The Financial Action Task Force on Money Laundering (FATF) is an inter-governmental body. Its purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. In 2007, China joined the FATF, bringing the number of member countries to 34. In June 2007, the FATF published a consultation paper in which it outlined the risk-based approach to combating money laundering.
In 1990, one year after it was formed, the FATF issued its Forty Recommendations to Combat Money Laundering. These were revised in 2003. The Revised Recommendations set out policies and procedures for countries, financial institutions and gatekeepers (lawyers, accountants, managers of financial institutions, etc.) to detect and combat money laundering. The Recommendations focus on transparency, knowing the customer and an obligation to report to government authorities any suspicion that a customer may be laundering money.
Recommendations 12 and 16 are of greatest concern to gatekeepers. Recommendation 12 imposes customer due diligence requirements: know your client, know where your client obtained its money, know the purpose of the transaction, know the ultimate beneficial owners and keep all this information in your records for at least five years. Recommendation 16 covers the circumstances in which a gatekeeper might be required to report a client to the authorities on suspicion of money laundering.
In its June consultation paper, the FATF identified the risk-based approach to combating money laundering as a combined effort by financial institutions and government authorities. These entities are advised to allocate their resources to the areas deemed to have the greatest risk of money laundering, rather than spreading their efforts equally across multiple areas. Importantly, Section 1.12 of the consultation paper recognises that one feature of a risk-based approach “will allow financial institutions to exercise reasonable business judgment with respect to their customers”. The riskbased approach should allow banks and others to focus their most intrusive inquiries on customers or transactions that they consider to pose the greatest risk of money laundering. The June consultation paper suggests that non-financial businesses and professionals take risk into consideration when deciding how to comply with Recommendations 12 and 16.
At the same time, the FATF states that certain basic obligations can never be eliminated due to a perceived absence of risk. One example is the obligation to freeze assets belonging to individuals or entities suspected of money laundering (section 1.40). Another is that elementary customer due diligence must be undertaken in order to obtain a reasonable basis for deciding whether the risk of money laundering is low.
Factors that affect risk include the following:
- Country. Customers based in a country that doesn’t comply with FATF Recommendations or is subject to UN sanctions, for example, are always high risk.
- Industry. Anyone in a cash-intensive business is deemed high risk, as are certain international businesses such as correspondent banking, international private banking and banknote, and precious metals delivery.
The risk-based approach is promising because it suggests practicality in trying to combat money laundering and a rational allocation of resources, rather than rote application of the same standards to all situations. As the FATF’s influence extends to more countries, it is to be hoped that the risk of money laundering decreases exponentially.