What is FATF - Financial Action Task Force?

At the heart of FATF’s work is a set of policy guidelines known as the 40 Recommendations.⁴ First issued in 1990, the Recommendations provided a comprehensive action plan for nations to fight misuse of financial systems by persons who were laundering drug money. These recommendations have since become the de facto international standard for anti-money laundering and countering the financing of terrorism. They are periodically revised to address new threats and evolving techniques of financial crime. The 40 Recommendations constitute a living framework that is subject to refinement over time. For instance,⁵ the rules for virtual assets, such as cryptocurrency, were enhanced in 2019, and standards were revised in 2022 to incorporate beneficial ownership transparency.

In essence, the Recommendations outline a comprehensive, consistent framework of measures that countries should implement to combat illicit finance. The Recommendations cover all aspects of a robust AML/CFT regime, including among others:

• Risk assessment and policy coordination (Recommendations 1–2): Countries should identify and assess their money laundering/terrorist financing risks (the risk-based approach) and develop national AML/CFT strategies. There should be strong coordination between government agencies in fighting financial crime.

• Legal frameworks (Recommendations 3–8):Countries must have money laundering and terrorist financing previsions in line with international conventions. They should enact laws enabling law enforcement authorities to set out measures against those misconduct, such as freezing or confiscation of criminal assets. Furthermore, there is a requirement to assess non-profit organizations (NPO) for any potential abuse by terrorists, while ensuring that such assessments do not hinder the legitimate operations of these entities.

• Preventive measures for financial sector and DNFBPs (Designated non-financial Businesses and Professions) (Recommendations 9–11): Financial institutions and other “obliged entities” (such as casinos, real estate firms, dealers in precious metals/stones, accountants and lawyers) must implement customer due diligence (CDD), maintain records on transactions available to domestic competent authorities. This includes identifying the ultimate beneficial owners of accounts or legal entities to prevent anonymous shell companies from laundering money.

• Measures for specific customers or activities (Recommendations 12–16): The FATF requires financial institutions to implement measures for Politically Exposed Persons (PEPs), correspondent banking, money or value transfer services (MVTS), new technologies, and payment transparency. These include enhanced due diligence for PEPs, senior management approval for high-risk relationships, and ensuring due diligence on correspondent banks. Institutions must monitor MVTS providers, regulate virtual assets, and ensure accurate payment originator/beneficiary information. Compliance with these measures strengthens AML/CFT efforts and international cooperation.

• Reliance, controls on third parties (Recommendations 17–21): The FATF addresses reliance on third parties, internal controls, and reporting obligations. Financial institutions may rely on third parties for CDD, but ultimate responsibility remains with the institution. They must ensure third parties are regulated and comply with AML/CFT requirements.

• Transparency and beneficial ownership of legal persons and other entities (Recommendations 24–25): Countries should assess risks related to the misuse of legal persons and arrangements for money laundering or terrorist financing, ensuring accurate, up-to-date beneficial ownership information is accessible to authorities. Measures should prevent the misuse of bearer shares, nominee shareholders, and directors. Additionally, countries should facilitate access to this information for financial institutions and DNFBPs to enhance compliance with AML/CFT requirements.

• Institutional and supervisory measures (Recommendations 26–32): Countries need to establish competent authorities to supervise compliance, for example financial regulators for banks and financial intelligence units (FIUs) to receive and analyze suspicious activity reports. Law enforcement agencies should have powers to investigate and prosecute financial crimes. International cooperation is emphasized. Countries should assist each other with mutual legal assistance, extradition, and information sharing to tackle cross-border money laundering.

• Monitoring, feedback, and enforcement (Recommendations 33–35): Countries should collect comprehensive statistics on AML/CFT activities, including suspicious transaction reports, investigations, prosecutions and mutual legal assistance requests. Furthermore, authorities must provide financial institutions and DNFBPs with practical guidance and feedback to support the effective implementation of AML/CFT measures. Effective, proportionate and dissuasive sanctions should be imposed on institutions, directors and senior management to ensure accountability and deter breaches.

• International cooperation (Recommendations 36–40): Countries should implement key international conventions and provide mutual legal assistance, including asset recovery and extradition. They must ensure effective, timely execution of legal assistance requests, including freezing, confiscating criminal property, and extraditing individuals charged with money laundering or terrorism-related offenses. Competent authorities must have sufficient resources and efficient processes to cooperate internationally, ensuring transparency and swift action across jurisdictions.

Collectively, the 40 Recommendations provide a global outline for effective AML/CFT systems. They are not laws themselves, but FATF calls on all countries to implement these standards through measures adapted to their particular circumstances. In practice, this means nations translate the FATF Recommendations into their own laws and regulations. For example, the Recommendations inspired comprehensive AML laws in many countries and regional directives, such as the European Union’s Anti-Money Laundering Directives⁶ that closely mirror FATF standards. Because the 40 Recommendations are recognized worldwide, they create a common baseline. Banks and businesses in different countries all face similar AML/CFT obligations, and authorities have a shared framework for cooperation. This harmonized approach makes it harder for criminals to exploit regulatory gaps.

The evaluation of a nation's compliance with the Financial Action Task Force's (FATF) standards constitutes a fundamental undertaking⁷ of the FATF. This is done through mutual evaluations,⁸ which is a peer-review assessments of each country’s AML/CFT system. A mutual evaluation is an in-depth review conducted by a team of experts from other member countries, and the FATF Secretariat. The process examines both technical compliance, whether the country has the required laws, regulations, and institutions in place as per the 40 Recommendations and effectiveness, whether those measures are actually achieving results in practice. During an evaluation, the country being assessed must provide evidence that it has a solid framework in place to safeguard its financial system against any potential misuse or exploitation. Assessors scrutinize everything from the criminalization of money laundering to bank supervision, to how many money laundering prosecutions or terrorist assets freezes a country has carried out. On-site visits are conducted to interview officials and private sector players, seeking evidence that the AML/CFT system is working as intended. The outcome is a Mutual Evaluation Report with ratings and recommendations for improvement.

Through the mutual evaluation mechanism, FATF wields significant influence. Countries deeply care about their evaluation results because these directly impact their international reputation, access to financial markets, and even economic health.

FATF evaluations can lead to a country being placed on public lists for deficient AML/CFT regimes, informally known as the grey list and black list.

• The Grey list⁹: Jurisdictions under increased monitoring
  This is a list of countries that have strategic deficiencies in combating money laundering or the financing of terrorism, but which are working actively with FATF to resolve them. Greylisted countries have committed to an action plan to swiftly address the identified weaknesses within agreed timeframes and are subject to extra oversight in the interim. In short, the grey list highlights jurisdictions that are not yet in full compliance with FATF standards but are cooperating and progressing. Being on this list is a warning signal to the international community, it means heightened scrutiny of financial transactions involving that country, and it spurs the government to make rapid reforms to avoid further reputational damage.

• The Black list¹⁰: High-risk jurisdictions subject to a call for action
  This is reserved for countries with serious ongoing strategic deficiencies that pose a high risk to the financial system through lax controls or willful non-compliance. For countries that have been blacklisted, the FATF has issued a call to its members, urging the implementation of stringent countermeasures. These countermeasures include the enhancement of due diligence procedures for transactions involving these blacklisted jurisdictions. In the most severe cases, the FATF has recommended the imposition of sanctions or the restriction of financial relationships.

This public identification process has proven to be an effective tool for FATF. No country enjoys being branded as high-risk for financial crime, the consequences are too costly. Grey or blacklisting can restrict cross-border transactions, reduce foreign investment, and even make it difficult for a country’s banks to maintain relationships and obtain credit from financial institutions. It also damages the national reputation and can carry over into ratings by investors or multinational companies deciding whether to do business in that market. In many cases, simply the threat of being listed is enough to spur a government into passing new AML laws or improving enforcement. In this way, FATF indirectly shapes national laws and regulatory regimes by leveraging peer pressure and market pressure. Overall, through mutual evaluations and the grey/black list process, FATF has elevated AML/CFT to a top priority on national agendas worldwide, effectively harmonizing laws and practices in line with its recommendations.

FATF’s recommendations and country listing processes do not only affect governments, but they also have far-reaching implications for businesses and financial industries across the globe. By setting the benchmark for AML/CFT controls, FATF influences what compliance measures companies must implement and how they operate internationally. The key impacts on businesses include:

• Banks and other financial institutions are at the frontline of implementing FATF-inspired regulations. They must establish rigorous internal controls to prevent money laundering. This means extensive Know Your Customer (KYC) procedures, ongoing transaction monitoring, employee training programs, and reporting of suspicious activities to authorities. FATF standards have pushed banks worldwide to adopt a risk-based approach¹¹ allocating more resources to higher-risk clients or products. Banks that fall short of these standards risk heavy fines and sanctions from national regulators and can even lose their banking license.

• FATF’s influence extends to corporate behavior and cross-border business. Multinational companies must be mindful of FATF ratings and lists when choosing business locations or partners. For example, if a country is greylisted or blacklisted, a multinational may face enhanced due diligence from banks when moving money in/out of that country, or they may find it riskier to invest there. Market actors take FATF lists into account, a country tagged by FATF tends to see reduced capital inflows and foreign direct investment, as investors fear increased scrutiny or sanctions risks. Companies also might need to implement group-wide AML programs across all their overseas subsidiaries to ensure each part of the business meets the local AML laws. On the upside, businesses benefit from FATF’s work by operating in cleaner, more transparent markets and a more level playing field. Honest businesses are less likely to be undermined by competitors who launder money or engage in illicit finance if all jurisdictions enforce similar high standards.

• In recent years, FATF has turned its attention to emerging financial technology sectors, recognizing that criminals can exploit new platforms if they are left unregulated. A landmark move was FATF’s revision of standards to cover virtual assets and virtual asset service providers¹² (VASPs), essentially bringing cryptocurrency exchanges and related firms under AML/CFT requirements. Now, crypto exchanges and wallet providers are expected to conduct KYC on customers and report suspicious transactions just like banks. FATF also introduced the so-called “travel rule” for crypto transfers, requiring originator and beneficiary information to accompany virtual asset transfers above a certain threshold, to ensure transparency and traceability in crypto transactions. These rules have had a significant impact. Crypto companies worldwide have had to build compliance infrastructures to collect customer data and monitor transactions. While compliance can be burdensome, embracing FATF’s standards helps fintech companies gain legitimacy and trust from banks and regulators, enabling their integration into the traditional financial system.

• Beyond finance, FATF standards also touch other industries that handle high-value assets or transactions. For instance, dealers in precious metals and stones, luxury goods sellers, and even art dealers in some cases have to be alert to money laundering through high-value purchases. Real estate developers and agents must perform due diligence on buyers (since property is a known avenue to launder large sums). Casinos and gambling businesses are required to monitor and report large cash transactions by patrons. All these sectors have had to develop compliance programs, often hiring AML compliance officers and conducting risk assessments, as a result of countries extending FATF-based obligations to them. The influence of FATF is such that even smaller businesses or professions are increasingly aware of the need to guard against being used unwittingly for illicit finance.

FATF’s standards ripple throughout the private sector.¹³ Businesses must internalize these rules or face regulatory consequences. The private sector’s role is crucial, FATF openly emphasizes that effective AML/CFT depends on collaboration with the private sector, which serves as the first line of defense in detecting and preventing misuse of the financial system. By complying with FATF-aligned rules, industries not only avoid penalties but also contribute to a safer financial environment that benefits legitimate commerce.

Over three decades since its inception, the Financial Action Task Force has proven to be a linchpin in the defense of the international financial system’s integrity. FATF provides the blueprint that virtually all countries use to craft their AML/CFT laws, ensuring convergence toward high standards. Its 40 Recommendations serve as a common language and standard of diligence for bankers, regulators, and law enforcement worldwide. Through rigorous mutual evaluations and its grey/blacklisting process, FATF has shown it can successfully induce countries to strengthen their regimes, demonstrating the power of collective action and peer pressure in global governance.

In today’s interconnected economy, this role is more crucial than ever. Money laundering and terrorist financing respect no borders, so a coordinated international response is essential. FATF, as the global AML/CFT watchdog, helps safeguard the stability and transparency of financial markets, protects legitimate businesses from criminal abuse, and by extension, contributes to global security. Complying with FATF standards is now a fundamental aspect of participating in the global financial community, for countries and businesses alike. The overall global relevance of the FATF can be seen in safer financial channels, increased accountability, and the isolation of those who would misuse the financial system for nefarious ends.