The Financial Action Task Force’s Challenge with Russia

In February, the Financial Action Task Force (FATF), the intergovernmental body responsible for setting anti-money laundering and counterterrorist financing (AML/CTF) standards, suspended Russia’s membership. This move, the first suspension in the organisation’s 34-year history, bars Russia from any leadership or decision-making authority but does not expel the country or place it on the FATF’s blacklist.

Indeed, while welcoming the decision, Ukraine and other FATF members have urged the watchdog to go further and blacklist Moscow altogether to ‘dramatically increase the cost of doing business with Russia’. While such a response to Russia’s unlawful aggression on multiple fronts is warranted, blacklisting the country – as satisfying as it may be – is not the most appropriate tool within the FATF’s current mandate. Instead, the watchdog should consider this as a wakeup call and use this moment as an impetus to review and update its standards and country assessment process to address a long-ignored array of illicit finance threats emanating from deeply corrupt countries, including Russia.

The FATF’s Stance on Russia

Since Russia’s unlawful aggression, the FATF has gradually placed new restrictions on the country to severely limit its role and influence within the organisation. These include barring Russia from participating in current and future FATF projects and from taking part in decision-making processes regarding standard setting, governance and membership matters. In February came the final blow: the FATF’s first suspension of one of its members, which effectively side-lines Russia and prevents it from attending meetings as well as accessing documents. Russia’s suspension was justified on the grounds that the country’s aggression towards Ukraine represented a major threat to the integrity and security of the financial system as Moscow engaged in arms trading with UN-sanctioned jurisdictions, and there were instances of malicious cyber-activities emanating from Russia. While welcoming the suspension as a positive step, the Ukrainian government thinks the FATF should do more, and is urging the watchdog to designate Russia as ‘a high-risk jurisdiction’ and include it on its ‘blacklist’, which would require all jurisdictions to conduct enhanced due diligence when dealing with Russia.

Should the FATF Blacklist Russia?

Blacklisting Russia may not be the best course of action for two reasons, grounded in both its potential applicability and effectiveness. First, proponents of blacklisting Russia support their argument by stating that Russia’s actions violate the FATF’s AML/CTF and counter-proliferation financing regimes and, as a result, the country should be isolated from the global financial system. Indeed, being blacklisted by the FATF can have severe consequences for a country’s economy, financial system and international reputation. It can result in restrictions on international transactions, difficulties obtaining credit, and limitations on foreign investments. In addition to economic consequences, blacklisting can lead to diplomatic isolation, damage international relationships, and reduce the country's influence on the global stage. However, blacklisting would arguably create a minimal additional economic and political impact to the one caused by international sanctions and other restrictive measures already in place. Indeed, sanctions and other restrictive measures rolled out internationally have already started to make Russia a political and economic pariah. Many Russian banks have been disconnected from SWIFT, the organisation that provides global financial messaging; Russia has also been expelled from 42 international fora, and its participation in many international organisations has been limited.

Second, there are distinct criteria for being blacklisted by the FATF, pertaining to either the organisation’s procedure for assessing countries' compliance with its standards, or a nomination by a member of the FATF or one of the FATF-Style Regional Bodies on the basis of specific money laundering (ML), terrorist financing (TF) or proliferation financing risks that have come to the attention of delegations. However, that opportunity passed with the publication of Russia’s latest Mutual Evaluation Report (MER), which found the country to have a somewhat robust framework and its authorities to have a sound understanding of ML/TF risks. An updated evaluation, and thus an opportunity for the FATF to reconsider its assessment, is currently some way off.

While a good MER does not necessarily equate to adequate compliance and strong AML/CTF frameworks – this is especially true in a context where corruption on behalf of government officials is often 'legalised' through control of law enforcement agencies and the judicial system – blacklisting Russia will not resolve the illicit finance threat posed by the country; it will merely offer a gesture, without addressing the underlying core issues. If the aim is to target illicit finance originating from Russia, then while blacklisting will ‘name and shame’ the country, it will fail to systemically address the illicit finance problem emanating from Russia, which either has not been detected or has been underestimated for many years. Furthermore, for those that view the FATF as a politically motivated organisation, such a decision will further erode the FATF’s integrity and negatively impact its reliability, as well as facilitating the further politicisation of the organisation.

The Need for a Targeted Response

Rather than conceding to political pressure and blacklisting Russia, the FATF should aim to devise more thorough and better crafted standards to ensure that illicit finance threats do not remain outside the scope of its recommendations and country assessments.

First, Russia is a case study in the deficiencies of the current FATF mutual evaluation process, which allows countries with high levels of institutionalised corruption to complete their evaluations despite the lack of integrity in their AML systems. It is essential for the watchdog to revisit its standards and to tailor its assessment and priority actions to a country’s specific context, thus capturing a more comprehensive view of its illicit finance threats.

Second, the FATF should focus more on addressing major deficiencies in the global financial system, as well as utilising its assessment tools to ensure greater compliance with the next mutual evaluation cycle, which is scheduled to begin in 2024. The watchdog should also spend equal time advocating for countries that have long been Russian kleptocrats’ favourite playground, such as the UK, to strengthen their frameworks and prevent further abuse.

Finally, the current debate presents an opportunity to discuss broader issues surrounding the organisation's governance, and the need for greater transparency in the FATF’s decision-making and listing processes. It is a test for the watchdog to prove its credibility and integrity in the face of recent questioning of its role as an ‘independent inter-governmental body’.

In the wake of Russia’s invasion of Ukraine, calls for action to address the flow of 'dirty money' from Russia through its kleptocrats into other European countries – a threat that has historically been ignored – are warranted. Blacklisting Russia, however, is likely to be an ineffective solution to the country’s financial crime problems and will do little to protect the global financial system. Instead, the watchdog must prioritise addressing key weaknesses in its recommendations and processes to ensure that no illicit finance threat is overlooked, and that no non-compliant country is let off the hook.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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