Effective global anti-money laundering (AML) and counter-terrorist financing (CFT) efforts rely on all jurisdictions maintaining strong safeguards. Unfortunately, criminals exploit weak links in the financial system to launder money or fund terrorism.
The Financial Action Task Force (FATF) addresses this by identifying jurisdictions with significant deficiencies in their AML/CFT frameworks and working with them to strengthen their systems.
How Does the FATF Identify High-Risk Jurisdictions?
The FATF uses a structured review process to identify jurisdictions with weaknesses that could threaten the global financial system. This review is managed by the International Co-operation Review Group (ICRG) .
A jurisdiction will be reviewed when:
It does not participate in a FATF-style regional body (FSRB) or does not allow the publication of their evaluation results.
A jurisdiction can be nominated for review if a FATF member or an FSRB identifies it as posing specific money laundering, terrorist financing, or proliferation financing risks.
It has poor mutual evaluation results as follows:
20 or more Non-Compliant (NC) or Partially Compliance (PC) ratings for technical compliance; or
Rated NC/PC on 3 or more of the following Recommendations: 3, 5, 6, 10, 11, and 20; or
Has a low or moderate level of effectiveness for 9 or more of the 11 Immediate Outcomes
Has a low level of effectiveness for 6 or more of the 11 Immediate Outcomes.
If a jurisdiction is identified through these criteria, it enters a one-year "Observation Period." During this time, the jurisdiction is expected to address its deficiencies in cooperation with the FATF or its regional body. Failure to make adequate progress can lead to public identification and a formal review.
The FATF’s Review Process
The FATF review process prioritizes jurisdictions with larger financial sectors, particularly those with financial assets exceeding USD 5 billion. The review looks at two main aspects and the progress in:
Technical Compliance: Does the jurisdiction have the necessary AML/CFT laws and regulations in place?
Effectiveness: Are these measures being implemented effectively to prevent money laundering and terrorist financing?
If the FATF finds that a jurisdiction is not making sufficient progress, it works with the jurisdiction to develop an action plan. This plan outlines specific reforms needed to address the identified weaknesses. Importantly, the jurisdiction must demonstrate a strong political commitment to implementing these reforms.
Regional Oversight and Public Statements
The ICRG four regional Joint Groups, which cover Africa, the Americas, Asia/Pacific, and Europe/Eurasia/Middle East and North Africa, conduct the reviews. Jurisdictions under review are given opportunities to discuss their progress directly with these groups before FATF plenary meetings.
At the end of each plenary meeting—held in February, June, and October—the FATF issues two public statements:
High-Risk Jurisdictions: These are countries with serious deficiencies that pose a significant risk to the global financial system.
Jurisdictions Under Increased Monitoring: These are countries with strategic weaknesses that are working with the FATF to improve.
Conclusion
The FATF’s classification of high-risk jurisdictions plays a vital role in maintaining the integrity of the global financial system. By understanding how the FATF identifies and monitors these jurisdictions, AML professionals can better protect their organizations from potential risks associated with these countries.
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