This article summarizes what FATF is and what it stands for. Further, it outlines FATF Recommendations and classifies them into two categories: Recommendations that are applicable to Financial Institutions and Country as a whole.
Why and When?
As international awareness and concern began to raise regarding money laundering, there was a need for serious action. As a result. Group of Seven nations launched the FATF at its annual economic summit in Paris. Then after, this multinational group started working toward a coordinated effort against international money laundering. Today, FATF is an international global standard-setter on money laundering and providing guidance to the governing bodies around the globe to combat money laundering, terrorist financing and other related threats to protect the integrity of the international financial system.
The main goals of FATF is the following:
- To expand its global network of anti-money laundering and anti-terrorist financing by increasing its membership, through the development of regional bodies like APG and cooperation with an international organization.
- To monitor the implementation of its FATF recommendations among its members’ countries. Currently, FATF has adopted FATF Methodology 2013 where it evaluates its member or any country on the basis of two methods:1. Technical Compliance and 2. Effectiveness Assessment provides a comprehensive analysis of to what extent a country is compliant with the FATF Recommendations and how successful it is maintaining a robust AML/CFT system.
if You want to know more about FATF Methodology, please follow the article here.
How and Whom?
Initially, FATF has introduced 40 Recommendations to combat money laundering and after 9/11, they also targeted anti-terrorism financing, hence the introduction of an additional 9 recommendations. We have classified these recommendations in such a way that there are some recommendations that are applicable to the country and those which are applicable to the financial institutions only. One more thing we added here is that we have compiled suggestions that if financial institutions could follow can comply with those recommendations.
Recommendation applicable to any Financial Institutions:
The following table shows the recommendations that are applicable to all Financial Institutions, requirements of that recommendation. We have also listed suggestions that if any financial institution follows, can easily meet the conditions required by FATF recommendations. Also, the main point to remember is that these recommendations are the basis for a robust AML/CFT program in any organization.
|FATF Rec. No||FAFT Recommendations||Particulars||Suggestions to meet these recommendations??|
|10.||Customer due diligence||Financial institutions should be prohibited from keeping anonymous accounts or accounts in obviously fictitious names.
Financial institutions should be required to undertake customer due diligence (CDD) measures when:
(i) establishing business relations;
(ii) carrying out occasional transactions:(i) above the applicable designated threshold or (ii) that are wire transfers in the circumstances covered by the Interpretive Note to Recommendation 16;
(iii) there is a suspicion of money laundering or terrorist financing; or
(iv) the financial institution has doubts about the veracity or adequacy of previously obtained customer identification data.
The CDD measures to be taken are as follows:
(a) Identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information.
(b) Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements, this should include financial institutions understanding the ownership and control structure of the customer.
(c) Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.
(d) Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.
|Financial Institutions should have explicit AML/CFT Policy and Manual detailing the provisions of CDD including identification of Beneficial owner.|
|11.||Record-keeping||Financial institutions should be required to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities||FIs can either include this in AML/CFT policy or guideline or can have separate record retention policy. Anyway, a complete and accurate record of the transaction should be kept so that it may serve as evidence if the situation warrants.|
|12.||Politically exposed persons||Financial institutions should determine whether a customer or beneficial owner is politically exposed persons (PEPs) and need to perform the following:
(a) have appropriate risk-management systems to determine whether the customer or the beneficial owner is a politically exposed person;
(b) obtain senior management approval for establishing (or continuing, for existing customers) such as business relationships;
(c) take reasonable measures to establish the source of wealth and source of funds; and
(d) conduct enhanced ongoing monitoring of the business relationship.
|CDD Mechanism in AML/CFT Policy should be risk-based. That is, the Simplified CDD mechanism will be applicable for low and medium risk customers while Enhanced CDD mechanism will be applicable for high-risk customers like PEP, hidden beneficial owners. ECDD mechanism should include the methodology for the identification of high-risk customers and what sort of documents to be collected to perform a higher level of Customer Due Diligence. For e.g., asking for the supporting document for the source of income, citizenships of family members and so on.|
|13.||Correspondent banking||Financial institutions should be required, in relation to cross-border correspondent banking and other similar relationships, in addition to performing normal customer due diligence
(a) gather sufficient information about a respondent institution to understand fully the nature of the respondent’s business and to determine from publicly available information the reputation of the institution and the quality of supervision, including
whether it has been subject to a money laundering or terrorist financing investigation or regulatory action;
(b) assess the respondent institution’s AML/CFT controls;
(c) obtain approval from senior management before establishing new correspondent relationships;
(d) clearly, understand the respective responsibilities of each institution; and
(e) with respect to “payable-through accounts”, be satisfied that the respondent bank has conducted CDD on the customers having direct access to accounts of the correspondent bank and that it is able to provide relevant CDD information upon request to the correspondent bank.
|FIs should develop a proper questionnaire for these corresponding banks for getting information about what is their organization structure, who are beneficiaries, what is their AML/CFT status and so on. Through this questionnaire, they need to require correspondent banks to submit other necessary documents like a copy of their registration documents, license, AML/CFT policy and so on.
If any FIs want to avoid doing above, then they can ask the correspondent bank to furnish them with Wolfsberg Questionnaire. This questionnaire is good tool to do comprehensive CDD of any correspondent bank.
|15.||New technologies||Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. In the case of financial institutions, such a risk assessment should take place prior to the launch of the new products, business practices or the use of new or developing technologies.||There should be a clause in the policy that prior to launching and new product, it should be reviewed by AML/CFT Unit to identify any type of AML/CFT issues. Only after their approval, product should be launched.|
|16.||Wire transfer||Countries should ensure that financial institutions include required and accurate originator information, and required beneficiary information, on wire transfers and related messages, and that the information remains with the wire transfer or related message throughout the payment chain. Countries should ensure that financial institutions monitor wire transfers for the purpose of detecting those which lack the required originator and/or beneficiary information and take appropriate measures.||There should be a mechanism mentioned in the Manual that every SWIFT message should be screened for the availability of this information by the SWIFT Unit, if not that messages should be rejected. As per(Anti-Money Laundering Prevention Act) ALPA, there is a requirement to obtain beneficiary details for the wire transfer from and above NPR.75,000.|
|18.||Internal controls and foreign branches and subsidiaries||Financial institutions should be required to ensure that their foreign branches and majority-owned subsidiaries apply AML/CFT measures consistent with the home country requirements implementing the FATF Recommendations through the financial groups’ programs against money laundering and terrorist financing||This recommendation requires the implementation of policies and manuals in all of the branches, subsidiaries of FIs. This is a very difficult thing to do, therefore, FIs should conduct massive training at regular intervals. Further, different Standard Operating Procedures relating to Account Opening, Remittance, Transaction Monitoring based on AML/CFT policy should be developed.|
|19.||Higher-risk countries||Financial institutions should be required to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries for which this is called for by the FATF. The type of enhanced due
diligence measures applied should be effective and proportionate to the risks.
|This recommendation can be implemented effectively if the organization used automation for the purpose of name screening. Different software is available in the market that can be used for name screening.|
|20.||Reporting of suspicious transactions||Financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of criminal activity, or are related to terrorist financing, it should be required, by law, to report promptly its suspicions to the financial intelligence unit (FIU)||This is a very important task. The best way is for this is to have good AML Software with a lot of Scenarios created to monitor transactions relating to SWIFT, remittance, Cash, Card that will trigger alerts based on the logic of the scenarios. These alerts when reviewed will help to identify suspicious transactions.
Next, is to educate all the staff involved in different areas of FIs to identify the suspicious transactions and report to Compliance.
|21.||Tipping-off and confidentiality||Financial institutions, their directors, officers, and employees should be:
(a) protected by law from criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, if they report their suspicions in good faith to the FIU, even if
they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred; and
(b) prohibited by law from disclosing (“tipping-off”) the fact that a suspicious transaction report (STR) or related information is being filed with the FIU. These provisions are not intended to inhibit information sharing under Recommendation 18.
|There should be a clear definition of whistleblowing and breach of confidentiality in the policy. Whistleblowing against suspicious transactions should be encouraged while leaking of confidential information to the customer or third party for the personal benefit should be severely reprimanded.|
|FATF Special Recommendations on Terrorist Financing(Other 9 recommendations)|
|44.||Reporting suspicious transactions related to terrorism||If financial institutions, or other businesses or entities subject to anti-money laundering obligations, suspect or have reasonable grounds to suspect that funds are linked or related to, or are to be used for terrorism, terrorist acts or by terrorist organizations, they should be required to report their suspicions promptly to the competent authorities.||There should be a proper mechanism of how STR should be reported. It is better to use AML solution with clear workflow for reporting suspicious transaction which ensure anonymous reporting to authorized individual so that proper action can be taken.|
(Extracted from FATF Recommendations 2012 Updated)
Recommendations that are applicable to Country As Whole:
The following tables show the recommendations that are applicable to the whole country. These recommendations are the basis for developing an appropriate institutional framework for AML/CFT regime. The country will be evaluated negatively or positively based on the compliance to these recommendations.
|1.||Assessing risks and applying a risk-based approach||Countries should identify, assess, and understand the money laundering and terrorist financing risks for the country,|
|2.||National cooperation and coordination||Countries should ensure that policy-makers, the financial intelligence unit (FIU), law enforcement authorities, supervisors and other relevant competent authorities should be able exchange information to curve ML/CFT|
|3.||Money laundering offence||Countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences.|
|4.||Confiscation and provisional measures||Countries should adopt measures
to freeze or seize and confiscate the following, (a) property laundered, (b) proceeds in money laundering or predicate offences, (c) property that is used or intended or allocated for use in, the financing of
terrorism, terrorist acts or terrorist organisations, or (d) property of corresponding value.
|5.||Terrorist financing offence||Countries should criminalise terrorist financing|
|6.||Targeted financial sanctions related to terrorism and terrorist financing||Countries should implement targeted financial sanctions regimes to comply with United Nations Security Council resolutions and freeze without delay the funds or other assets of, and to ensure that no funds or other assets are made available, directly or indirectly, to or for the benefit of, any person or entity either (i) designated by, or under the
authority of, the United Nations Security Council
|7.||Targeted financial sanctions related to proliferation||Countries should implement targeted financial sanctions to comply with United Nations Security Council resolutions relating to the prevention, suppression and disruption of proliferation of weapons of mass destruction and its financing.|
|8.||Non-profit organisations||Countries should review the adequacy of laws and regulations that relate to non-profit organisations which the country has identified as being vulnerable to terrorist financing abuse.|
|9.||Financial institution secrecy laws||Countries should ensure that financial institution secrecy laws do not inhibit implementation of the FATF Recommendations.|
|14.||Money or value transfer services||Countries should take measures to ensure that natural or legal persons that provide money or value transfer services (MVTS) are licensed or registered, and subject to effective systems for monitoring.|
|17.||Reliance on third parties||Countries may permit financial institutions to rely on third parties to perform elements of the CDD measures ensuring following
criteria should be met are as follows: (a) A financial institution relying upon a third party should immediately obtain the
necessary information concerning elements (a)-(c) of the CDD measures set out in Recommendation 10.
(b) Financial institutions should take adequate steps to satisfy themselves that copies of identification data and other relevant documentation relating to the CDD requirements will be made available from the third party upon request without delay.
(c) The financial institution should satisfy itself that the third party is regulated, supervised or monitored for, and has measures in place for compliance with, CDD and record-keeping requirements in line with Recommendations 10 and 11.
(d) When determining in which countries the third party that meets the conditions can be based, countries should have regard to information available on the level of country risk.
|22.||NFBPs: customer due diligence||The customer due diligence and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17, apply to designated non-financial businesses and professions (DNFBPs) in the following situations:
(a) Casinos – when customers engage in financial transactions equal to or above the applicable designated threshold.
(b) Real estate agents – when they are involved in transactions for their client concerning the buying and selling of real estate.
(c) Dealers in precious metals and dealers in precious stones – when they engage in any cash transaction with a customer equal to or above the applicable designated threshold.
(d) Lawyers, notaries, other independent legal professionals and accountants – when they prepare for or carry out transactions for their client concerning the following activities:
Trust and company service providers – when they prepare for or carry out transactions for a client concerning the following activities:
|23.||DNFBPs: Other measures||The requirements set out in Recommendations 18 to 21 apply to all designated non-financial businesses and professions, subject to the following qualifications:
(a) Lawyers, notaries, other independent legal professionals and accountants should be required to report suspicious transactions when, on behalf of or for a client, they engage in a financial transaction in relation to the activities described in paragraph (d)
of Recommendation 22
(b) Dealers in precious metals and dealers in precious stones should be required to report suspicious transactions when they engage in any cash transaction with a customer equal to or above the applicable designated threshold.
(c) Trust and company service providers should be required to report suspicious transactions for a client when, on behalf of or for a client, they engage in a transaction in relation to the activities referred to in paragraph (e) of Recommendation 22.
|24.||Transparency and beneficial ownership of legal persons||Countries should ensure that there is adequate, accurate and timely
information on the beneficial ownership and control of legal persons. In particular, countries that have legal persons that are able to issue bearer shares or bearer share warrants, or which allow nominee shareholders or nominee directors, should take effective measures to ensure that they are not misused for money laundering or terrorist financing.
|25.||Transparency and beneficial ownership of legal arrangements||Countries should ensure that there is adequate, accurate and timely information on express trusts, including information on the settlor,
trustee and beneficiaries, that can be obtained or accessed in a timely fashion by competent authorities.
|26.||Regulation and supervision of financial institutions||Competent authorities or financial supervisors should take the necessary legal or regulatory measures to prevent criminals or their associates from holding, or being the beneficial owner of, a significant or controlling interest, or holding a management function in, a financial institution. Countries should not approve the establishment, or continued operation, of shell banks|
|27.||Powers of supervisors||Supervisors should have adequate powers to supervise or monitor, and ensure compliance by, financial institutions with requirements to combat money laundering and terrorist financing, including the authority to conduct inspections. They should be authorized to compel production of any information from financial institutions|
|28.||Regulation and supervision of DNFBPs||Designated non-financial businesses and professions should be subject to regulatory and supervisory measures as set out below.
(a) Casinos should be subject to a comprehensive regulatory and supervisory regime that ensures that they have effectively mplemented the necessary AML/CFT measures. At
(b) Countries should ensure that the other categories of DNFBPs are subject to effective systems for monitoring and ensuring compliance with AML/CFT requirements. This should be performed on a risk-sensitive basis. This may be performed by (a) a supervisor or (b) by an appropriate self-regulatory body (SRB), provided that such a
body can ensure that its members comply with their obligations to combat money laundering and terrorist financing.
|29.||Financial intelligence units||Countries should establish a financial intelligence unit (FIU) that serves as a national centre for the receipt and analysis of: (a) suspicious transaction reports; and (b) other information
relevant to money laundering, associated predicate offences and terrorist financing, and for the dissemination of the results of that analysis.
|30.||Responsibilities of law enforcement and investigative authorities||Countries should ensure that designated law enforcement authorities have responsibility for money laundering and terrorist financing investigations within the framework of national
|31.||Powers of law enforcement and investigative authorities||When conducting investigations of money laundering, associated predicate offences and terrorist financing, competent authorities should be able to obtain access to all necessary documents and information for use in those investigations, and in prosecutions and related actions.|
|32.||Cash couriers||Countries should have measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, including through a declaration system and/or
|33.||Statistics||Countries should maintain comprehensive statistics on the STRs received and disseminated; on money laundering and terrorist financing investigations, prosecutions and convictions; on property frozen, seized and confiscated;|
|34.||Guidance and feedback||The competent authorities, supervisors and SRBs should establish guidelines, and provide feedback, which will assist financial institutions and designated non-financial businesses and
professions in applying national measures to combat money laundering and terrorist financing, and, in particular, in detecting and reporting suspicious transactions.
|35.||Sanctions||Countries should ensure that there is a range of effective, proportionate and dissuasive sanctions, whether criminal, civil or administrative, available to deal with natural or legal persons covered by Recommendations 6, and 8 to 23, that fail to comply with AML/CFT requirements.|
|36.||International instruments||Countries should take immediate steps to become party to and implement fully the Vienna Convention, 1988; the Palermo Convention, 2000; the United Nations Convention against
Corruption, 2003; and the Terrorist Financing Convention, 1999
|37.||Mutual legal assistance||Countries should rapidly, constructively and effectively provide the widest possible range of mutual legal assistance in relation to money laundering, associated predicate offences and terrorist financing investigations, prosecutions, and related proceedings..|
|38.||Mutual legal assistance: freezing and confiscation||Countries should ensure that they have the authority to take expeditious action in response to requests by foreign countries to identify, freeze, seize and confiscate property laundered;
proceeds from money laundering, predicate offences and terrorist financing; instrumentalities used in, or intended for use in, the commission of these offences; or property of corresponding value.
|39.||Extradition||Countries should constructively and effectively execute extradition requests in relation to money laundering and terrorist financing, without undue delay. Countries should also take all
possible measures to ensure that they do not provide safe havens for individuals charged with the financing of terrorism, terrorist acts or terrorist organisations.
|40.||Other forms of international cooperation||Countries should ensure that their competent authorities can rapidly, constructively and effectively provide the widest range of international cooperation in relation to money laundering, associated predicate offences and terrorist financing.|
|FATF Special Recommendations on Terrorist Financing(Other 9 recommendations)|
|41.||Ratification and implementation of UN instruments||Countries should also immediately implement the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts, particularly United Nations Security Council Resolution 1373.|
|42.||Criminalising the financing of terrorism and associated money laundering||Each country should criminalise the financing of terrorism, terrorist acts and terrorist organisations. Countries should ensure that such offences are designated as money laundering predicate offences.|
|43.||Freezing and confiscating terrorist assets||Each country should also adopt and implement measures, including legislative ones, which would
enable the competent authorities to seize and confiscate property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organizations.
|45.||International Co-operation||Countries should also take all possible measures to ensure that they do not provide safe havens for individuals charged with the financing of terrorism, terrorist acts or terrorist organisations, and should have procedures in place to extradite, where possible, such individuals|
|46.||Alternative Remittance||Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply to banks and non-bank financial institutions.|
|47.||Wire transfers||Countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain. Countries should take measures to ensure that financial institutions, including money remitters,
conduct enhanced scrutiny of and monitor for suspicious activity funds transfers which do not contain complete originator information (name, address and account number)
|48.||Non-profit organisations||ountries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organisations are particularly vulnerable, and countries
should ensure that they cannot be misused:
(i) by terrorist organisations posing as legitimate entities;
(ii) to exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures; and
(iii) to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.
|49.||Cash Couriers||Countries should have measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, including a declaration system or other disclosure obligation. Countries should ensure that their competent authorities have the legal authority to stop or restrain currency or bearer negotiable instruments that are suspected to be related to terrorist financing or money laundering, or that are falsely declared or disclosed.|
(Extracted from FATF Recommendations 2012 Updated)
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