Skip to content
C6I-Lockup-4C-Light-BG
  • There are no suggestions because the search field is empty.


#2 - 35 years later, Has the Financial Action Task Force been Effective?

This paper offers a topical examination of the FATF's background, historic mandates, funding mechanisms, and impact, while provocatively questioning whether the financial crime ecosystem still needs FATF or has outgrown its utility.

1/  Introduction

Established in 1989, the Financial Action Task Force (“FATF”), in its own words, was created by the G7 to examine and develop measures to combat money laundering resulting from drug trafficking and organized crime activities. FATF began with the G7 countries, the European Commission, and eight other countries.  As of October 2024, the FATF has 38 members, 2 member organizations, 9 associate members, and 25 observers (of which 1, the UN, has 6 sub-groups observing in addition).  

2/  FATF Mandate(s), Secretariat, & Funding

Mandates

The FATF’s original mandate in 1989 was “to assess the results of cooperation already undertaken in order to prevent the utilization of the banking system and financial institutions for the purpose of money laundering, and to consider additional preventive efforts in this field, including the adaptation of the legal and regulatory systems so as to enhance multilateral judicial assistance”.   The G7 recognized a need for a strategic, coordinated multi-national effort to counter the aforementioned illicit money movements. 

From this assessment, we are given what are arguably the most widely utilized counter-measures against money laundering, the 40 Recommendations (which have since been revised).  This all happened before the end of 1990.   These Recommendations have formed the backbone of anti-money laundering regulations globally for decades.

In the wake of 9/11, FATF was given additional mandate to examine countering terrorist financing measures.  It produced the IX Special Recommendations.  

Continuing its operations, in 2019 the Ministers of the FATF decided to give FATF an open-ended mandate.   In short, the FATF’s mandate is whatever FATF decides.  You can read their current mandate here.  The Ministers also agreed to “more frequent ministerial-level meetings” and a “new funding model”.  To date I’ve been unable to discern what the new funding model is. 

Secretariat & Funding

According to the FATF’s 2022-2023 Annual Report (“Report”), the FATF Secretariat (“Secretariat”) “ provides support to FATF delegations and its President to deliver on FATF’s mandate”.  The Report notes the Secretariat consists of 68 staff (including 8 seconded or loaned), of which 66% (or 45 staff members) are focused on ‘policy’.  The total annual budget for FY2023 was over €14m.  Figure 1 has a breakdown of spending.

Figure 1

According to the Report, funding is derived from:

  • Governments of the FATF Members (Figure 2)
  • Two member organisations (Gulf Co-operationg Council and the European Commission)
  • Additional voluntary contributions provided by some Members for specific projects (which represents 38% of the FATF budget) 

Collectively, this group agrees to fund operations “on a temporary basis with specific goals and projects (a "mandate")” according to the FATF FAQs.  I could not discern from the Report, nor other sources, if the funding is evenly solicited amongst the funding entities.  However, a breakdown of budgetary contributions to the Organisation for Economic Co-operation and Development (“OECD”) can be found here.  The Secretariat is housed administratively within the OECD.  

Figure 2

3/  Impact

For 35 years, the FATF has played an instrumental role in establishing the global framework for Anti-Money Laundering (“AML”)/Countering Financing of Terrorism (“CFT”) efforts.  The explanations of the FATF’s history and groundwork at the beginning of this article was intended to bring about a fundamental understanding of its significance, transformation, and size.  

As the standard bearer in the AML/CFT fight, governments, regulatory agencies, financial institutions, law enforcement, and policy makers globally reference its Recommendations, guidance, and assessments of member organizations (and jurisdictions) in most everything they do financial crime related.

The impact the FATF has had in permeating the very laws and regulations we rely upon to prevent, detect, and address money laundering and to counter financing of terrorism is undeniable.  In its own words, “The Financial Action Task Force (FATF) leads global action to tackle money laundering, terrorist and proliferation financing.  The FATF researches how money is laundered and terrorism is funded, promotes global standards to mitigate the risks, and assesses whether countries are taking effective action.”  

The FATF takes it upon itself to evaluate implementation and effectiveness of measures to combat money laundering, terrorist and proliferation financing (“CPF”), measures largely crafted by the FATF and codified into law in various jurisdictions on FATF’s recommend.  Outcomes of these evaluations can have a significant economic effect on a country’s ability to conduct commerce globally and move money through the global financial system.  

Gone are the days of the Medellin Cartel and Barry Seal laundering money through our financial system.  Right?

4/  Effectiveness

The Oxford English dictionary defines ‘effectiveness’ as “the degree to which something is successful in producing a desired result; success”.  While I was not able to find how the FATF defines ‘effectiveness’, it too considers this term critical in its reports and methodology for assessing technical compliance with their Recommendations and AML/CFT/CPF systems.  We have collectively come to view the fight against financial crime through the barometer of effectiveness.  To this end, 35 years after the FATF’s founding, we are faced with three questions:

  1. Are we effective in preventing, detecting, and deterring money laundering?
  2. Are we effective in preventing, detecting, and countering financing of terrorism?
  3. Are the policies, legal, and regulatory systems in place for AML/CFT/CPF systems effective?

The FATF’s own data would suggest a “no” on all three fronts.  In it’s 2022 ‘Report on the State of Effectiveness and Compliance with the FATF Standards’, the FATF shares its perspective in the executive summary:

  • Chapter 1, Understanding of Risks:  Only 19% of FATF-Style Regional Bodies (“FSRB”) demonstrate substantial or high effectiveness, and need to improve both their understanding of money laundering and terrorist financing risks, and strengthen the effective implementation of risk-based policies”.  
  • Chapters 3&4, Prevention & Supervision:  Nearly all (97%) of 120 assessed countries have low to moderate effectiveness ratings for preventing money laundering and terrorist financing in the private sector. In particular, the non-financial sector performs poorly in terms of risk awareness and applying preventive measures. In general, private sector entities need a change of culture in applying a true risk-based approach to conduct customer due diligence, keep records, and file suspicious transaction reports.
  • Chapters 2,6,7, Criminal Justice Systems:  “...investigations and prosecutions of money laundering and terrorist financing remain rare in most countries, particularly for complex cases or cases involving a cross-border element, despite some strong international co-operation among countries. Furthermore, only a tiny fraction of all proceeds of crime are recovered. As such, convictions for money laundering are often not in line with the major risks identified within each country.” 

Outside of the FATF’s conclusions, there are considerations to be made on the economic impact resulting from FATF greylisting of countries after FATF evaluations, evaluations that non-member institutions do not opt to participate in.  A 2021 study by the International Monetary Fund found that greylisted countries, many of which are developing nations, experience an average decline of capital inflows by 7.6% of GDP.  This adds risk to already vulnerable economies.

According to LexisNexis’ 2023 True Cost of Financial Crime Compliance Global Study, institutions collectively are spending $206 billion on financial crime compliance.  And 78% of respondents say that the complex web of global regulations and sanctions has begun to restrain their business involvement. 

5/  Conclusion

The FATF was created by the G7 to examine and develop measures to combat money laundering resulting from drug trafficking and organized crime activities. Its original mandate was “to assess the results of cooperation already undertaken in order to prevent the utilization of the banking system and financial institutions for the purpose of money laundering, and to consider additional preventive efforts in this field, including the adaptation of the legal and regulatory systems so as to enhance multilateral judicial assistance”.  We have nearly 35 years of data to examine.

The FATF has been transformational in educating the world on money laundering and proactively proposed foundational measures to combat it.  Its legacy is unquestionable.  While the need for international cooperation remains paramount, the world must critically assess the FATF’s relevance and effectiveness in today’s financial crime landscape.  The public and private sectors are more aware than ever before of the risks in front of them and spending at levels previously unheard of to combat financial crime.  And they’re willing to innovate, if the regulatory and legal frameworks will allow them to.  Perhaps our collective global tax dollars/pounds/euros/yen can be better spent elsewhere.

Do we still need the Financial Action Task Force?