Let’s talk about FATF and whether or not their recent initiatives are doing more good or harm for FinTech and crypto. 

The Financial Action Task Force (FATF) constantly introduces new measures and updates to combat money laundering, terrorist financing, and other financial crimes. On the surface, their initiatives aim to enhance global financial security, I personally could not help but notice how their recent guidelines impose excessive burdens, introduce discriminatory rules, and result in financial system efficiencies and unintended (or deliberate?) negative consequences. I would argue that the following trends are the direct results of unfortunate FATF initiatives:

• Banking de-risking: Banks often opt for “de-risking” which involves terminating relationships or avoiding business with clients or regions perceived as high-risk. For example, FATF issued several statements during the last years (and still has not repealed them!!) asserting that non-face-to-face relationships are riskier than relationships established via personal meetings. This idea is entirely untrue and most likely has no factual evidence behind it, but the entire financial industry is forced to replicate this position within all local risk assessments. This measure made it so much harder for many FinTechs to secure banking relationships.
• Industry segmentation: FATF guidelines and topographies around many industries (cash-based, commodities, travel, insurance, crypto, diamonds, luxury goods…) are often out of touch with realities, overly strict, or imposing unnecessary burdens on compliance without proportionate risk. This creates additional bureaucratic steps, slowing down transactions and increasing costs of compliance. For example, the FATF has issued guidance on the risks associated with non-profit organizations and this resulted in many charities (especially smaller ones) having no access to bank accounts. 
• Travel Rule Implementation: FATF’s Travel Rule requires VASPs to share customer information with counterparty VASPS  before and during transactions. This rule came into force in 2019, and for the most part, makes no sense, adds no value, and is easy to circumvent. FATF’s warning about the risks of decentralized finance (DeFi) has led to some financial institutions blocking transactions to DeFi platforms. 
• Biased and Politically Motivated Risky Jurisdiction Listings: When the FATF identifies jurisdictions as having deficiencies in their AML and CTF frameworks, it can have significant consequences, especially for developing countries. Such listings can result in restricted access to the global financial system, hindering trade and financial flows, even if those jurisdictions might have improved their systems. For example, FATF can declare (without having to provide much evidence) that a particular jurisdiction has a higher risk of being a tax haven or has a higher level of corruption, and at the same time, there is no requirement or any assurance that such conclusions are universally applied to assess all countries.
• Guidance on the beneficial ownership of legal entities and arrangements: The FATF has issued guidance on how to identify and verify the beneficial ownership of legal entities and arrangements, such as companies, trusts, and foundations. On the surface is intended to prevent criminals from using these entities to hide their identities and the proceeds of their crimes. In practice, this requirement just created more paperwork for lawyers and accountants but did not change any underlying processes.

In 2020, the Financial Times reported that the FATF had been pressured by the United States to remove Saudi Arabia from its “grey list” of countries The report alleged that the US had threatened to withhold funding from the FATF if it did not remove Saudi Arabia from the grey list, while keeping Croatia and Bulgaria (EU members) on the list.

How is it possible that Croatia and Bulgaria are riskier than Pakistan or Saudi Arabia?!?!? Yes, both Croatia and Bulgaria have recently (in 2023) been added to the grey list by FATF while Russia has not. I mean – seriously – how is this outcome useful or actionable?

Not to mention that FATF has also been continuously criticized for its bias because its members are predominantly from wealthy developed countries.

One of the main discrepancies or inconsistencies in how FATF assigns risks to countries is its use of subjective criteria. For example, the FATF’s assessment of the technical compliance of countries is based on a review of their laws and regulations. Another discrepancy is the FATF’s different treatment of developed and emerging economies. Their risk assessments are not always based on the best available and objective data. For example, the FATF has been criticized for relying on intelligence reports from member countries, which may be biased or inaccurate.

My problem with FATF is that they are non-elected officials with a history of being politically or economically motivated, however, their decisions have a huge impact on the global financial industry. The biggest problem at all is that their decisions are not easy to overrule in courts (because their recommendations are technically non-mandatory), however, they have a huge impact on the future of financial innovation.

What do you think of FATF? How could they be made accountable?

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