FATF Standards
Also written FATF Recommendations · FATF 40 Recommendations · Forty Recommendations
The FATF Recommendations together with their Interpretive Notes and the applicable Glossary definitions — the international AML/CFT/PF standard that more than 200 jurisdictions have committed to implement.
In plain language
People use "the FATF Recommendations" and "the FATF Standards" almost as if they mean the same thing. The workbook draws a clear line between them. The Standards are three things taken together. They are the Recommendations themselves, their Interpretive Notes, and the definitions that apply from the Glossary.
The Standards are not a law. Each country has its own legal, administrative and operational set-up. Each also has its own financial system. So countries are expected to adapt how they put the Standards in place. What the Standards give is a benchmark. Every country is judged against it. Much of the IFSCA Guidelines is also drawn from this text.
The workbook calls the risk-based approach the cornerstone of the Recommendations.
How it works
The 40 Recommendations in seven areas (Chapter 8, section 8.2): 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 international cooperation.
Numbers worth knowing, from the workbook's table (the "old number" is the corresponding 2003 Recommendation):
| Rec | Subject | Old number |
|---|---|---|
| 1 | Assessing risks and applying a risk-based approach | — |
| 3 | Money laundering offence | R.1 & R.2 |
| 10 | Customer due diligence | R.5 |
| 11 | Record keeping | R.10 |
| 12 | Politically exposed persons | R.6 |
| 13 | Correspondent banking | R.7 |
| 15 | New technologies | R.8 |
| 16 | Payment transparency | SR VII |
| 17 | Reliance on third parties | R.9 |
| 19 | Higher-risk countries | R.21 |
| 20 | Reporting of suspicious transactions | R.13 & SR IV |
| 21 | Tipping-off and confidentiality | R.14 |
| 29 | Financial intelligence units | R.26 |
| 32 | Cash couriers | SR IX |
The IX Special Recommendations on terrorist financing (section 8.3), which combined with the Forty made the "40+9" framework: ratification of UN instruments; criminalising terrorist financing; freezing and confiscating terrorist assets; reporting suspicious transactions related to terrorism; international co-operation; alternative remittance; wire transfers (accurate originator name, address and account number travelling with the transfer); non-profit organisations; and cash couriers.
Reach. The FATF is a 40-member body, and more than 200 countries and jurisdictions have committed to implement its Standards. The FATF also issues guidance and best-practice papers and revises them from experience.
A worked example
Illustrative mapping for an IFSC compliance officer.
Mapping the IFSCA Guidelines to the Standards. The compliance officer of Sabarmati Bank (IFSC Banking Unit) prepares a one-page map for training, linking each chapter of the Guidelines the bank uses daily to the FATF Recommendation behind it.
| IFSCA Guidelines topic | FATF Recommendation | Old number |
|---|---|---|
| Risk-based approach, business risk assessment | 1 | — |
| Customer due diligence | 10 | R.5 |
| Accounts of politically exposed persons | 12 | R.6 |
| Correspondent banking | 13 | R.7 |
| New products and technologies assessed before launch | 15 | R.8 |
| Wire transfers and the USD 1,000 information rule | 16 | SR VII |
| Third party reliance | 17 | R.9 |
| Enhanced due diligence for countries FATF calls for | 19 | R.21 |
| STR reporting | 20 | R.13 & SR IV |
| Confidentiality of risk rating and STR | 21 | R.14 |
Why it helps. When a trainee asks why the bank insists on an originator's address above USD 1,000, the answer is not "IFSCA says so" but Recommendation 16, formerly Special Recommendation VII, which requires accurate originator information to travel with the transfer through the payment chain.
Why NISM asks about it
Chapter 8 (Financial Action Task Force and Its Recommendations), sections 8.2 and 8.3, carries the seven areas, the table of 40 Recommendations with old numbers, the definition of the Standards, and the IX Special Recommendations; Chapter 1, section 1.3.2, gives the history. Expect "what do the FATF Standards comprise?", the count of areas, and matching questions between a subject and its Recommendation number.
Common exam traps
- Standards = Recommendations + Interpretive Notes + Glossary definitions. The Recommendations alone are not the whole Standards.
- 40 Recommendations in seven areas; the historical terrorist-financing supplement was IX Special Recommendations — 40+9.
- Countries adapt implementation to their frameworks; the Standards are not applied identically everywhere.
- Payment transparency is Recommendation 16, formerly SR VII; correspondent banking is 13; PEPs 12; higher-risk countries 19; tipping-off 21.
- The risk-based approach is the cornerstone — and Recommendation 1.
- The workbook dates the Recommendations two ways. Chapter 1 says the forty recommendations were revised in 2023; the table in Chapter 8 is labelled "Version as adopted on 15 February 2012". The 2012 date is when the current numbering was adopted; the 2023 reference is to later revisions. Both appear in the workbook.
- Chapter 8 speaks of extending the 8 Special Recommendations to cover cash couriers — that extension is what made them nine.
Check yourself
1.Which measure would most effectively strengthen international cooperation to combat trade-based money laundering in line with FATF standards?
- a)Establishing clear information-sharing gateways through MOUs, Mutual Legal Assistance Treaties, and customs-to-customs cooperation for exchange of trade data
- b)Restricting cross-border trade transactions through higher customs duties
- c)Conducting unilateral investigations without involving foreign jurisdictions
- d)Limiting reporting obligations only to domestic financial institutions
Show the answer
Answer: (a) Establishing clear information-sharing gateways through MOUs, Mutual Legal Assistance Treaties, and customs-to-customs cooperation for exchange of trade data
Countries need to work cooperatively to identify and combat trade-based money laundering. Consistent with FATF standards, countries could put clear and effective gateways in place to facilitate the prompt and constructive exchange of information. In practice, this may require broader use of memoranda of understanding and mutual legal assistance treaties between countries to facilitate the sharing of information related to specific transactions. It also means greater recourse to mutual assistance agreements between customs agencies to facilitate the exchange of export and import data in order to identify trade anomalies that may indicate potential trade-based money laundering abuses.
Three instruments in one paragraph — MOUs, mutual legal assistance treaties, and customs-to-customs agreements.
Option B addresses the wrong problem. Duties restrict the volume of legitimate trade; the vulnerability lies in the limited recourse to verification procedures or programs to exchange customs data between countries and the limited resources that most customs agencies have available to detect illegal trade transactions.
Options C and D are the opposite of cooperation. International cooperation is one of the seven areas of the 40 Recommendations — 36 International instruments · 37 Mutual legal assistance · 38 Mutual legal assistance: freezing and confiscation · 39 Extradition · 40 Other forms of international cooperation — and Special Recommendation V requires each country to afford another the greatest possible measure of assistance.
The other two steps identified by the study:
Building Better Awareness — a stronger focus on training programs for competent authorities (e.g., customs agencies, law enforcement agencies, financial intelligence units, tax authorities and banking supervisors), which could result in substantial increases in the number of suspicious transaction reports filed, with outreach sessions to the private sector.
Strengthening Current Measures — access to the case studies and red flag indicators, and more effective information sharing among competent authorities at the domestic level, for example allowing law enforcement agencies... [to] seek information from customs agencies on specific trade transactions in advance of a full-fledged criminal investigation.
2.What do the "FATF Standards" comprise, according to the chapter?
- a)Only the 40 Recommendations
- b)The 40 Recommendations and the lists of High Risk Jurisdictions
- c)The mutual evaluation reports of all member countries
- d)The Recommendations themselves and their Interpretive Notes, together with the applicable definitions in the Glossary
Show the answer
Answer: (d) The Recommendations themselves and their Interpretive Notes, together with the applicable definitions in the Glossary
The FATF Recommendations are also often referred to as the FATF Standards, which comprise the Recommendations themselves and their Interpretive Notes, together with the applicable definitions in the Glossary.
There are three parts: Recommendations, Interpretive Notes, and Glossary definitions.
Why the others are wrong:
- Only the 40 Recommendations leaves out the Interpretive Notes and the Glossary.
- The grey and black lists are outputs of the Plenary's work of holding countries to account. They are not part of the Standards.
- Mutual evaluation reports assess whether countries meet the Standards. They are not the Standards themselves.
Flexibility in how they are applied: As countries have diverse legal, administrative and operational frameworks and different financial systems, they should adapt the implementation of the Recommendations to their particular circumstances.
Supporting material: the FATF creates guidance and best practice papers and regularly revises them, which can involve outreach to stakeholders or public consultations.
Version: as adopted on 15 February 2012.
3.What does it mean when the FATF places a jurisdiction under increased monitoring?
- a)The country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring — the "grey list"
- b)All jurisdictions are called upon to apply counter-measures against it
- c)The country is expelled from the FATF
- d)Its financial institutions are automatically sanctioned
Show the answer
Answer: (a) The country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring — the "grey list"
When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the "grey list".
Two elements — a commitment by the country, and agreed timeframes. Grey listing is cooperative rather than punitive.
Option B describes the black list, and overstates even that. For all countries identified as high-risk by FATF, the FATF calls on all members and urges all jurisdictions to apply enhanced due diligence, and, in the most serious cases, countries are called upon to apply counter-measures.
Enhanced due diligence generally; counter-measures only in the most serious cases.
Options C and D invent consequences. Listing does not expel a country or automatically sanction its institutions; it changes what other jurisdictions' firms must do.
How listing happens: if a country repeatedly fails to implement FATF Standards then it can be named a Jurisdiction under Increased Monitoring or a High Risk Jurisdiction. These are often externally referred to as "the grey and black lists".
And who decides: the FATF's decision-making body, the FATF Plenary, meets three times per year and holds countries to account if they do not comply with the Standards.
Assessments are shared: countries and jurisdictions are assessed with the help of nine FATF Associate Member organisations and other global partners, the IMF and World Bank.
What the listings mean in practice for a regulated entity. Third-party reliance requires that the third party is not based in a country or jurisdiction assessed as high risk; correspondent banking demands caution with jurisdictions which have strategic deficiencies; and enhanced due diligence must be applied to persons from countries for which this is called for by the FATF.
Where this is taught
Free preparation for NISM Series IFSCA-01Related terms
- Correspondent bankingAn arrangement in which one bank, the correspondent, provides services such as wire transfers, currency exchange and trade finance to another, the respondent, in a market where the respondent has no presence.
- FATFThe intergovernmental body founded in 1989 that writes the global AML/CFT standards — the 40 Recommendations plus IX Special Recommendations — and grey-lists or black-lists countries that fail them.
- FATF PlenaryThe FATF's decision-making body, meeting three times a year, which holds countries to account for non-compliance and can name them Jurisdictions under Increased Monitoring or High Risk Jurisdictions.
- FATF Style Regional BodiesThe nine regional counterparts of the FATF — APG, CFATF, EAG, ESAAMLG, GABAC, GAFILAT, GIABA, MENAFATF and MONEYVAL — which with FATF form the global AML/CFT network; India belongs to APG and EAG.
- Trade-based money launderingDisguising the proceeds of crime and moving value through trade transactions to legitimise their illicit origin — by misrepresenting the price, quantity or quality of imports or exports.
- Wire TransferAny transaction carried out for an originator through a financial institution by electronic means to make funds available to a beneficiary at a beneficiary institution — even if originator and beneficiary are the same.
- UNSC sanctions listsThe UN Security Council's ISIL (Da'esh) & Al-Qaida Sanctions List and 1988 Sanctions List — no IFSC regulated entity may hold an account in a listed name, and resembling accounts go to FIU-IND and MHA.
- Over- and under-invoicingMisstating the price of goods or services on an invoice to move value between importer and exporter — under-invoicing moves value to the importer, over-invoicing to the exporter.
- Predicate offenceThe underlying crime that generates the proceeds a launderer then has to hide — the critical element without which there is no money laundering offence at all.
- Shell Financial InstitutionAn institution the IFSCA Guidelines bar outright: no correspondent relationship may be entered into with one, no correspondent account may be used by one, and no business relationship may be established with one.
- Third-party relianceUsing another regulated firm's client due diligence instead of doing your own — permitted under Rule 9(2) of the PML Rules on six conditions, with the relying entity still ultimately responsible.
- Financial GroupA parent company, or other legal person exercising control and coordinating functions, together with the branches and subsidiaries that are subject to AML/CFT policies and procedures at group level.
- FATF PresidentThe senior official the FATF Plenary appoints from among its members to chair the Plenary and the Steering Group, serving a two-year term that runs from 1 July to 30 June.