Remarks at the RUSI meeting on the Financial Action Task Force Strategic Review

Speech by David Lewis
FATF Executive Secretary
RUSI Whitehall, 18 November 2019, 17:00

[As prepared for delivery]

Thank you, Tom, for holding this event and inviting me to speak for FATF.

I’ll provide the context for the review and then set out how it will work and what it will involve.

The FATF has held substantive reviews between the previous two rounds of mutual evaluations. They have involved wholesale reviews of the FATF Standards, and last time, also included the introduction of the methodology for assessing the effectiveness of national anti-money laundering and counter terrorist financing (AML/CFT) measures. In doing so, the FATF become the first global standard-setter to assess not only the existence of law, regulations, institutions, etc. - so called ‘technical compliance’ - but to also attempt to assess the use of those measures and the impact of them.

The FATF is now about two thirds of the way through the current round of evaluations. There are still ten or so FATF member countries to be evaluated, and we do six a year.

So we already have a substantial body of evidence, both on how countries are doing, and on what is working well and not so well in terms of the way FATF evaluates countries.

There are some positive results, however overall most countries are failing when it comes to effectiveness, and still many failing on technical compliance. For example, 75% of countries need to make fundamental or major improvements to their supervision of financial institutions and other regulated businesses. And 100% of countries need to make fundamental or major improvements to the implementation of preventative measures by financial institutions and other regulated businesses.

This is the context to the Chinese Presidency of the FATF, making a Strategic Review, the first priority of its term.

The challenge today is not the absence of standards – they are regularly updated to keep pace with the new and emerging risks. For example, this year the FATF introduced the first global standards in any area for virtual assets, including so called crypto-currencies and now stable coins.

The challenge today is effective implementation of the FATF Standards. Our evaluation of effectiveness by countries show a focus on processes more than outcomes, and that the implementation of a risk-based approach by most countries remains in its infancy.

Hence, the focus of the Strategic Review is on how FATF evaluations of countries can better promote and enable more effective and efficient AML/CFT measures.

It will consist of a stocktake, then work to review and modernise the mutual evaluation and follow-up processes, including the work of FATF’s international cooperation and review group that leads to the so-called grey and black lists.

The FATF requires governments, supervisors, financial institutions and other regulated businesses, to take a risk-based approach.

It takes 10 years to carry out a mutual evaluation of all FATF member governments. The evaluation process is very effective in motivating countries to take action on money laundering and terrorist financing. However, the motivation is generally to avoid a bad report, and the consequences of that, including potential naming and shaming by FATF in the grey or black list, as this increases the costs of doing business in those countries and deters foreign direct investment, as well as affecting their international reputation.

The action is rarely motivated by reducing harm to society and citizens by following the money that fuels crime and terrorism, or by protecting the integrity of the financial system, or promoting financial inclusion.

As such, while FATF evaluations motivate meaningful action that does have an impact, the way in which it does so, does not encourage a level playing field or a real focus on crime and terrorism.

Through the FATF evaluations of effectiveness, we see countries taking a tick-box approach to regulatory compliance, and focussing on processes rather than outcomes. This needs to change.

The evaluations motivate action but they also suck up resources that would or should otherwise be focussed on tackling money laundering and terrorist financing.

All of this flows through to the follow-up and ICRG processes.

The grey and black lists are very effective, but they are largely the result of the mutual evaluation process and schedule, and as such, at any point in time, the list does not represent all the greatest geographic risks of the day.

Also in 2013, the FATF introduced a review of effectiveness for countries, to take place 5 years after their mutual evaluation. It had been planned to pause these reviews after the first 6, in order to check if they are delivering what is expected. However, the FATF last month decided to do this now, after the first two (Norway and Spain) so that the results of this can be taken into account in the Strategic Review. This happened because we identified problems with the process.

So, the Strategic Review will look at:

  • Whether there should be a 5th round of evaluations, immediately after this one.
  • If there should be, how should countries be selected and their evaluations scoped?
  • Are there ways in which FATF evaluations can better encourage effective implementation of the FATF Standards?
  • Can the methodology be enhanced, and changes made to encourage countries to more effectively combat money laundering and terrorist financing?
  • Should evaluations continue to treat all countries identically, regardless of risk and of the capacity of countries to implement the FATF Standards?
  • And how can the FATF Global Network (the 9 regional bodies, IMF and World Bank) improve the quality and consistency of its evaluations?

There is (qualified) interest from member governments to hear from the private sector, academia and think tanks, such as RUSI, as part of the Strategic Review. There will be opportunities for this. In the meantime events such as this are very welcome.

Thank you.