What Is FATF and How Does It Curb Money Laundering?

Living off digital services brings a lot of comfort. No brick-and-mortar overheads, lower operational costs, and a wider business stage are only some of the benefits.

But just as yin can’t live without yang, the convenience of providing and using digital services comes with certain challenges.

For digital merchants, online fraud is a big issue, from intentional scams to friendly fraud. Even though organizations like ThePayPortal help merchants handle chargebacks and open high-risk accounts, it’s still a dynamic playground for all interested parties.

For international business institutions, online money laundering is one of the biggest concerns.

That’s why we have organizations like the Financial Action Task Force (FATF), aimed at anti-money laundering (AML) activities and curbing terrorist financing.

This article explains why FATF is so important for the global digital payment system and how it whitelists, grey-lists, and blacklists countries.

What Is FATF?

The FATF is an international financial organization founded in 1989. Its main purpose is anti-money laundering and combating terrorist financing (hereinafter AML/CTF) measures.

This institution defines international regulations to combat and prevent financial offenses.

What’s also essential in its operations is that the FATF is an intergovernmental organization, meaning that the governments of various countries collaborate within its activities.

How Does FATF Function?

The member countries jointly propose and adopt standards and policies implemented and monitored by the FATF, which then scrutinizes each country’s compliance with the relevant regulations. If a government doesn’t comply with the valid FATF standards, the country in question experiences financial sanctions and a damaged reputation.

The in-house finance and legal experts have brought a set of policies, labeled as the FATF Recommendations. They refer to various aspects, from enforcing domestic laws complied with effective policies to specifying customer due diligence, to the adjustment of local financial regulations with cross-border institutions.

Why Is Financial and Legal Compliance Important?

In an ideal scenario, the AML/CFT framework adopted and pursued by the FATF would eradicate money laundering and financing terrorist organizations on a global scale.

The more countries agree to comply with its regulations, the better for the AML/CFT goals.

Let’s make one thing clear: you don’t have to be a member of the FATF to be compliant and whitelisted.

With 39 countries on board and nine regional bodies with FATFA jurisdiction, this organization has a global presence. Without such representation, it wouldn’t be able to implement the necessary regulations.

Those nine FATF-authorized organizations cover different parts of the world, enabling stronger monitoring and implementation of the latest AML/CFT policies.

FATF Black List

The FATF works diligently to reduce money laundering and financing of terrorism to the lowest possible level.

In that effort, it puts together two official documents three times a year, highlighting countries and governments that lack vital regulations for preventing money laundering and financing of terrorism. Upon such occasions, those governments are invited to adopt the proper procedures to increase their AML/CFT protection level.

Those with the most serious omissions in AML/CFT protection and legislation receive a set of policies they need to implement and apply. They’re blacklisted until those rules have been met. In practice, it means that various financial institutions and commercial payment platforms may charge higher fees for transactions made to and from such countries; in some cases, they won’t carry out such transactions at all.

TPP Intel: As of February 2024, Myanmar, Iran, and the Democratic People’s Republic of Korea were on the FATF’s blacklist. If they apply the recommendations, they could be grey-listed by the next report.

What About the Grey List?

As for the grey list, it’s meant for the countries that have adopted certain recommendations and have been removed from the black list. Conversely, a country can be dragged and dropped from the white list to the grey list if its AML/CFT regulations haven’t been updated.

This grey list can include countries from highly regulated countries, even EU members. At the time of writing, Croatia is on the grey list due to its inefficacies in implementing the latest AML/CFT standards. On the positive side, the United Arab Emirates was removed from the grey list in February 2024, having implemented the recommended measures to prevent money laundering and financing of terrorism.

FATF and the Ever-Changing AML/CFT Environment

As mentioned above. FATF doesn’t have the judiciary power, so it can’t impose legal decisions or force countries to change their AML/CFT legislative. However, its announcements, recommendations, and reports have a significant role in establishing trust and collaboration among companies, governments, and financial institutions.

As the digital payment environment is changing, with innovative methods emerging as we speak, money launderers and terrorist organizations are getting more sophisticated. Their shrewdness requires that the FATF is always alert, on the waterfront of exterminating illegal financial activities worldwide.

AML/CFT within the Dark Web and Blockchain

Another challenge for the FATF and other relevant financial institutions is the swift development of cutting-edge technological solutions. For instance, blockchain technology and cryptocurrencies are handy for fast transactions, as they’re decentralized. However, this decentralization might lead to serious financial felonies, mostly revolving around money laundering.

In a recent case reported by Europol, the US and German authorities – assisted by Europol – have taken down ChipMixer – one of the greatest cryptocurrency laundromats. Allegedly, they have laundered more than EUR 2.73 billion in crypto assets, while the police have seized four servers, with Bitcoin worth more than EUR 44 million.

This is only one instance of the fintech gallop we’re all witnessing. Both natural persons and legal entities must take care of their online payment security. The FATF is here to bring the regulations that will reinforce our safety in the online environment and keep reducing the impact of money laundering perpetrators on the global economy.

Conclusion

So far, the FATF’s efforts have helped the international monetary system to become more transparent and trustworthy in the last 35 years. Working together with this institution is a prerequisite for a prosperous national economy, based on healthy financial foundations, as immune as possible to dirty money and corruptive activities.

ThePayPortal follows all the compliance standards, both on domestic and international levels, standing at the forefront of secure and legally approved transactions for all sorts of merchant accounts, high-risk ones included. If you need assistance with your merchant account, fill out the form below and our experts will get back in touch: https://thepayportal.typeform.com/precheck?typeform-source=mail.google.com