28 Oct 2019
The latest gathering of the global anti-financial crime standard-setter, the Financial Action Task Force (FATF) – the first under its Chinese presidency – included a number of eye-catching items reflecting the incoming president’s Objectives statement. The plenary considered long-ignored threats such as money laundering associated with the illegal wildlife trade; contemporary concerns such as ‘stablecoins’ (cryptocurrencies akin to that proposed by Facebook, whose value is backed by asset pools rather than valued according to supply and demand , as in the case of Bitcoin); and contemporary solutions such as the use of digital identities. But far more fundamental was the decision to undertake a strategic review of the FATF’s work, ‘…to consider the experience of the conduct of mutual evaluations to date [with the aim of] strengthen[ing] the efficiency and the effectiveness of FATF and make the FATF’s country assessments and monitoring processes more timely, effective and risk-based’.
It is now five years since the FATF began its fourth round of mutual evaluations. This is the process by which the watchdog coordinates the assessment of the extent to which member states comply with its required standards and the effectiveness of this compliance. As the FATF discovered during its third round of evaluations, laws, regulations and agencies are worth nothing if they do not lead to action. Indeed, the continued emergence of large-scale money-laundering scandals underlines this shortcoming. During the FATF’s 30-year stewardship of the global fight against financial crime it has driven forward remarkable advances in the global anti-financial crime architecture. Yet the credibility of the FATF is being increasingly undermined. Until this most recent plenary, where it added minnow Iceland to its watchlist, the 39 members of the FATF – mainly rich countries – have failed in this round to censure one of their own (as opposed to members of its regional bodies, which they have willingly done) despite the fundamental failings of several member countries. Similarly, the country assessment process it oversees has become increasingly politicised.
There is no doubt that, over this time, the FATF’s standards have strengthened the integrity of the global financial system; but this journey has reached an important juncture for reflection. The announced strategic review is welcome and is a process that RUSI’s Centre for Financial Crime and Security Studies will continue to engage with through a series of written outputs (including a recently published paper by Associate Fellow Matthew Redhead) as well as planned events.
At a headline level, while the FATF’s detailed country evaluations have some value, they are conducted too infrequently (approximately every 7–10 years) and fail to apply the FATF’s own mantra of a ‘risk-based approach’; using a uniform framework for all countries, regardless of whether they are central or peripheral to the integrity of the global financial system. Put simply, minor failings in the UK are far more consequential to the FATF’s raison d’être than gaps identified in, say, Uganda, yet the FATF’s approach does not reflect this.
With this in mind, the FATF’s impact on global financial crime would be far more effective if it deployed its resources on the basis of a risk-based approach, conducting a higher tempo of targeted reviews on systemically important jurisdictions. Consider the lessons learned by global prudential regulators following the 2008 financial crisis. Global systemically important financial institutions – that is, banks that support the effective functioning of the global financial system – became subject to higher standards and more rigorous scrutiny in recognising that the failure of such an institution (for example, Lehman Brothers) has a global impact, in contrast to the collapse of a domestic bank (such as Northern Rock).
In addition to tailoring its reviews to the systemic importance of a country, the FATF should also take greater effort to consider the capabilities and capacity of countries to engage with the FATF process. For example, the costs (in money and government staff time) incurred by countries in preparation for and in undergoing a FATF evaluation are immense. While such costs may be easily absorbed by high capacity countries such as the UK, which can marshal and drill an army of civil servants to carry the task, lower capacity countries face immense resourcing challenges. Language skills also challenge countries where complex and technical evaluations (most often conducted in English) require translation and document review requires technical and nuanced understanding.
As part of a move to being more nimble and risk-based, the FATF should also apply greater focus to systemically important issues such as the continued failure to advance company registry transparency. When it wants to, the FATF can respond with impressive speed. Consider the efficient way in which the FATF mobilised – under the recent US presidency – to create standards for the risks posed to the integrity of the global financial system by the emerging cryptocurrency industry.
But most importantly, for a process that can have such far-reaching and fundamental implications for a country, greater integrity is required across the country evaluation process.
- Assessors should be drawn from a dedicated cadre that meet rigorous standards and include evaluation experience. The current approach – where assessors squeeze their commitments into evenings and weekends alongside their existing professional responsibilities, and may take part in only one evaluation – undermines the credibility and quality of the evaluation process.
- Those that are deployed or engaged by international donors or countries as FATF evaluation consultants, either in advance of a review or in response to it, should likewise meet rigorous and endorsed standards, to ensure that their services are effective.
- The process for conducting and reviewing evaluations should be revised. Assessors and subject countries should be convened by an independent panel to assess and opine on the findings of the evaluation, replacing the often politicised nature of the final outcome of the plenary review process and thereby re-establishing the credibility of this process. The model of the credit-rating agencies and its review process might be instructive in this regard.
In sum, after 30 years of proscriptive evaluation, treating countries as peers where weaknesses are deemed comparable and overburdening these countries (and itself and its regional bodies) with a process that is not risk-based, it is time for the FATF to return to its original objectives – developing policy responses to emerging financial crime threats. Assessments of countries and threats should be handled by a dedicated, professional and non-partisan body.
To be effective, the FATF’s strategic review needs to take brave and far-reaching decisions that challenge the status quo. Anything else will play into the hands of criminals, and critics alike.
By Tom Keatinge, Director of the Centre for Financial Crime and Security Studies, RUSI
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