The 25th anniversary of the FATF will occur on 16 July this year. It is fitting that this should coincide with a new phase of the FATF’s work – a complete assessment of the effectiveness in how we implement the FATF standards. We think that this is the first time an international standard setter has attempted the difficult task of assessing the effectiveness of the implementation of its standards in this way. It is a significant step and perhaps a precedent for other bodies and organisations.
But the challenges, inevitable difficulties and problems we will encounter in carrying out this work need to be addressed and we will need to exercise common sense and flexibility in doing this. It is a central Objectives for the Australian Presidency of the FATF (2014-2015), and I dare say ensuing presidencies, to make sure that this process operates as smoothly and efficiently as possible.
Already it is clear that resourcing this process is creating challenges. But more significant challenges confront us. I will mention only two:
- First, there is the importance of ensuring the uniform and universal application of the FATF standards across all assessments, whether carried out under the auspices of the FATF or through the FSRBs. This is not a gratuitous issue; it is of the very essence of what we are about. In an increasingly globalised system of finance and business we are only as strong as our weakest link – we are reliant on each other. So the quality and consistency of assessments against the FATF standards are fundamental.
- Second, is the question of how follow up and the ICRG process will work in a world in which deficiencies that turn up will have to do with the effective application of our standards and not just technical compliance. Addressing processes of data capture or capability or capacity are potentially much more complex and may take longer than passing a law or setting up an institution. In many parts of the world we will need a perspective that views assessments as a diagnostic tool for future work and assistance rather than simply a judgement of failure.
We need to learn from the early assessments and be prepared to adjust our settings to address these issues. I hope to see the commencement of this work at least during the Australian presidency.
The achievements of the FATF
The 25th anniversary of the FATF is also an opportunity to take stock of what we have achieved, and much has been achieved. On any measure of the success of international bodies, the FATF and the FSRBs have accomplished much.
- Membership has increased from what was originally the G7, to now a coverage across the global network of more than 190 jurisdictions
- The scope of work has expanded from a response to the global drug problem, to now cover the flow of illicit money more generally
- Recommendations have been introduced to deal with the financing of terrorism and proliferation
- Most countries around the world have now arrived at a point where at least the basic laws and institutions to deal with money laundering and the financing of terrorism are in place
- Governments increasingly understand the importance of compliance with the FATF standards for the health of their economies, reputation and participation in international markets.
Relationship with the private sector and international bodies
Building our relationships and understanding of the FATF with the private sector is really critical. Our work is getting increased publicity [for example, the recent article in The economist on issues related to de-risking]. But also there is a focus on the real motives and sanctions for non-compliance and how this has to do ultimately with market forces - how the financial markets and the ratings agencies view the risk of doing business with certain countries or companies/organisations. Increasingly the products of the FATF will need to be attuned and better understood by the private sector.
One of the priorities of the Australian presidency is to utilise the opportunity of the 25th anniversary and the commencement of the fourth round of evaluations to deepen the understanding and input of the private sector.
This is also true of international bodies. We need to continue to deepen our relationships with the UN, G20, IMF and World Bank. It is worth singling out our relationship with the Egmont Group of Financial Intelligence Units, a very close and symbiotic relationship given the role of FIUs. I would like to see an opportunity for the Egmont Group to present at plenary meetings of the FATF. I would hope that this would give us an important perspective on the practical implications of our policy.
I also want to mention the G20 which Australia is also hosting the presidency of this year, particularly the G20 Anti-Corruption Working Group chaired by Italy and Australia. The FATF has specifically worked closely with this group to address the importance of beneficial ownership and customer due diligence in both the context of corruption and money laundering.
Threats to the international financial system
Finally, let me turn to the other part of our core business – keeping abreast of changes and developments in threats to the international financial system. We need to ensure that our policies remain relevant, and that we continue to provide leadership and some measure of international consistency in approaching new products and risks.
There are two main priority areas for the Australian presidency in this regard:
- One is in the area of virtual currencies. In this case I think we have an obligation to begin to facilitate an informed discussion about virtual currencies. We should, I think, be careful not to take a definitive position on this issue too quickly, but rather take time to understand it and to flag the key aspects of this development that might concern us from the perspective of money laundering. Virtual currencies could create issues of an economic and prudential kind that have to do with consumer protection as well. These are not our issues, but we need to make sure we stay close to other organisations and authorities who are looking at virtual currencies from this and other perspectives. We should not be quick, however, to cut off innovations in financial products that could represent a real cut in transaction costs and an increase in productivity.
- Another key area which we would like to see discussed at plenary level is the issue of ‘de-risking’ by financial institutions. This is emerging as a major issue in potentially a number of ways. We have been involved in dialogue with other international bodies about the relationship between the FATF standards and financial inclusion/exclusion in the provision of financial services. There is also interest in the media as well. The economist has recently published an article which suggests that too rigorous a process of de-risking has the danger of driving the development of alternative remittance systems and shadow banking. On the other hand, de-risking can also be seen as a notable success of the application of the FATF standards. As I said earlier, in some cases, exclusion from the international financial system can be a significant and legitimate sanction. There is also the contention that de-risking has more to do with the risk-management requirements that Basel III will place on a financial institution, rather than the requirements of the FATF. But clearly it is important for us to discuss this and try to understand its implications.
The work and structure of the FATF
In relation to structure and organisation of FATF itself, there are a number of initiatives commenced under the Norwegian presidency, continued by the Russian presidency, which need to be finalised. Prioritisation of work is a critical area, particularly now that we have commenced the fourth round of evaluations. There are also some internal governance issues that we need to deal with. These are important initiatives and I hope that they can come to fruition under the Australian presidency, so that the FATF can continue the important work that it does to protect the integrity of the international financial system.