The Financial Action Task Force was created as a “policy-making body” in 1989 to combat the growing concern about money laundering at the time, which is surprisingly still a prevalent issue today. It was charged as an intergovernmental task force to study money laundering trends and monitor legislative, financial, and law enforcement activities taken by member bodies. 

FATF started with 16 members, a number which has grown to 4 over the years. In its very first year, FATF issued a report containing forty recommendations to combat money laundering effectively; these recommendations were further revised in 2003, owing to the evolving patterns and techniques of money laundering as well as the improved resources or avenues available to launder money. 

The 40  FATF recommendations will be the basis of this article. This article will explain what the FATF’s 40 recommendations are all about and how financial entities can align with the recommendations.

The Financial Action Task Force: What Is It And What Does It Do?

The Financial Action Task Force is an intergovernmental body that develops and promotes policies created to protect the global financial system from terrorist financing and money laundering, including other related vices. The body conducts peer reviews and guides to ensure compliance with its standards; it helps governments enhance their financial regulatory frameworks and law enforcement capabilities.

What is the FATF 40 Recommendations?

The Financial Action Task Force (FATF) 40 Recommendations are a set of international standards designed to combat money laundering and terrorist financing. These recommendations provide a framework for countries to implement effective measures to prevent illicit financial flows and protect their financial systems.

The revised Forty Recommendations now address both money laundering and terrorist financing. FATF 40 recommendations pdf can be downloaded here

What are  Designated Non-Financial Businesses and Professions (DNFBPs) according to FATF?

According to the Financial Action Task Force (FATF) 40 Recommendations Designated Non-Financial Businesses and Professions (DNFBPs) are sectors that are considered to be at a higher risk of being used for money laundering or terrorist financing. They include:

The DNFBPs include the following sectors:

1. Casinos (including online casinos) – As they handle large sums of money and can be used for laundering illicit funds.

2. Real Estate Agents – Involved in transactions for clients concerning the buying and selling of real estate, a sector often targeted for money laundering.

3. Dealers in Precious Metals and Precious Stones – High-value commodities like gold, diamonds, and other jewels are frequently used in laundering schemes.

4. Lawyers, Notaries, and Other Legal Professionals – When they prepare or carry out transactions for clients, such as buying/selling real estate, managing client money, securities or assets, creating companies, etc.

5. Accountants – When they perform certain financial transactions for their clients, such as managing client funds, securities, or assets.

6. Trust and Company Service Providers – Individuals or firms that provide services such as the formation, management, and administration of legal persons or arrangements like companies, trusts, and foundations.

Why are the 40 Recommendations of the  Financial Action Task Force Important?

The FATF 40 recommendations, first issued in April 1990, is a body of robust or stringent framework for countries to implement effective anti-money laundering (AML) and counter-terrorist financing (CTF) measures.

These policies are carefully thought out and formulated with inputs and deliberations from experts and policymakers all over the world.  They are made to address different aspects of financial crime, from regulatory requirements for financial institutions to law enforcement practices and international cooperation. Complying with these recommendations will help to maintain the integrity of the global financial system and prevent misuse of financial institutions. 

The FATF 40 recommendations have been endorsed by more than 130 countries and are considered the international anti-money laundering standard. In fact, they are also known as the “FATF standards.” 

How Many FATF Recommendations Are There?

There are 40 FATF recommendations, which cover a wide range of measures and standards. The FATF was created by the G7 Summit in Paris in 1989.

The FATF recommendations were first issued in 1990 but have since gone through different revisions. Aiming to tighten up these policies following the changing times, laws and financial technology as well as banking systems and the emergence of rapid cross - border transactions and new avenues like gambling, sports betting, etc.

To reflect evolving money laundering techniques and to address gaps identified in the initial recommendations, it was revised in 1996, then in 2001, as a response to the 9/11 attacks, The FATF issued 8 (later expanded to 9) Special Recommendations on Terrorist Financing (SR I-IX), in addition to the existing 40 Recommendations.

In 2003, a comprehensive revision of the framework was taken to further strengthen the international anti-money laundering and counter-terrorist financing framework. The nine special recommendations made in 2001 were integrated with the 40 FATF recommendations. There was an introduction of new standards for transparency of beneficial ownership of legal persons and arrangements, as well as enhanced requirements for financial institutions, including CDD, suspicious transaction reporting, and record-keeping.

In 2012, another revision took place; the 9 special recommendations were merged with the 40 recommendations into a single set of 40 recommendations. There was an emphasis on a risk-based approach to AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism). The crimes were also included as a predicate offence for money laundering. The revision also saw the strengthening of the measures to address the funding of the proliferation of weapons of mass destruction (WMDs).

2020 saw the rise of virtual assets in the form of cryptocurrencies and other forms of decentralized finance. The revision in 2020 addressed the rising risks of cryptocurrencies and Virtual Asset Providers such as crypto exchanges and DeFi platforms. New standards were made for VSAPs to combat the misuse of virtual assets for money laundering and terrorist financing. Then the “Travel Rule” was also introduced, and it requires the collection and transfer of customer information during transactions. 

There are still ongoing changes to the FATF recommendations as the international financial ecosystem continues to evolve. 

The FATF 40 recommendations are divided into seven distinct areas; 

• AML/CFT Policies and Coordination
• Money laundering and confiscation
• Terrorist financing and financing of proliferation
• Preventive measures
• Transparency and beneficial ownership of legal persons and arrangements
• Powers and responsibilities of competent authorities and other institutional measures
• International cooperation 

What are the Big 6 FATF Recommendations?

The policies from the FATF 40 recommendations that make up the “big six” FATF recommendations include 3,5,6,10,11, and 20; criminalizing money laundering and terrorism funding offences, targeted financial sanctions for TF, customer due diligence & record keeping measures and reporting of suspicious transactions. 

The Big 6 FATF recommendations are unanimously seen as crucial, and the common recommendations help build a strong framework to prevent, reduce, and prosecute money laundering and terrorism funding.

What is the FATF 40 Recommendations Summary

The FATF Recommendations are the international standards for anti-money laundering and counter-terrorist financing measures. They cover a wide range of areas, including the criminalization of money laundering, customer due diligence, suspicious transaction reporting, and international cooperation. The FATF recommendations can be succinctly explained or summarized in the following ways:

1. Criminalization of Money Laundering

Countries should criminalize money laundering based on UN conventions. This includes a wide range of predicate offences, which are the crimes that generate the funds to be laundered.

2. Liability for Money Laundering

Both individuals and legal entities (like corporations) can be held liable for money laundering offences. This can include criminal, civil, or administrative liability.

3. Confiscation of Proceeds

Countries should have measures in place to confiscate property or assets that are the proceeds of money laundering or other predicate offences.

4. Customer Due Diligence

Financial institutions are obligated to perform customer due diligence (CDD). This includes identifying and verifying the identity of their customers, understanding the nature of their business, and monitoring their transactions.

5. Enhanced Due Diligence

In certain higher-risk situations, such as dealing with politically exposed persons (PEPs), financial institutions should perform enhanced due diligence. This involves additional scrutiny and measures to manage the risks.

6. Record-Keeping

Financial institutions are required to keep records of customer information and transactions for at least five years. These records must be accessible to competent authorities upon request.

7. Suspicious Transaction Reporting

Financial organisations must report suspicious transactions to the Financial Intelligence Unit of their country or region, (FIU). This includes transactions that have no apparent economic or lawful purpose.

8. Compliance Programs

Financial institutions should have anti-money laundering and terrorist financing programs in place. These programs should include internal policies, procedures, controls, and employee training.

9. Regulation and Supervision

Financial institutions are essentially subjected to adequate regulation and supervision to ensure they comply with the FATF Recommendations.

10. International Cooperation

Countries should cooperate in the fight against money laundering and terrorist financing. This includes mutual legal assistance, extradition, and information sharing.

Why are the 40 Recommendations of the FATF Important?

The 40 Recommendations of the Financial Action Task Force (FATF) are crucial for several reasons:

1. Preventing Money Laundering and Terrorist Financing:

2. Promoting Financial Integrity:

3. Supporting Global Cooperation:

4. Protecting Vulnerable Populations

5. Promoting Economic Development

How FATF Recommendations Can Be Implemented Effectively 

1. Comprehensive Internal Policies and Procedures Should Be Developed 

Financial institutions should establish detailed internal policies and procedures that align with FATF Recommendations. This includes clear guidelines for customer due diligence (CDD), transaction monitoring, and suspicious activity reporting. These policies should be regularly updated to reflect new updates in regulations and emerging risks.

2. The Implementation of  Robust Customer Due Diligence (CDD) Measures 

Effective implementation of CDD is crucial. Financial institutions must confirm or verify the identity of their customers, including; understanding the nature of the business that they do, and assessing the risk of money laundering or terrorist financing. Enhanced due diligence should be applied to high-risk customers, like politically exposed persons (PEPs) and those from high-risk jurisdictions.

3. Establishing and Maintaining  Strong Record-Keeping Systems

Institutions must keep accurate and comprehensive records of all transactions and customer information for at least five years. This ensures that relevant data is available for audits, investigations, and regulatory inquiries. Record-keeping systems should be secure and accessible to authorized personnel only.

4. Providing  Continuous Training and Awareness Programs

Regular training for employees is important to ensure that staff are aware of the latest AML/CTF regulations, risks, and red flags. Training should be streamlined to different roles within the organization and include case studies, updates on regulatory changes, and practical scenarios to enhance understanding.

5. Creating and Supporting  a Strong Compliance Culture with Regular Audits

A strong compliance culture starts at the top. Senior management should demonstrate a commitment to AML/CTF compliance, ensuring that adequate resources are allocated for this purpose. Regular internal and external audits should be undertaken to assess the effectiveness of AML/CTF programs and identify areas for improvement.

6. Cooperation with Regulatory Bodies and Law Enforcement

Financial institutions must cooperate with national and international regulatory bodies and law enforcement agencies. This includes timely reporting of suspicious transactions, participating in information-sharing initiatives, and adhering to requests for assistance in investigations. Cooperation strengthens the global effort to combat money laundering and terrorist financing.

7. Utilizing Compliance Software for Streamlined Implementation

Compliance software can automate and streamline many aspects of FATF Recommendation implementation. These platforms integrate various tools for customer due diligence, transaction monitoring, and reporting. They can also help manage regulatory updates, ensuring that institutions stay compliant with the latest requirements. By centralizing compliance activities, these software solutions reduce manual errors and improve overall efficiency.

Bottom Line 

The FATF 40 recommendations are a crucial framework for controlling or combating financial crimes in the international financial ecosystem. It is important to adhere to the FATF 40 recommendations, especially for financial institutions. 

To effectively implement the FATF Recommendations, financial entities must align their internal policies, procedures, and controls with these international standards. This includes making sure that staff are adequately trained, that systems for monitoring and reporting suspicious activities are robust, and that there is strong cooperation with national and international regulatory bodies.

Youverify offers a range of strong suites of AI-powered compliance software products and tools to effectively aid compliance with the FATF 40 recommendations. See how financial institutions all over the world are utilizing Youverify software to effectively comply with and implement the FATF 40 recommendations. Request a FREE DEMO from our compliance expert today!