FATF Logo – Public Domain
The Paris-based Financial Action Task Force (FATF), an intergovernmental technical and policy-making body that is “the global standard setter on combating money laundering and the financing of terrorism,” is once again trying to emphasize it is not a politically influenced body, but strictly technical in its globally-reaching decisions.
At the end of February, FATF suspended the Russian Federation for its “illegal, unprovoked and unjustified full-scale military invasion of Ukraine.” It is the first time in the body’s history that one of the 37 members has been treated in this way. South Africa and Nigeria were also added to FATF’s lengthy gray-list, which signals a serious economic blow to both countries.
Being gray-listed means you are high risk in the financial sector. What the high risk designation does, in a nutshell, is deter inflows of investment, and makes trade, debt repayments and the like so much harder and more expensive, particularly when it comes to accessing foreign currency, whether as loans or for trade financing. Being high risk can also undermine the local currency, causing depreciation, which makes debt repayments more expensive.
“The most powerful organization most people will have never heard of”
Created in 1989 by the G7, in large part by the US Treasury, to combat the narcotics trade, FATF is one of those international bodies that has incredible global clout yet is largely unknown by the public, a bit like the Basel, Switzerland-based Bank for International Settlements (BIS), AKA the “central bank of central banks”.
As Tom Keatinge, the director of the Centre for Financial Crime and Security Studies at the RUSI think tank in London, told me back in 2018, FATF is “the most powerful organization most people will have never heard of… and one that’s only grown more influential in recent years”…“A lot of aggravation that people suffer with their banking is FATF-related but they don’t realize it.”
The ‘suffering’ the average person in the US or Europe experiences is having to go through a bank’s Know Your Customer (KYC) checks, such as declaring source of income, or having certain payments queried if there is unusual account activity, such as large amounts of funds going in and out. Clamping down on money laundering is also why it is harder to pay for large ticket items with cash and why it is harder to open a bank account in another country.
The public invariably does not know why they are subjected to these controls, but financial institutions are following the rules of their governmental regulator, which have enacted laws in response to FATF’s guidelines on anti-money laundering and countering the financing of terrorism.
Yet while FATF is largely unknown in the West, countries and populaces on the receiving end of FATF’s decisions do know of it. The body makes headlines in what FATF calls ‘high-risk jurisdictions’. And during the height of the US-led War on Terror, people around the world, particularly Muslims or those with Arab names, faced issues when opening bank accounts, transferring money abroad, or making donations to charities, ostensibly over concerns over ‘terrorist financing risks’.
FATF’s expansion post-9/11
Indeed, the FATF’s importance increased exponentially following the September 11 2001 attacks on the US, when terrorist financing suddenly became a global concern. A special unit was established in the US Treasury, documented by Juan Zuarte, former Assistant Secretary of the Treasury for Terrorist Financing and Financial Crime, in his book Treasury’s War: The Unleashing of a New Era of Financial Warfare.
The US Treasury pushed global adoption of FATF’s standards, and over the next decade countries scrambled to put anti-money laundering and countering the financing of terrorism legislation into place. Central and Western Asia were particularly under the spotlight, given the invasions of Afghanistan and Iraq, and the Arab-Israeli conflict. Then came the Islamic State in Iraq and Syria (ISIS), or Daesh. Terrorist financing became a primary focus of FATF.
Several years ago a participant at one of FATF’s bi-annual plenaries told me that, to his exasperation, they spent 90 percent of the week discussing Daesh. This was at the expense of focusing on major financial crimes such as human trafficking, the illegal wildlife trade, real estate, and trade-based money laundering, which only garnered more focus in the past few years.
FATF’s focus has been on whatever is the political zeitgeist. Last year I could barely get an interview to discuss Daesh and terrorist financing, including at US-based think tanks that had churned out articles on the topic during the heyday of the War on Terror.
Suspending Russia from FATF
Terrorist financing is still on the agenda, but it has slipped down the list of priorities. Today it is of course Russia that is under the spotlight, with the US and Europe using all the weapons in its financial arsenal to cut Moscow out of the financial system. First it was sanctions, and now FATF has joined the melee in suspending the Russian Federation from the body.
FATF stated that Russia’s actions “unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system. They also represent a gross violation of the commitment to international cooperation and mutual respect upon which FATF Members have agreed to implement and support the FATF Standards”.
This is clearly a political decision, given membership is dominated by what is essentially the “international financial system” – the US and Europe. The only members that are outside of the Western block are Argentina, Brazil, China, Hong Kong, India, and Malaysia. Then there are West Asian members Saudi Arabia, Turkey and Israel. The core FATF members include most of the 45 countries that sanctioned Russia in 2022, and again in February this year.
Russia was very much part of the FATF club. In fact Russia held the year-long presidency of FATF in 2013-14, during the same period Russia invaded Crimea.
But the tide has turned on having undesirable members in the big financial clubs. Last year, the Bank for International Settlements (BIS) suspended Russia. “The access of the Central Bank of Russia to all BIS services, meetings and other BIS activities has been suspended,” the bank stated. This move effectively cut-off Russia from clearing money through BIS.
FATF’s move further tightens the screws. It did not need to gray-list Russia as Moscow was already a high risk jurisdiction due to US and European sanctions. But the decision was not a technical one, based on Russia having inadequate controls or policies following a periodic Mutual Evaluation Report, as is typically the case for a country to be gray-listed until it gets its act together. The membership decided to suspend Russia – which members supported, rejected or abstained is not public knowledge.
Selectively going after aggressors
What is significant is that it is another case of selective use of mandates by international bodies. No such action for undermining the “security, safety, and the integrity of the global financial system” has been taken against any other member before, or for invading, occupying or violating the sovereignty of another country. Neither has FATF ever, to my knowledge, deplored the “huge loss of lives and malicious destruction” from other invasions, other than in regard to Russia’s recent warmongering.
Russia was not disciplined in the past for its wars in Chechnya, Georgia and the Crimea. The USA, the UK, Saudi Arabia and Israel – among others – could equally be called up for violating the FATF’s principles. Yet there was no call for this to be done following the wars in Afghanistan and Iraq, nor military involvement in the conflict in Syria, or the Saudi-led war on Yemen.
And Syria and Yemen are gray-listed by FATF. Neither country has been subject to an on-site visit to assess whether reforms have been implemented since 2014, not due to war, but to the more tamely worded “security situation”.
FATF has also used the COVID-19 pandemic as an excuse to not review Iran and North Korea, having put the process on hold since February 2020. Presumably this is also because no members of FATF are pushing for reviews of these pariah states to be carried out.
South Africa and Nigeria were gray-listed at the FATF plenary in February. Immediately questions were asked whether this was politically motivated. The South African Broadcasting Corporation asked the FATF president whether the country had been listed because it hosted a joint military exercise with China and Russia in February (it also held one with France, which seems to have gone largely unnoticed). The president said that was not the case, and indeed, South Africa had been evaluated and called upon to address its deficiencies since June 2021. It was a technical decision.
However, the timing of FATF’s announcement is problematic amid global tensions, and South Africa being under pressure for not condemning Russia, having abstained at the UN.
Gray-listing equals GDP loss
Gray-listing is a major financial blow at a time no country can afford further dents to their economies amid high fuel prices, inflation, rising debt levels and, in the case of Turkey, the devastating earthquake in early February. It is a lengthy list of “jurisdictions under increased monitoring” by FATF – Albania, Barbados, Burkina Faso, the Cayman Islands, the Democratic Republic of Congo, Gibraltar, Haiti, Jamaica, Jordan, Mali, Mozambique, Nigeria, Panama, Philippines, Senegal, South Africa, South Sudan, Syria, Tanzania, Turkey, Uganda, the UAE, and Yemen. On the “black-list” are North Korea, Iran and Myanmar.
Being FATF gray-listed is meant to make a jurisdiction clean up its act ASAP due to the financial repercussions – borrowing money becomes more expensive, financial inflows dry up, and the cost of business rises overall.
According to a 2021 IMF paper, being gray-listed has “a large, significant negative” … “on capital inflows. The empirical results suggest that capital inflows decline on average by 7.6 percent of GDP when the country is gray-listed. The results also suggest that FDI [foreign direct investment] inflows decline on average by −3 percent of GDP, portfolio inflows decline on average by −2.9 percent of GDP, and other investment inflows decline on average by −3.6 percent of GDP. The estimated impacts are all statistically significant.”
While there are of course strong technical grounds for gray-listing the above-listed countries, no such action has ever been taken against what are considered the world’s money laundering hubs – the United Kingdom and the US.
Furthermore, most of the gray-listed countries do not have banks accused of the sort of multi-billion-dollar money laundering schemes that Lloyds, HSBC, Deutsch Bank, Danske Bank and other Western heavyweights have been involved in. While these banks were penalized, they did not disappear off the face of the planet, as two Lebanese banks did when fingered by the US Treasury for being banks of “prime money laundering concern” for allegedly facilitating funding for Hizbullah.
Then again, there does not seem to be the political will to truly go after the launderers, with ongoing efforts to curb money laundering proven to be largely ineffective, at 1 percent or less of proceeds of crime being recovered by the authorities. Indeed, in a 2018 speech, before stepping down as executive director of Europol, Rob Wainwright said: “Professional money launderers – and we have identified 400 at the top, top level in Europe – are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate.”
The ineffectiveness of the fight against money laundering is another matter, for another article, but it does fit into an interconnected-narrative of which jurisdictions can get away with what.
Risky business
What also needs to be highlighted is that if a country is removed from FATF’s gray-list it does not equate to a country suddenly being considered a less risky jurisdiction. Many non gray-listed countries are considered high risk, certainly by the US, and pretty much by default by other US allies.
The UAE is a case in point, which was gray-listed in 2021. A former US Treasury official told me last year that “the risk rating for the UAE increased with the listing, but it was already in a risk area due to the fact of its geography. If I were advising a company, it would be in the high risk bucket due to the known issues. That is already pegged in. Taking the UAE off the gray-list doesn’t make a big difference from the US risk standpoint.”
An oil-rich country like the UAE can arguably afford to deal with being deemed high risk, given its attractiveness to international capital and as a major hydrocarbons producer, but many countries do not have such buoyant economies or the petrodollars.
As a result of being high-risk, money flows out of countries and gets deposited in ‘safe jurisdictions’, particularly the USA, and to a lesser extent the UK, Europe and its archipelago of offshore tax havens. This helps shore up US dollar hegemony, or what economist Michael Hudson has termed the “current volatile and predatory dollar-centered system”.
FATF’s recent decisions show once again where the so-called international financial system is centered and how it is politicized. The rules – as well as the loop-holes – were created by the West, and can be used as a form financial warfare elsewhere in the world to shore-up the dominance of the Western financial system.
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