Closing the door on money laundering and terrorist financing

The Financial Action Task Force (FATF), a leading global watchdog, has announced a significant overhaul of its “grey-listing” criteria. The changes, unveiled on October 17, 2024, aim to better tackle financial crimes like money laundering and terrorist financing. This revision targets high-risk jurisdictions while offering greater support to least developed countries, promoting financial stability and sustainable economic growth on a global scale. What is the FATF? The Financial Action Task Force (FATF) is an intergovernmental organisation that sets global standards for preventing financial crimes, focusing on money laundering and terrorist financing. Its 40 Recommendations are recognized by over 200 jurisdictions and serve as a blueprint for safeguarding international financial systems. Why are these Changes Important? A 2023 International Monetary Fund (IMF) report highlighted illicit financial flows as a critical obstacle to sustainable economic growth. These flows benefit a small elite, widen economic disparities, foster informal economies, and erode public trust in governance. FATF’s revised approach aims to counter these negative impacts by enforcing compliance while promoting financial inclusion and economic resilience. The FATF’s new approach 1. What are the changes? The revised grey listing criteria shift focuses to countries with significant financial sectors or higher incomes, addressing risk at its source. The reforms aim to minimise the unintended consequences of compliance measures on vulnerable nations by offering them extended timelines and support. This more nuanced approach seeks to enhance Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) efforts where they are most needed. 2. Where Will the Changes Have an Impact? The impact will be global, focusing on countries that pose significant risks to the international financial system. Reviews will prioritise high-income economies or those with substantial financial sectors. Meanwhile, least-developed countries will benefit from additional time and resources to address compliance deficiencies without facing immediate penalties. 3. How will it impact the industry? The revised approach signifies a shift toward a risk-based framework that balances enforcement with support. By prioritising high-risk countries, FATF aims to have a more meaningful impact on the global financial system. This strategy encourages sustainable development and financial inclusion, particularly in least developed nations, while avoiding disruption of legitimate activities. The changes represent a broader effort within FATF to reduce unintended harm while strengthening global financial security. The reforms are expected to reshape global financial compliance: • Targeted Compliance: Countries with high risks will be encouraged to implement focused action plans to combat financial crimes, enhancing the resilience of the international financial system. • Support for Low-Capacity Countries: By extending observation periods and offering more support, least-developed countries can adopt effective measures without overwhelming their systems, promoting sustainable development. • Minimised Consequences: Simplified requirements in low-risk scenarios aim to prevent over-compliance, making financial services more accessible to underserved populations. • Reduced Listings: In the upcoming evaluation cycle, the FATF anticipates a nearly 50% reduction in low-capacity countries on the grey list, leading to more efficient resource use and better-targeted support. A unified response to a worldwide challenge Illicit financial flows destabilise international financial systems, divert critical resources, and hinder sustainable development. By revising its grey-listing criteria, FATF is taking a significant step toward a more effective, inclusive, and cooperative approach to combating financial crimes. The upcoming evaluation cycle will reflect these changes, focusing on high-risk areas while offering lower-capacity countries the support needed to improve compliance without compromising their resources. The FATF’s recent reforms represent a strategic shift in the fight against financial crime, aligning AML and CTF efforts with a risk-based model. These changes aim to foster a safer, more inclusive, and resilient global financial system by focusing on high-risk jurisdictions and providing more support to vulnerable nations. As these reforms take hold, they promise to promote sustainable development, reduce illicit flows, and create a fairer financial landscape. The writer is a compliance professional.

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Closing the door on money laundering and terrorist financing