Terrorism and Money Laundering are deeply connected. Money laundering seeks to disguise illegal funds as legitimate, and when this money is used to fund terrorism, it raises alarming concerns. Terrorism has taken countless lives, caused immense destruction, and created chaos in peaceful nations. Because of this, the international community has taken a firm stance against terrorism.

Money laundering is a key funding source for terrorism, and it relies on the movement of money across borders. Tracking these funds and taking action becomes even more complex when they move from one country to another. International cooperation between concerned countries is necessary to make a significant impact, and this is facilitated by the Financial Action Task Force (FATF).

However, the anonymity of cryptocurrency and other virtual assets makes the mission to curb money laundering even more challenging. As a result, the FATF is paying close attention to the crypto industry to ensure that it is regulated in line with anti-money laundering and counter-terrorism policies. This has sparked reactions from crypto users, who question the legitimacy of the FATF’s authority to regulate their industry.

What Is the Financial Action Task Force (FATF)? 

The Financial Action Task Force (FATF) is an intergovernmental organization that focuses on creating policies to combat money laundering and terrorism financing. Established by the G7 countries in 1989, the FATF’s primary mission is to develop and promote national and international policies to regulate the financial industry effectively.

The FATF plays a crucial role in assisting authorities in identifying, freezing, and confiscating the assets and funds of criminals. The organization’s headquarters are located in Paris, France, and it has grown significantly since its inception. As of 2022, the FATF comprises 39 member countries, including the world’s largest economies.

Moreover, these member countries also participate in nine FATF-style regional bodies (FSRBs) globally. This participation allows the FATF to extend its influence to over 200 countries worldwide, further strengthening its role in promoting sound financial policies and practices.

What Are FSRBs?

FSRBs stands for “FATF-style Regional Bodies,” which are essential in promoting and implementing Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) policies in their respective regions. Each FSRB group is to their region what the FATF is to the world.

Although independent, each FSRB was modeled after the FATF and encourages and enforces the 40+9 FATF recommendations. Through FSRBs, the influence of FATF on the financial sector extends beyond its official members’ 39 jurisdictions to over 200 countries worldwide. The principles and objectives that guide the partnership between the FATF and FSRBs make these bodies more effective.

In 1990, the FATF published a report containing 40 Recommendations that outlined comprehensive plans to combat money laundering. Initially, the FATF focused on addressing money laundering, but in 2001, it added the fight against terrorism financing to its objectives.

What Are The FATF’s Recommendations?

The FATF’s recommendations aim to combat illicit financial activities carried out by money launderers, terrorists, and other criminals. These 40 recommendations offer actionable steps and guidelines to Financial Investigative Units (FIUs) and other AML/CFT agencies to combat the rapid increase of criminally linked financial actions.

After eleven years of the first 40 Recommendations, the FATF started developing standards to fight terrorism financing, which was added to the FATF mission in October 2001. Technology kept growing, and money laundering techniques kept changing, which led to the urgent need to revise the previously issued recommendations to keep pace with criminals taking advantage of the financial sector.

In 2004, the FATF published nine additional recommendations, bringing about a total of 40 + 9 Recommendations (also known as 40 + IX). This step further strengthened the international standards for combating money laundering and terrorism financing. The FATF continues to grow and added efforts to counter the financing of the proliferation of weapons of mass destruction in April 2012.

The 40 + 9 Recommendations are non-binding guidance, and the FATF only focuses on policy-making, not pursuing AML/CFT transgressors. Regional law enforcement agencies and Financial Intelligence Units (FIUs), e.g., FinCEN (U.S.), NCA (UK), and Tracfin (France), prosecute transgressors.

The FATF is a simple international body that only makes policies and does not interfere with different countries governing councils or persecute countries that violate the FATF recommendations. However, in order to encourage governments to follow these recommendations, the FATF manages a greylist and blacklist of non-compliant countries in the fight against money laundering and terrorist funding.

What Does It Mean To Be Blacklisted by FATF?

The FATF’s Blacklist is made up of Non-Cooperative Countries or Territories (NCCTs). If the FATF blacklists a country, it means that it is not meeting the expected standards for combating money laundering and terrorist financing. This lack of cooperation with the FATF’s global mandate results in the country being officially designated as a “High-Risk Jurisdiction subject to a Call for Action”.

For all countries identified as high-risk, the FATF calls on all members and jurisdictions to apply enhanced due diligence (EDD). In some critical cases, countries are required to take countermeasures to protect and shield the international financial system from risks of money laundering, terrorist financing, and proliferation financing.

The FATF’s Blacklist publicly identifies countries that have deficiencies in their anti-money laundering and counter-terrorism laws. Being on this list can result in prohibitive measures by FATF member states and international organizations, and the country may even face economic sanctions.

It’s important to note that this blacklist is updated regularly in official FATF reports every year. Countries can be removed as their AML and CFT regulatory regimes are adjusted to meet the relevant FATF standards. As of October 2022, Iran and North Korea are the two countries on the blacklist.

What Does It Mean To Be Greylisted by FATF?

While the blacklist confirms the countries performing below expectation in fighting money laundering and terrorist financing, the greylist serves as a form of warning to countries. It means that any country on this list may enter the blacklist in the future if it fails to tighten and firmly implement the FATF’s recommendations against money laundering, financing of terrorism and proliferation of weapons of mass destruction. The greylist can also mean that the country in question has committed to resolving the recognized strategic deficiencies within stipulated timeframes and is subject to increased monitoring.

This list is officially known as “Jurisdictions under Increased Monitoring”. Countries found on it are actively working with the FATF to address strategic deficiencies in their regimes towards their AML/CFT goals. During this process, the countries are subject to increased monitoring, either assessed directly by the FATF or through the FSRBs.

The negative perception of the greylist isn’t as severe as that of the blacklist. However, countries on the greylist can still face economic sanctions from the World Bank and International Monetary Fund (IMF). This alone can yield an unfavorable trade experience.

The greylist is updated when new countries are added or when other countries that complete their action plans are removed. Below are the greylisted countries as of October 2022: Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Gibraltar, Haiti, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirates, Yemen.

FATF Supporting Countries

While many countries feel the impact of FATF worldwide through its policies and recommendations, not all countries belong to the FATF directly. Here are the official members of FATF. This excludes indirect member countries through FSRBs:

Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark, European Commission, Finland, France, Germany, Greece, Gulf Co-operation Council, Hong Kong, Iceland, India, Ireland, Israel, Italy, Japan, Republic of Korea, Luxembourg, Malaysia, Mexico, Kingdom of Netherlands, New Zealand, Norway, Portugal, Russian Federation, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States 

FATF-Style Regional Bodies (FSRBs) Across The Globe

Nine FATF-style regional bodies (FSRBs) were established to disseminate the International standards on combating money laundering, financing of terrorism & proliferation (FATF Recommendations) throughout the world.

S/N	Full Name	Acronym	Region	HQ City
1	Asia/Pacific Group on ML	APG	Asia-Pacific	Sydney
2	Caribbean FATF	CFATF	Caribbean	Port of Spain
3	Eurasian Group	EAG	Eurasia	Moscow
4	Eastern & Southern Africa AML Group	ESAAMLG	Africa	Dar Es Salaam
5	Central Africa AML Group	GABAC	Africa	Libreville
6	Latin America AML Group	GAFILAT	Latin America	Buenos Aires
7	West Africa Money Laundering Group	GIABA	Africa	Dakar
8	Middle East and North Africa FATF	MENAFATF	Middle East & Africa	Manama
9	Committee of Experts on the Evaluation of AML Measures and the Financing of Terrorism of the Council of Europe	MONEYVAL	Europe	Strasbourg

 

Objectives Of The FATF (and FSRBs in extension)

Below are the official FATF objectives in simpler terms: 

1. Publishes best practices and guidance to stop illicit finance and sets global standards.
2. Tackles money laundering through drug trades, smuggling, illicit cash integration, falsely described goods & services, multiple invoicing of goods & services etc.
3. Explores the use of new technologies to prevent money laundering.
4. Examines how terrorism is financed. It involves researching how money is laundered and how terrorism is funded.
5. Trains officials in anti-money laundering and counter-terrorism financing techniques.
6. Assesses how well countries are doing in practice and how they can improve.
7. Tackles proliferation by preventing funding for weapons of mass destruction.
8. Helps different government authorities to trace the funds behind environmental crimes.
9. Seeks to take the illicit profit out of human trafficking.

FATF’s Role in the Cryptocurrency Realm

The cryptocurrency industry has come a long way since the release of the first decentralized cryptocurrency, Bitcoin, in 2009. Despite initial skepticism, it has grown tremendously worldwide, garnering the attention of global financial regulators like the FATF. Their goal is to ensure that this technological development doesn’t aid money laundering, terrorism funding, or the proliferation of weapons of mass destruction.

In 2019, the FATF officially began regulating cryptocurrencies, a move that will affect cryptocurrencies themselves and virtual assets service providers (VASPs), ultimately shaping the industry’s future. VASPs are businesses or companies that facilitate the exchange of virtual assets such as cryptocurrency (e.g. Bitcoin, Ethereum), non-fungible tokens (NFTs), and utility tokens (e.g. Filecoin, Basic Attention Token, Golem). Examples of VASPs include exchanges, decentralized exchanges, OTC desks, P2P exchanges, and more.

What You Should Know About the FATF’s Travel Rule

In 2019, the FATF significantly updated Recommendation 16 through the interpretive note to Recommendation 15.  Before this new development, Recommendation 16 only asked the traditional finance sector to collect information about the sender and beneficiary of a transaction. The FATF’s updated standard has added VASPs (Virtual Assets Service Providers) to carry out the same instruction on their users as recommended 15 on new technologies. This means there will be an exchange of real-name and user information anytime there is a fund transfer from one VASP to another VASP. These users’ details can be submitted to the authorities if requested.

The originator VASP must share the following sender information with the beneficiary VASP during a transaction: 

1. Originator’s name (customer)
2. Originator account number used for the transaction
3. Unique identifiable information, e.g. national identity number, passport number, social security number, driving license number, residential address, etc.

The beneficiary VASP must share the following recipient information with the originator VASP in return:

1. Beneficiary name (customer)
2. Beneficiary account number used for the transaction

Conclusion

To comply with the Travel Rule and share data between VASPs, there is a need to securely share personally identifiable information (PII) with counterparties without violating privacy laws or sharing inaccurate data. This has raised concerns among crypto users who fear that the identification and due diligence procedures could lead to slower transactions and higher fees.

To address this challenge, the blockchain industry is exploring ways to facilitate identification and data sharing between VASPs while still making cryptocurrency transactions fast and inexpensive. However, there are also concerns about data breaches, as seen in the aftermath of the Celsius Chapter 11 incident where a list of all Celsius customers was released.

Decentralized Identities (DIDs) are one possible solution to this problem. By giving users control over their own identity data, DIDs can ensure privacy and security while still allowing for compliant data sharing between VASPs. As the blockchain industry continues to develop and evolve, finding solutions to these challenges will be critical to ensuring the continued growth and success of the cryptocurrency ecosystem.

About Identity.com

Identity.com offers an open-source ecosystem that provides secure and on-chain identity verification, making the identity verification process hassle-free for many businesses. Our solutions improve user experience and reduce onboarding friction by offering reusable and interoperable Gateway Passes. If you require assistance with identity verification and general KYC processes, please refer to our docs for more information on how we can help.