AML (Anti-Money Laundering) and CFT (Counter-Financing of Terrorism) form a crucial part of the architecture of the modern financial system. Expert Sergey Kondratenko clarifies that companies face the challenge of complying with all regulatory requirements in this direction, considering that such rules are regularly updated. AML/CFT is a global phenomenon, and work is constantly being done on uniform requirements for all market participants.
However, CFT and AML regulations in different jurisdictions may vary depending on regional standards and requirements set by national or regional regulatory bodies, adapting global requirements to the peculiarities of local legislation.
States with insufficient control or ineffective measures to combat money laundering are particularly attractive to financial criminals. The critical organisation responsible for developing global standards and guidelines for AML/CFT is the FATF (Financial Action Task Force).
FATF – The Financial Action Task Force
FATF was established in 1989 in Paris at a G7 summit in response to the global financial system’s challenges – global money laundering. In its first year, FATF formulated 40 recommendations that set standards for combating money laundering. These, in turn, are integrated into the national legislative systems of member countries.
In 2001, the organisation expanded its mandate to counter the financing of terrorism and developed an additional eight special recommendations in this direction. Currently, there are 9. As of 2024, the organisation has 39 permanent members.
In a broader sense, FATF is part of the FATF Global Network, including 9 FATF-Style Regional Bodies (FSRBs). The entire Network unites over 200 governments in joint efforts to combat money laundering and the financing of terrorism.
FATF recommendations cover various areas: policies and coordination; anti-money laundering and confiscation; anti-terrorist financing and proliferation financing; preventive measures; transparency and beneficial ownership of legal persons and arrangements; powers and responsibilities of competent authorities and other institutional measures; and international cooperation.
– These recommendations are not law but create the basis for national and global efforts on AML/CFT, says Sergey Kondratenko.
Recommendations of FATF
Non-compliance with the recommendations can be seen as encouraging money laundering and the financing of terrorism. Therefore, FATF can impose sanctions and put countries on a black or grey list. This affects the ability to use global financial instruments and reduces the level of investments, interest in partnerships, and trust.
“Grey list” of FATF – Jurisdictions under Increased Monitoring. This list includes countries that have already committed themselves to undertake the necessary systemic transformation in terms of AML/CFT. They are under increased oversight and monitoring of the reforms. As of 2024, there are 21 countries on the FATF grey list.
“Black list” of FATF – High-Risk Jurisdictions. The blacklist includes countries with deep strategic problems in terms of anti-money laundering, combating the financing of terrorism and proliferation of weapons of mass destruction. This includes three countries: Democratic People’s Republic of Korea, Iran and Myanmar.
Thus, FAFT encourages joining the joint efforts of AML/CFT to improve the assessment and get off the blacklist.
The 40 recommendations can be divided into four categories:
- Legal Framework and Institutional Measures. They call for the criminalisation of violations, the establishment of monitoring compliance with AML requirements, and data exchange on a global scale to strengthen overall cooperation.
- Customer Due Diligence and Record Keeping. FATF recommends implementing a methodology for client identification, identity verification, and data accounting for further exchange. Verification can be conducted using available databases and sanction lists.
- Implementing a risk-oriented approach. The recommendations call for the use of risk assessment principles for each case. This encourages identifying cases with different levels of risk and using various levels of verification for such clients: from simplified to comprehensive, from identity verification and source of funds to transaction monitoring, checking sanction lists, checking negative media reports, etc.
- Cooperation with law enforcement agencies and reporting. Financial organisations must notify law enforcement agencies of violations and use mechanisms to block and freeze financial accounts that can be used for illegal financial operations.
FIUs (Financial Intelligence Units) are used to ensure that AML/CFT is carried out in close interaction with the law enforcement system at national levels. Recommendation 26 of the FATF recommends creating a national body with the functions of an FIU.
– The concept of FIU is based on linking private companies and organisations with state law enforcement agencies as part of common efforts on AML/CFT, explained Sergey Kondratenko.
Sergey Kondratenko: Financial Intelligence Units (FIU)
The key task of FIU is compiling, analysing, and assessing SARs (Suspicious Activity Reports) and coordinating the enforcement of AML/CFT norms and requirements. Essentially, they perform a regulatory function.
When a financial or any other organisation identifies suspicious financial activity that may be associated with money laundering or the financing of terrorism, it forms a SAR. FIU studies it and assesses the need for further investigation. FIU also interacts with law enforcement agencies to ensure proper measures are taken following the criminal code when cases of money laundering, financing of terrorism, or other financial crimes are detected.
Such a body has access to large volumes of specific data, can interact with similar bodies in other countries, and can conduct in-depth analysis of financial activity and violations in this area. All the information obtained by FIU is also packed into SARs and exchanged at a global level.
In 1995, the Egmont Group of FIUs was created to ensure global information exchange and cooperation among national FIUs.
– The organisation provides a global platform, Egmont Secure Web, for the rapid exchange of financial intelligence data about financial crimes, money laundering, and the financing of terrorism, specifies Sergey Kondratenko.
It is one of the 28 Observer members of FATF. As of today, the Egmont Group includes 174 members. National financial intelligence bodies actively participate in combating financial crimes worldwide.
Sergey Kondratenko: AML Regulators around the World
In the global structure of AML, major economies proportionately contribute to the joint efforts against financial crimes.
The most developed financial crime regulation system operates in the USA. The efforts of three separate agencies carry it out:
- Office of the Comptroller of the Currency (OCC)
- Office of Foreign Assets Control (OFAC)
- Financial Crimes Enforcement Network (FinCEN)
OCC regulates and supervises the activity of national banks, federal savings associations, branches, and representative offices of foreign banks and organisations. Its essential task is to maintain and develop the financial system. Every bank is required to report to OCC about the transactions it conducts for its clients.
OFAC introduces and monitors the enforcement of economic sanctions. Sanctions are imposed on countries, political regimes, organisations, individuals, etc. They are based on US foreign policy and are introduced to ensure interests and security. OFAC investigates and identifies financial crimes and strictly limits such activity.
FinCEN, a bureau within the Department of the Treasury, performs the functions of FIU USA, which specialises in ensuring AML/CFT, combating financial crimes, and is a member of the Egmont Group of FIU. FinCEN also monitors compliance with the Bank Secrecy Act, under which financial institutions are required to report suspicious financial activity.
In Canada, FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) handles AML/CFT and coordinates data exchange at the global level.
In Europe, the major regulators are L’Autorité des marchés financiers (AMF) – France, Bundesanstalt für Finanzdienstleistungsaufsicht (BAFIN) – Germany, Swiss Financial Market Supervisory Authority (FINMA) – Switzerland, The Financial Conduct Authority (FCA) – Great Britain.
In 2011, the European Banking Authority (EBA) was created to ensure the integration of standards in banks of the European Union. This independent agency conducts stress tests to identify weaknesses, increase the transparency of the banking system, and strengthen financial security.
The Gulf Cooperation Council (GCC) operates in the Middle East. The organisation positions itself as a system of interaction between the six Gulf countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates.
It covers a wide range of tasks resolved in terms of interaction: trade, education, culture, legislation, etc. However, the fundamental task is enhanced coordination to achieve unity and common goals. Among the essential issues that GCC resolves is the regulation of AML/CFT.
Since the Persian Gulf is adjacent to politically turbulent countries, the GCC faces significant challenges in counteracting the financing of terrorism. However, it makes symmetrical efforts to influence the situation and ensure economic security.
Additionally, there is the Dubai Financial Services Authority (DFSA), an independent regulator of Dubai International Financial Centre, a special economic zone and the largest financial hub in the Middle East. Its task is to ensure proper regulation regarding financial violations to protect Dubai’s economic interests and investment attractiveness.
Successful in regulation and compliance with AML/CFT rules in South Africa – The Financial Intelligence Centre (FIC); in Japan – Financial Services Agency (FSA); in China – China Banking Regulatory Commission (CBRC); in the special administrative region of Hong Kong, the Hong Kong Monetary Authority (HKMA) operates. The Australian Transaction Reports and Analysis Centre (AUSTRAC) is responsible for Australia’s AML/CFT compliance. In Singapore, the Monetary Authority of Singapore (MAS), which is also the central bank, oversees the financial system and policy.
According to the UN, funds ranging from $800 million to $2 trillion USD are laundered worldwide annually. This represents a significant loss to global GDP, a blow to financial stability and security in general. After all, “dirty” money is always linked with crimes – from drug trafficking to terrorism. And tax evasion in this structure of financial violations seems the lesser evil.
– But overall, specialised bodies, organisations, and governments make tremendous efforts to protect and secure the global financial system. The implementation of strict but fair rules and standards allows for significantly mitigating economic and financial damage, summarised Kondratenko Sergey.
