The FATF (Financial Action Task Force) is one of those acronyms that everyone in finance has heard about. And if you’ve been following the news in Pakistan, then you will by default attach the phrase ‘grey list’ with the acronym FATF.
According to the Webster online dictionary, a task force is “a temporary grouping under one leader for the purpose of accomplishing a definite objective”, which clarifies the meaning of the FATF. It has the definite and ‘temporary’ policy-making task of fighting against money laundering globally. However, it seems that the task force does little more than just temporary policy-making.
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So, what exactly is this international task force?
FATF received its ‘birth certificate’ from an informal gathering of the heads of seven industrialized states known as the G-7 (now G-20). This informal gathering took place in Paris in 1989, and the G-7 gave FATF the mandate of five years for combating drug money laundering. Thus, the nascent origins of FATF can be summarized as an informal club established by another informal club in 1989.
FATF: Not a legal authority?
FATF’s informality is vital for a couple of reasons. For one, European laws on public information access do not apply to the FATF. The FATF is not bound by any duty of disclosure and can release just as much information to the public domain as it pleases.
One cannot seek a legal remedy to extract information from the FATF as it is not a legal authority and does not legally exist. To understand the functioning of the FATF, we are entirely dependent on its publications.
The Plenary is the supreme organ of the FATF. The Plenary undergoes discussion and reaches decisions and opinions “by consensus” and only shares its findings if deemed useful. As a result, the public only has access to the Plenary’s decisions if the FATF chooses to share the information through its annual reports, public statements, or other working group reports.
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FATF is a self-proclaimed (and informally anointed) legal authority that sets global standards for combating money laundering, the financing of terrorism, and the proliferation of weapons of mass destruction. It is an inter-governmental organization and, in that capacity, a “policy-making body”.
FATF has never presented itself as a public organization restricted by legislation or public authority. However, it is wholly funded by public money, i.e., through its members. All members of FATF contribute to its operations roughly in proportion to the size of their economy (GDP).
FATF is a policy-making body and not an advisory body. It can consult or advise stakeholders, but in the end, FATF determines the anti-money laundering (AML) policy for all countries. Without exception. Not even North Korea can escape FATF’s reach.
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FATF legislating criminal law
FATF Recommendations can be considered the ultimate tool for its policy-making role. The Recommendations are a set of globally imposed standards on states and financial and non-financial institutions. The Recommendations simultaneously serve another function – a tool used to enforce compliance.
The word ‘recommendation’ must not be understood as merely a ‘should’. The verb ‘should’ has the meaning of ‘must’. For this reason, ‘recommendation’ must be written with a capital R. FATF has forgotten its assigned policy-making role and has gone a step further: it is enforcing policy at the same time. It is the first informal global policy enforcing body in history.
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FATF further impedes state sovereignty by making Recommendations in procedural criminal law. Procedural Criminal law such as imprisonment terms do not have a direct relationship with the integrity of the financial system and should be outside the purview of FATF.
Nevertheless, FATF exercises its influence in this matter too. For example, the Recommendations concerning the criminal liability of legal persons (Recommendation 7) and the seizure and confiscation of property derived from crime (Recommendations 8 and 38) as well as the international coordination of prosecution actions (Recommendation 39).
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FATF interfering in independent judicial systems
Legislating criminal law is not the only line that FATF has crossed. FATF also ventures into criminal justice policy and law enforcement, a field that is strictly beyond the financial institutional boundary. The lack of restraint in judging the work judicial institutions can have gross interference with an independent judiciary.
State organs like the judiciary are constitutionally empowered as one of the main branches of the government. However, FATF’s habit of influence as a constitutionally independent judiciary can have a massive influence on both the judiciary and the legislative organs of the state.
For example, FATF will lower the effectiveness rating if criminal sanctions are not dissuasive enough. A lowered rating was the case in the MER (Mutual Evaluation Report) of Spain in 2014. As a result, Spain was forced to alter their legislation, and this resulted in judges passing stricter sentences on money laundering cases.
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Sentencing practice is always open to discussion and development. However, changes to the legislature are at the state’s discretion and should not be influenced through a supranational body. FATF’s habit of exerting pressure on sovereign states comprises principles of constitutionality, such as judicial independence.
FATF’s Recommendations reproach an independent judiciary with comments such as ‘not sufficiently dissuasive’. And if the country in question defends the independence of its judiciary, it gets a lower rating.
It is also interesting to note that judicial independence is not a factor FATF uses in assessing a country’s effectiveness in combatting money laundering. Thus, Recommendations should not be taken as mere suggestions. They are commands, no matter the etymology FATF incorporates.
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A higher authority than the UN?
A question that requires addressing is the international legal status of the Recommendations. They are primarily directed at countries, sovereign states, and territories, ordered in unambiguous terms by an informal body.
For example, FATF uses the phrase: “should, without further delay, take steps to fully implement the Vienna Convention, and proceed to ratify it.” On one hand, the United Nation’s Congress follows a legal procedure. It accepts a Convention via resolution and subsequently invites the Member States for ratification.
FATF, on the other hand, is an informal body of at present 37 states/organizations, and orders about 160 other states to ratify “without further delay”, irrespective of being a member of its “global network”. Could this mean that FATF has become in its field a higher legal authority than the UN? And if so, with what authority?
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By all accounts, the Recommendations are the antithesis of voluntary suggestions and have been rightfully described as a “crown jewel of soft law”.
To achieve global implementation of the FATF Recommendations, FATF, with a relatively small membership, relies on a solid global network of nine FATF-Style Regional Bodies (FRBs), in addition to its own 37 members.
The nine FSRBs have an essential role in promoting the effective implementation of the FATF Recommendations by their membership and providing expertise and input in FATF policy-making. Over 180 jurisdictions worldwide have committed to the FATF Recommendations through the global network of FSRBs and FATF memberships.
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FATF established informal networks together with the FSRBs (which are responsible for the implementation of the Recommendation by countries within their region), conducts MERs (Mutual Evaluation Reports) for almost every State in the world, and on an ongoing basis assesses whether a country is sufficiently compliant with the FATF standards; providing an in-depth description and analysis of each country’s system for preventing abuse of the financial system.
Mutual Evaluation Reports
Over the past twenty years, FATF has developed, used, and refined rigorous compliance mechanisms to help ensure global compliance with its standards. It assesses compliance through the MER, a stringent country evaluation and monitoring process.
The MER sets out the specific requirements of each Recommendation as a list of criteria, which represent those elements that should be present to demonstrate full compliance with the mandatory elements of the Recommendations. For each Recommendation, the FATF’s assessors conclude the extent to which a country complies (or does not comply) with the standard.
There are four possible levels of compliance: Compliant—no shortcomings are present; Largely compliant—only minor shortcomings exist; Partially compliant—moderate shortcomings exist, and Non- compliant—major shortcomings are present.
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The MER summarizes the CTF (counter-terrorist financing) and AML measures in place as of the date of the FATF assessor’s on-site visit to the country. It analyses the level of compliance with the FATF 40 Recommendations and the level of effectiveness of the CTF (and AML) system and recommends how the system could be strengthened.
Based on the jurisdiction’s MER results, and where jurisdictions’ MER reveals a significant number of key deficiencies, it is likely this jurisdiction will be referred for a review and, when necessary, face sanctions.
Why FATF cannot be ignored
While the FATF does not have the legal authority to impose decisions on its members or to impose sanctions for their failure to comply with its standards, its mandate to CTF is tied to several compelling international financial institutions like the IMF and UNSC.
It has the support of powerful governments like the U.S., international organizations such as the European Union, and, of course, its members. As such, what may be referred to as the ‘soft law’ of the FATF is reinforced by solid connections.
Countries that are not up to par in terms of FATF’s standards are subjected to further scrutiny. This is precisely what is happening with Pakistan. Being placed on the ‘grey list’ means that Pakistan is under increased monitoring from the FATF.
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Being placed on the ‘grey list’ can have significant implications for a country’s international reputation. It is for this reason that complying with the FATF Recommendations is mandatory and not optional. Countries that are grey-listed or, even worse, black-listed face problems with trading and interacting with other countries.
In summary, the FATF is a non-legal policy-making authority. However, sovereign states do not have the liberty of ignoring the FATF and its Recommendations. These Recommendations are not suggestive and should be considered obligatory changes to a state’s legislative framework.
Despite Pakistan’s resolve to comply with the FATF’s action plan, Pakistan remains on the ‘grey-list’. Whether or not you disagree with the FATF and its rhetoric, one thing is for sure; FATF cannot be ignored.
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Hashim Iqbal Jadoon holds a BComm from Ryerson University and an LLB (Hons.) from the University of London. He is currently a practicing lawyer in Islamabad and Chief Executive Officer of Ploutos Consulting. He tweets at: @Hash4cash2 and can be reached at hashim.iqbal.jadoon@gmail.com.The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.