Good Intentions: The FATF Faces Its Own Unintended Consequences

Earlier this year, the Financial Action Task Force (FATF) – the global anti-financial crime standard setter – launched a new project to study and mitigate the unintended consequences stemming from the incorrect implementation (purposefully or otherwise) of its anti-financial crime standards.

In numerous cases, this seems to stem from occasions where implementation of the standards deviates from the FATF’s insistence on a risk-based approach – where measures applied are commensurate with the level of threat – leading to circumstances where overly restrictive regulations are enacted under the pretence of combatting illicit finance. This results in infringements on the legitimate activities of those such as not-for-profit organisations (NPOs) that are subject to FATF-directed scrutiny; marginalised people being excluded from the formal financial system; and states discovering novel channels to curtail human rights for political purposes. Those that track the impact of FATF standards on civil society, the financially excluded and human rights advocates welcomed the FATF’s initiative.

Since then, while the FATF has provided briefings to interested groups in civil society on its initial findings, its ‘stocktake’ report – based on evidence gathered regarding unintended consequences – remains unpublished. And the potential impact of this work is still unclear.

At the same time, the FATF is well underway with its ‘Strategic Review’, through which it seeks to determine how its country evaluations ‘can better promote and enable more effective and efficient AML/CFT measures’. Optimists might hope that this review will provide a vehicle for accommodating the learnings of the FATF’s unintended consequences project; but regular FATF-watchers will, unfortunately, be aware that the nature of FATF decision-making – and the limited independent governance and oversight of its activities – do not encourage radical change.

With this in mind, during July, RUSI’s Centre for Financial Crime and Security Studies hosted a webinar series that considered the issue of FATF-related unintended consequences from three perspectives: lessons from previous occasions when the FATF has responded to the negative consequences of the application of its standards; the present impact the FATF standards have on financial inclusion; and the rising abuse of the standards for politicised purposes, notably to target human rights defenders and political opponents.

Some positive outcomes were also explored: for example, the considerable progress made by the FATF in acknowledging the impact its standards have had on the NPO sector, including the introduction of a dedicated programme of engagement with NPOs; and the growing recognition by the FATF of the potential impact of its standards on financial inclusion.

Yet, a unifying thread through all three discussions was the lack of any sort of consequence or penalty for countries where the FATF standards are misused: the process is asymmetric. Put simply, there is no downside if standards are overapplied in the pursuit of the best possible evaluation outcome or, worse still, if they are actively abused for political purposes.

Thus, while the FATF should be congratulated for recognising that its standards often have unintended consequences, it is not clear whether it has the mechanisms in place to take responsibility for these consequences and respond to misapplication.

But, if the FATF were to embrace the required accountability, what might this look like?

The Imperative of Greater Accountability

Improved governance and greater operational transparency must be at the core of any response. As the February 2021 report from the Financial Accountability, Transparency and Integrity Panel – formed at the invitation of the UN General Assembly – observed, the FATF ‘operates without a legal convention or articles of agreement at its core’. This reminds us that the FATF, often playfully referenced as ‘the most important international organisation you have never heard of’, lacks the legitimacy-enhancing underpinnings enjoyed by comparable institutions.

Lacking a legal convention that outlines its mandate and the extent of its powers also means that the FATF’s operating procedures can appear to exhibit a ‘behind closed doors’ way of working that has become outdated and unacceptable. For those countries that are not direct members of the FATF, or those that believe they are negatively affected by its standards, the lack of operational transparency and governance is especially problematic.

Although the FATF (and specifically the Paris-based Secretariat) has shown increasing willingness to engage with those outside of its membership, such as financial institutions, members of civil society and academics, much of its process and decision-making is opaque, punctured only by the social media posts of those that are ‘in the room’ and frustrated by its actions.

A New Framework

Thus, firstly, the FATF needs to commit to significantly greater transparency in its deliberations and decision-making. Those impacted by its standards need to see clearly how their input and concerns are being addressed, if the FATF is to extract legitimacy and popular buy-in in the absence of strict legal foundations.

Secondly, and connected, the FATF needs to introduce independent governance and oversight. An Ombudsperson (and staff), funded by FATF members, should be set up to investigate and represent related grievances, not dissimilarly to how the Ombudsperson of the 1267 sanctions committee of the UN Security Council is mandated to offer an impartial voice when it comes to de-listing requests from individuals who believe they have been wrongly targeted by the UN’s sanctions regime related to al-Qa’ida and Islamic State. This office should produce an annual, public report on identified abuses of the FATF standards and be guaranteed a speaking slot at every FATF plenary meeting. Countries identified in the Ombudsperson’s report as having overstepped the mark should be required to respond to the report as part of the regular follow-up reporting that countries are already obliged to provide.

The FATF’s assessments of countries’ financial crime failings – notably its ‘grey’ and ‘black’ listing process – have an evidenced impact on investment received by countries, and thus represent the body’s chief source of influence over its members. Therefore, thirdly, the criteria for inclusion on the FATF’s grey list should be expanded. Where the Ombudsperson identifies that FATF standards are being abused by countries, they should be added to the grey list until the misuse – such as overbearing legislation – is addressed. Recognising the drastic economic implications, countries take every measure to avoid being added to the FATF’s black/grey lists. Leveraging this strong aversion in order to combat abuse of the FATF’s standards should therefore be considered. Countries should know that misuse of the standards will carry consequences.

Lastly, where the consequences of FATF standards are genuinely unintended, the FATF must act much more swiftly than it has done previously. It is notable that where new risks are identified – for example, the emergence of new financial instruments such as cryptocurrencies – the FATF can expedite decision-making; yet when unintended consequences are identified, progress is glacial, at best (just ask those, such as one of the authors, involved in the years-long process to amend failings in Recommendation 8 on NPOs). The Ombudsperson should be mandated to monitor and evaluate the FATF’s response to identified failings.

At the heart of this issue are transparency, legitimacy and responsibility. The power wielded by the FATF and the impact of its standards and assessments have undoubtedly improved the integrity of the global financial system. But, for those countries that are not core members of the FATF and feel they are unfairly treated by an organisation that is dominated by rich nations, or for those groups that are inconvenienced or (at worst) persecuted as a result of the FATF’s influence, its lack of accountability and mechanisms through which it can take responsibility for the actions it directs or inspires significantly undermines its legitimacy.

While the unintended consequences project is welcome, if the project is credible it is almost certain to create its own unintended consequences, confronting the FATF with remedial steps which, in its current incarnation, it will be unwilling or unable to take. Failing to take the radical action this project is likely to demand will reinforce the arguments of those that already question the FATF’s legitimacy.

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

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For the Centre for Financial Crime and Security Studies' webinar series on unintended consequences of the FATF standards, see below: