DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

TITLE OF THE PROJECT

ROLE OF THE FINANCIAL ACTION TASK FORCE IN PREVENTIVING MONEY

LAUNDRING

SUBJECT

INVESTMENT LAW

NAME OF THE FACULTY

VARSHITA MADAM

Name of the Candidates U.UPENDRA,

Roll No. 2016112

Semester VII
 ACKNOWLEDGEMENT

I would sincerely like to put forward my heartfelt appreciation to our respected professor,
Varshita madam for giving me a golden opportunity to take up this project. I have tried my best
to collect information about the project in various possible ways to depict clear picture about the
given project topic.
 RESEARCH METHODOLOGY

This project is purely Doctrinal and based on primary and secondary sources such as websites,
books, journals and internet sources. The referencing style followed in this project is BLUE
BOOK 19th Edition's format of citation. This Research process deals with collecting and
analyzing information to answer questions. The Research is purely descriptive in its boundaries
of the topic
 CONTENTS

INTRODUCTION………………………………………………………………………

THE FINANCIAL ACTION TASK FORCE: BACKGROUND…………………..

Members of the Financial Action Task Force………………………………………

FATF Recommendations…………………………………………………………

FATF Sub-Organizations…………………………………………………………….

Conclusion…………………………………………………………………………
INTRODUCTION

MONEY laundering is "the process by which one conceals the existence, illegal source, or illegal
application of income and then disguises that income to make it appear legitimate."' In order to
convict on a money laundering charge, prosecutors must show that the defendant engaged in
financial transactions or international transfers of money involving funds from a "specified
unlawful activity."' 2 Such activities include "bribery, counterfeiting, drug trafficking, espionage,
extortion, fraud, murder, kidnapping, racketeering, and certain banking practices. 3 Money
laundering is not a new phenomenon, although it was not defined as a specific crime until 1986.
4 The criminal term "money laundering" was first used in the United States to describe the
Mafia's blending of illegal income with legitimate business revenue. 5 Today it is also associated
with the terrorist financial network. In the wake of the September 11 terrorist attacks on
America, money laundering has taken on a new priority as it now appears that terrorists are
funded through money laundering processes.

THE FINANCIAL ACTION TASK FORCE: BACKGROUND

In 1989, the threat of money laundering in the international banking system prompted the leaders
of the Group of Seven (Canada, France, Germany, Italy, Japan, the United Kingdom, and the
United States) to convene the Financial Action Task Force (FATF). 1 The FATF was to be
responsible for "examining the money laundering trends and techniques, reviewing international
and national action and determining additional anti-money laundering strategies.”FATF
membership currently consists of two regional organizations, the European Commission and the
Gulf Cooperation Council, and twenty nine countries and territories. The Financial Action Task
Force was first formed at the Group of Seven Paris Summit in 1989.2

More generally stated, the FATF's primary purpose is to "monitor and to coordinate
international enforcement of anti-money-laundering laws." In February 1990, at its first meeting,
the FATF issued a series of recommendations to combat money laundering based on UN

1
United States State Department, The Financial Action Task Force on Money Laundering, ECONOMIC
PERSPECTIVES, (May 2001), available at http:// usinfo.state.gov/journals/ites/0501/ijee/fatffacts.htm.
2
Lisa A. Barbot, Money Laundering: An International Challenge, 3 TUL. J. INT'L & COMP. L. 161, 174 (1995).
Convention principles. The "Forty Recommendations" were amended in 1996 to reflect changes
in money laundering trends as well as potential threats in the future.

In 2001, the FATF expanded its mission to include the fight against terrorist financing (combat
the financing of terrorism, or CFT). That October, following the September 11 terrorist attacks,
the FATF adopted eight new Special Recommendations to its original forty, and, in 2004, added
a ninth Special Recommendation. These new Recommendations were sometimes collectively
referred to as the 40+9 Recommendations, but in February 2012, the FATF consolidated the
40+9 Recommendations into a revised Forty Recommendations, which remain today as the
international standards for combating money laundering and terrorist financing. Most pertinent to
the practice of law are Recommendations 22 through 25 regarding customer due diligence and
transparency-beneficial ownership of legal persons or arrangements.3

The FATF focuses on six key areas that are intended to reduce the potential for the abuse
of financial systems and financial crimes.

 FATF Recommendations. The FATF issued its Forty Recommendations to serve as global
standards to protect the integrity of the international financial system and enhance international
co-operation on AML/CFT by increasing transparency and assisting countries in successfully
taking action against the illicit use of their financial system.

 High-risk and Non-cooperative Jurisdictions. FATF attempts to identify those countries that
are not complying with the FATF recommendations. On the basis of reviews by the International
Co-operation Review Group (ICRG), jurisdictions may be publicly identified in one of the two
FATF public documents that are issued three times a year: 1) FATF’s Public Statement identifies
jurisdictions that have strategic AML/CFT deficiencies and to which counter-measures apply and
jurisdictions which have deficiencies but have not made progress in addressing the deficiencies
or have not committed to an action plan to address the deficiencies; and 2) Improving Global
AML/CFT Compliance: On-Going Process in which the FATF identifies those jurisdictions that

3
Duncan E. Osborne, The Financial Action Task Force and the Legal Profession, 59 N.Y. L. Sch. L. Rev. 421 (2014).
have AFL/CFT deficiencies but have provided a high-level political commitment to address the
deficiencies through a plan developed with the FATF.4

 Financing of Proliferation. The FATF updated its standards to include measures on the
implementation of targeted financial sanctions related to proliferation of weapons of mass
destruction.

 Mutual Evaluations. The FATF conducts peer reviews of each member on an ongoing basis
to assess levels of implementation of the FATF Recommendations, providing an in-depth
description and analysis of each country’s system for preventing criminal abuse of the financial
system.

 Methods and Trends. FATF monitors and updates the constant evolution of the methods used
to launder proceeds of criminal activities and finance illicit activities. Recently, FATF surveyed
the vulnerability of Hawalas and other similar service providers to money laundering and
terrorist financing as a result of their use of non-bank settlement methods. The FATF also
surveyed the vulnerabilities and risks of the diamond trade to money laundering, including
production, rough diamond sale, cutting and polishing, jewelry manufacturing and jewelry
retailers.

 Corruption. FATF focuses on the linkage between corruption and money laundering, both of
which are generally committed to obtain or hide financial gain.5

FATF Secretariat

The FATF Secretariat is located at the OECD headquarters in Paris.

Since November 2015, the FATF Secretariat has been led by the Executive Secretary David
Lewis

Members of the Financial Action Task Force

As of 2020, there were 39 members of the Financial Action Task Force, including the European
Commission and the Gulf Cooperation Council. To become a member, a country must be
considered strategically important (large population, large GDP, developed banking and

4
The Financial Action Task Force: An Overview ,James K. Jackson
5
Ibid
insurance sector, etc.), must adhere to globally accepted financial standards, and be a participant
in other important international organizations.

Once a member, a country or organization must endorse and support the most recent FATF
recommendations, commit to being evaluated by (and evaluating) other members, and work with
the FATF in the development of future recommendations.

A large number of international organizations participate in the FATF as observers, each of

which has some involvement in anti-money laundering activities. These organizations include
Interpol, the International Monetary Fund (IMF), the Organization for Economic Cooperation
and Development (OECD), and the World Bank6.

FATF Recommendations

Creation and ongoing maintenance

Together, the Forty Recommendations on Money Laundering and nine Special

Recommendations on Terrorism Financing set the international standard for anti-money
laundering measures and combating the financing of terrorism and terrorist acts. They set out the
principles for action and allow countries a measure of flexibility in implementing these
principles according to their particular circumstances and constitutional frameworks 7. Both sets
of FATF Recommendations are intended to be implemented at the national level through
legislation and other legally binding measures. There are multiple groups to organize the
Recommendations; AML/CFT Policies and Coordination, Money Laundering and Confiscation,
Terrorist Financing and Financial of Proliferation, Preventive Measures, Transparency and
Beneficial Ownership of Legal Persons and Arrangements, Powers and Responsibilities of
Competent Authorities and other Institutional Measures, and International Cooperation.8

6
https://www.investopedia.com/terms/f/financial-action-task-force-fatf.asp,last accessed on 3rd April,2020
7
"International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation"
8
Ibid
Forty recommendations on money laundering

The FATF's Forty Recommendations on money laundering of 1990 are the primary policies
issued by and the Nine Special Recommendations (SR) on Terrorism Financing (TF).] The
Recommendations are seen globally as the world standard in anti-money laundering as well
many countries have made a commitment to put the Forty Recommendations in place. The
Recommendations cover the criminal justice system and law enforcement, international co-
operation, and the financial system and its regulation.

NINE Special Recommendations on Terrorism Financing

The FATF has issued Special Recommendations on Terrorist Financing. In October 2001 the
FATF issued the original eight Special Recommendations on Terrorism Financing,[citation
needed] following the September 11 terrorist attacks in the United States. Among the measures,
"Special Recommendation VIII" (SR VIII) specifically targeted nonprofit organizations. This
was followed by the International Best Practices Combating the Abuse of Non-Profit
Organizations in 2002, released one month before the U.S. Department of Treasury's Anti-
Terrorist Financing Guidelines, and the Interpretive Note for SR VIII in 2006. A ninth Special
Recommendation was added later. In 2003 the Recommendations, as well as the 9 Special
Recommendations were adjusted for the second time. The Recommendations, and Special
Recommendations were advocated by over 180 countries.
FATF Recommendations

Successfully investigate and prosecute money laundering and terrorist financing.

Criminalize money laundering and terrorist financing. Properly train law enforcement and
prosecutorial authorities, and equip them with sufficient powers and resources.

Deprive criminals of their criminal proceeds and the resources needed to finance their
illicit activities. 

  Implement effective mechanisms to freeze, seize and confiscate criminal assets.

Require financial institutions and other businesses and professions to implement effective
measures to detect and prevent money laundering and terrorist financing.

Ensure that the required range of persons and entities in both the financial and non ‐financial
sectors implement the AML/CFT preventative measures listed below.

 Customer due diligence: Prevent criminals from operating anonymously or under false
identities by accurately identifying customers and knowing enough about their business
to be able to differentiate between legitimate business and criminal activity.
 Record keeping: Keep accurate customer identification and transaction records that can
be promptly accessed by the authorities and enable customer transactions to be traced.
 Suspicious transaction reporting: Monitor customer relationships and promptly report
any suspicious transactions to the financial intelligence unit for analysis and possible
dissemination to law enforcement authorities.

Ensure that financial institutions and other businesses and professions comply with
AML/CFT requirements.

Implement monitoring and supervision mechanisms, including powers to sanction financial

institutions and other businesses and professions that do not comply with AML/CFT
requirements.
Enhance the transparency of legal persons and arrangements.

Prevent legal persons and arrangements from being abused by criminals by ensuring that the
appropriate authorities have timely access to accurate and current information concerning the
ownership and control of legal persons and arrangements.

Implement mechanisms to facilitate cooperation and co‐ordination of AML/CFT efforts at

the international and domestic level.

Ensure that there are no safe havens for criminals by implementing mechanisms for effective co‐
operation with countries in a timely manner when investigating and prosecuting money
laundering and terrorist financing.

Effective co‐operation and co‐ordination should also take place amongst domestic authorities
(including law enforcement, prosecutorial and supervisory authorities, the financial intelligence
unit and policy makers).

Securing a more transparent and stable financial system that is more attractive to foreign
investors.

Corrupt and opaque financial systems are inherently unstable. Excessive money laundering can
cause increased volatility of international capital flows and exchange rates, market disparities,
and distortions of investment and trade flows.

Ensure that financial institutions are not vulnerable to infiltration or abuse by organized
crime groups.

Financial institutions that are exploited in this manner are exposed to reputational risk, financial
instability, diminished public confidence, threats to safety and soundness, and direct losses.

Build the capacity to fight terrorism and trace terrorist money.

Terrorists need money to finance attacks. Tracing this money is one of the few preventive tools
that governments have against terrorism.
Meet binding international obligations, and avoid the risk of sanctions or other action by
the international community.

The international community—through numerous international treaties, United Nations Security

Council Resolutions and best practices—has endorsed the FATF Recommendations at the
highest political level.

Avoid becoming a haven for criminals.

Countries with weak AML/CFT systems are attractive to criminals because they provide an
environment in which criminals can enjoy the profits of their crimes and finance their illicit
activities with little fear of facing punishment.

FATF Sub-Organizations

There are numerous associate members and observer body organizations which supplement the
work of the FATF and have specific anti-money laundering and terrorist financing functions.
These “sub-organizations” can be split into three groups: Associate Member Organizations,
Observer Bodies and Other International Organizations.

Asia/Pacific Group on Money Laundering (APG)

The origins of Asia/Pacific Group on Money Laundering or APG date back to the “raising
awareness” stage of the FATF in the early 1990s. It was established to ensure the adoption,
implementation and enforcement of the FATF’s recommendations for universally adopted
international anti-money laundering standards within Asia and the Pacific countries. After the
events of September 11, the APG, like the FATF, expanded the scope of its work to include
countering terrorist financing, and the universal adoption of the FATF’s special
recommendations.

The APG’s duties include providing assistance to countries and territories within its scope and to
encourage the co-operation of countries with confiscation, forfeiture and extradition matters and
information sharing. The APG provides guidance to countries in setting up systems and
organizations for reporting suspicious transactions, helping the countries develop systems
tailored to regional factors and circumstances.

Caribbean Financial Action Task Force (CFATF)

The Caribbean Financial Action Task Force (CFATF) was designed to encourage the co-
ordination of and the participation in anti-money laundering and terrorist financing training
programmes. It is amed at assessing the degree to which its members have implemented the
recommendations of the FATF and CFATF. Membership includes Jamaica, Costa Rica and
Panama.

CFATF was established in the early 1990s and adapted the recommendations of the FATF to
have regional perspective. Furthermore, an important aim of the CFATF is to continuingly
develop measures designed to combat the laundering and the re-direction of the proceeds from
crime.

Financial Action Task Force on Money Laundering in South America (GAFISUD)

Members of the Financial Action Task Force on Money Laundering in South America or
GAFISUD include amongst others Colombia, Chile, Brazil and Argentina. This particular FATF
sub-organization was created in 2000 with the aim of coordinating efforts towards developing
and implementing a global strategy to prevent money laundering and the financing of terrorism.
Like the other sub-organizations, GAFISUD conscientiously co-operates with the FATF, with
the purpose of achieving this aim.

GAFISUD carries out a similar task to that of the FATF in that it carries out a series of mutual
evaluations on member countries, to see the extent to which they have implemented the FATF
Recommendations and Special Recommendations (the 40+9 recommendations). It is also
committed to coordinating anti-money laundering training and educational programs.

Intergovernmental Anti-Money Laundering Group in Africa (GIABA)

The Intergovernmental Anti-Money Laundering Group in Africa (GIABA) was established on 10

December 1999. Members include amongst others Ghana, Nigeria, Senegal. It aims at protecting
national economies and financial institutional systems against the dangers of the integration of
the proceeds of crime and terrorist financing. Its objective is to find global solutions to the issues
these illicit activities pose. The strategy of GIABA has been to improve and intensify measures
designed to combat the proceeds of crime and to encourage co-operation amongst its members

Offshore Group of Banking Supervisors (OGBS)

The Offshore Group of Banking Supervisors (OGBS) was established in response of growing
concern in 1980 over the risk that the offshore financial institutions were not subject to sufficient
supervision or subjected to adequate control and could therefore be easily susceptible to money
launderers, and those wishing to provide collateral for terrorist projects. The OGBS objective,
among others, is to promote the implementation of universal international standards of
supervision for cross-border banking, money laundering and terrorist financing.

Conclusion

The FATF has been praised for protecting the integrity of the international financial system.
However, the organization has been criticized for representing the interests of powerful states
and not the interest of the majority of jurisdictions resulting in unequal negotiating power
between the developed and the developing countries. The organization has been criticized for
imposing the 40+9 Recommendations on developing countries through difficult customer due
diligence requirements. Furthermore, civil society engagement has been limited to organizations
from developed countries, which has resulted in civil society organizations from developing
having no voice and agency within the organization. For FATF global standards to be effective it
is important that member states consider proper ways of improving the legal regulation,
democratic control, and public accountability of the organization. Transparent rules and
procedures in the rule-making process and the right of the public to access the FATF information
is also important.