2023 saw a record high filing of Suspicious Activity Reports (SARs); the confidential reports filed by banks and financial institutions when they suspect cases of money laundering, terrorist financing or other crime (source).
SARs exist among other measures to detect, identify and investigate shady financial practices under the Financial Action Task Force (FATF), an international watchdog.
Learn about the most relevant FATF recommendations and some common challenges for global businesses, as well as how Trustpair can help meet the FATFs regulatory requirements through the detection of suspicious payment activities.
What is the Financial Action Task Force (FATF)?
The Financial Action Task Force (FATF) is an international body that leads action against money laundering and terrorist financing. The group was set up to research the ways that criminals send money to each other and finance their crimes.
In 2012, the FATF released its first set of recommendations – guidance that aimed to harmonise international governance standards. It has since updated those standards regularly, keeping up with new technologies and techniques to promote the best practices in fighting money laundering.
The FATF also acts as a deterrent for cybercrime, as businesses that follow their rules may deter online and virtual fraudsters, who would prefer to aim for an easier target. It keeps a list of countries where extra measures may be required, as the internal standards don’t typically meet the high FATF standards.
The FATF is responsible for investigating key breaches in protocol because it assesses the effectiveness of anti-money laundering actions. All governmental and corporate AML policies should follow the standards in order to protect their assets and mitigate the risks.
Key FATF recommendations for fighting money laundering
The FATF promotes 40 recommendations to fight money laundering, which can each be categorised into seven groups:
- AML or Counter Terrorism-Financing (CFT) policies and coordination
- Money laundering and confiscation
- Terrorist financing and proliferation financing
- Preventive measures
- Transparency, beneficial ownership and legal person arrangements
- Powers and the responsibilities of authorities
- International cooperation
There are a number of jurisdiction requirements, which are the responsibility of governments to implement. For financial institutions, it’s mostly focused on due diligence.
Recommendation 10
Recommendation 10 asks that customers aren’t able to open an account anonymously or with obviously fake names.
It also includes customer due diligence (CDD) measures such as:
- Identifying the customer and verifying that identity
- Identifying and confirming the beneficial owner of the account
- Getting information on the nature of business relationships
- Performing ongoing due diligence
Recommendation 12
Recommendation 12 relates to politically exposed persons (PEPs), who are more at risk of financial blackmail thanks to their exposure. Due diligence here includes:
- Determining whether you have the appropriate risk management systems to confirm whether the customer is a PEP
- Gaining senior approvals for onboarding a PEP as a customer
- Providing extra scrutiny on a PEP’s source of wealth
- Ongoing monitoring
Recommendation 13
Cross-border payments deserve extra attention in the money laundering world because there is often less transparency around them, making traceability more difficult too.
On top of standard due diligence measures, institutions processing cross border payments should assess to what standard the respondent institution completes its AML. In particular, institutions should focus on the quality of controls and supervision.
How FATF guidelines impact businesses and financial institutions?
FATF guidelines are the leading global standard for money laundering and terrorist financing prevention. Implementation can therefore be costly, especially for organisations that are completely overhauling or transforming their current processes to meet best practices. Maintaining such investments into AML can continue to cost, especially thanks to ongoing training and development expenses.
Yet, compliance can enhance the reputation of your brand, which can help in winning contracts, as partners aim to build their supply chain with compliant organisations. This strengthens the overall security of the business ecosystem. Moreover, compliance with these guidelines can reduce the risk of sanctions and enforcement actions across all regulations.
Challenges in implementing FATF recommendations
From a corporate standpoint, the data has shown that some organisations struggle to even implement the basics well.
In particular, businesses can find it hard to transform from a rules-based approach to a risk-based approach. Businesses can fall victim to overreporting based on policies, but working with real-time data to inform of the risks would be a more recommended way to work.
In the case of a new account opening, for example, businesses may get caught up in manually going through each FATF recommendation, and trying to decide which are relevant to the case. Instead, by following an automated risk flow, the team could select the conditions that applied and ensure they cover all bases with the checks and statements required.
And as a regulated entity, you can’t really afford to get the risk assessment against money laundering wrong.
There are also huge gaps between larger and smaller organisations, predominantly due to budget differences. With variation in technology and resource allocation, it’s much more costly for small organisations to invest in the right systems for compliance. Similarly, implementing FATF recommendations can take much longer at larger companies, especially while trying to organise so many moving parts.
The future of FATF regulations and global financial security
Ahead of the next round of evaluations, the FATF has announced that it will be evolving its strategy towards a more ‘cohesive and inter-related’ network. In particular, they’ll be leveraging the expertise of other global anti-money laundering groups whose strategies and missions align with their own.
The FATF plans to continue strategically evaluating the effectiveness of their recommendations, including identifying new money laundering and terrorist financing threats. The group will place particular emphasis on regional risks and vulnerabilities, which may see corporations face extra compliance requirements, depending on their locations.
For businesses looking to comply, consider partnering with Trustpair. Our platform verifies bank account ownership to reduce the risk of fraud, validating suppliers and detecting suspicious activities. To meet your AML requirements under the FATF, get a demo. Do not hesitate also to learn best-practices and get insights in our latest fraud study.
To conclude on following the FATF’s recommendations
Businesses must consider all of the FATF’s forty recommendations in order to truly follow best practice for preventing money laundering and terrorist financing. Trustpair helps businesses to comply with the FATF by preventing payment fraud and strengthening third-party risk management, reducing fraud risks, and meeting AML requirements.
