRA, a country assesses several different inputs, including intelligence reports, suspicious transaction reports or STRs, threat assessments, investigation outcomes, economic and social indicators, and the level of the threat and existing vulnerabilities.
The overarching theme from public sector contributors was the association of TBML with a range of domestic and foreign predicate offenses. This includes offenses resulting in the smuggling of illicit or restricted commodities, such as drug trafficking, arms dealing, or tobacco smuggling, with Organized Criminal Groups or OCGs and Professional Money Launderers or PMLs exploiting the supply chain used to smuggle the goods to launder their criminal proceeds.
TBML schemes are associated with predicate offenses not reliant on commodity smuggling, such as tax evasion. These schemes require the development of new supply chains and financial intermediaries to exploit. These TBML schemes were often multi-jurisdictional, exploiting trade sectors in the originating jurisdiction and impacting others through the exploitation of corporate services.
A handful of respondents referenced both actual and potential Trade-Based Terrorist Financing or TBTF abuse. However, most did not see abuse of the trading system in moving funds to facilitate terrorist acts or on behalf of individual terrorists or groups.
Every country in the world is involved in the trade. TBML or TBTF can therefore occur anywhere. Contributors noted that TBML/TF enabling activities, such as the misuse of corporate structures, can occur in many jurisdictions.
Criminals, including money launderers and terrorists, exploit potential loopholes or gaps. The benefit of the NRA is challenging countries to consider risk exposure in terms of threat and vulnerability.
Understanding FATF Recommendations
Having identified and understood the exposure to ML/TF risks, the FATF Recommendations require jurisdictions to use insight to inform mitigating actions and drive effective cooperation across the AML/CTF system.
Jurisdictions should adopt a risk-based approach to supervision. In the context of TBML, this might mean financial institutions with large trade finance divisions or significant cross-border payment activity require additional oversight from supervisory bodies to ensure the effectiveness of any threat mitigation strategy. Jurisdictions with specialist company formation sectors and accountancy service providers should also consider the potential for these firms to be exposed to TBML or TBTF, again ensuring the robustness of any threat mitigation strategy.
Overview of the Most Important FATF Recommendations
The following FATF Recommendations are especially important for a good practice:
Recommendation 2: National cooperation and coordination
States should implement a national policy so that every business, government body, etc., will follow the same rules. A designated authority should be established for regulation purposes. States should ensure that there are effective mechanisms in place which enable authorities to cooperate and coordinate and exchange information domestically with each other to combat ML/TF.
Recommendation 6/7/35: Sanctions
In order to comply with the UN Security Council resolutions, it is recommended that member states implement targeted financial sanctions against people or entities that pose terrorist financing risks. These sanctions should be effective, proportionate and dissuasive.
Recommendation 10: Customer due diligence
Financial institutions should be prohibited from keeping anonymous accounts or accounts in obviously fictitious names. It is recommended to assess risks posed by potential and current customers.
Recommendation 12: Politically exposed persons
All PEPs should be actively monitored during their customer lifecycle. This also includes family and close associates, identifying their sources of wealth, etc.
Recommendation 15: New technologies
States should be aware of how criminals may use new technologies and new business practices. The risk assessment and the implementation preventive measures should take place prior to any official release of a new product, business practice, or technology development.
Recommendation 32: Cash couriers
It is recommended that states should have adequate measures in place to detect the physical cross-border transportation of currency and other items of value. There should be implemented competent authorities with legal means to stop or restrain anyone conducting this activity illegally.
Final Thoughts
The Financial Action Task Force (FATF) plays a pivotal role in establishing international guidelines to deter money laundering, terrorist financing, and other threats to global financial systems. This inter-governmental organization’s guidelines, adopted by over 200 countries and jurisdictions, prioritize a thorough understanding of each nation’s unique risk exposures to illicit financial activities. Key measures include developing National Risk Assessments that account for various factors such as intelligence reports, suspicious transaction reports, and economic indicators.
With trade being ubiquitous, the vulnerabilities in Trade-Based Money Laundering (TBML) and Trade-Based Terrorist Financing (TBTF) are emphasized, necessitating rigorous oversight especially in financial sectors with extensive trade finance activities. Among the FATF’s pivotal recommendations, national cooperation, targeted sanctions, rigorous customer due diligence, monitoring of Politically Exposed Persons (PEPs), vigilance on new technologies, and tracking cash couriers stand out as especially crucial. In essence, a proactive, comprehensive, and adaptable approach to identifying and mitigating these financial threats is imperative for the safety and integrity of global financial systems.
