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The Financial Action Task Force’s unintended consequences study will point to necessary reforms that the watchdog will be unwilling to undertake.

Earlier this year, the Financial Action Task Force (FATF) – the global anti-financial crime standard setter – launched a new project to study and mitigate the unintended consequences stemming from the incorrect implementation (purposefully or otherwise) of its anti-financial crime standards.

In numerous cases, this seems to stem from occasions where implementation of the standards deviates from the FATF’s insistence on a risk-based approach – where measures applied are commensurate with the level of threat – leading to circumstances where overly restrictive regulations are enacted under the pretence of combatting illicit finance. This results in infringements on the legitimate activities of those such as not-for-profit organisations (NPOs) that are subject to FATF-directed scrutiny; marginalised people being excluded from the formal financial system; and states discovering novel channels to curtail human rights for political purposes. Those that track the impact of FATF standards on civil society, the financially excluded and human rights advocates welcomed the FATF’s initiative.

Since then, while the FATF has provided briefings to interested groups in civil society on its initial findings, its ‘stocktake’ report – based on evidence gathered regarding unintended consequences – remains unpublished. And the potential impact of this work is still unclear.

At the same time, the FATF is well underway with its ‘Strategic Review’, through which it seeks to determine how its country evaluations ‘can better promote and enable more effective and efficient AML/CFT measures’. Optimists might hope that this review will provide a vehicle for accommodating the learnings of the FATF’s unintended consequences project; but regular FATF-watchers will, unfortunately, be aware that the nature of FATF decision-making – and the limited independent governance and oversight of its activities – do not encourage radical change.

With this in mind, during July, RUSI’s Centre for Financial Crime and Security Studies hosted a webinar series that considered the issue of FATF-related unintended consequences from three perspectives: lessons from previous occasions when the FATF has responded to the negative consequences of the application of its standards; the present impact the FATF standards have on financial inclusion; and the rising abuse of the standards for politicised purposes, notably to target human rights defenders and political opponents.

Some positive outcomes were also explored: for example, the considerable progress made by the FATF in acknowledging the impact its standards have had on the NPO sector, including the introduction of a dedicated programme of engagement with NPOs; and the growing recognition by the FATF of the potential impact of its standards on financial inclusion.

Yet, a unifying thread through all three discussions was the lack of any sort of consequence or penalty for countries where the FATF standards are misused: the process is asymmetric. Put simply, there is no downside if standards are overapplied in the pursuit of the best possible evaluation outcome or, worse still, if they are actively abused for political purposes.

Thus, while the FATF should be congratulated for recognising that its standards often have unintended consequences, it is not clear whether it has the mechanisms in place to take responsibility for these consequences and respond to misapplication.

But, if the FATF were to embrace the required accountability, what might this look like?

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