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A pile of money is surrounded by a sharp trap waiting to catch financial criminals

Illustration by iStock; Security Management

International Financial Crime Watchdog Updates List of Countries Under Scrutiny

Cambodia and Morocco received some particularly good news last week: the Financial Action Task Force (FATF) removed them from its gray list of countries under increased monitoring for financial crimes, including money laundering and terrorism financing.

The FATF is a global watchdog for financial crimes, setting international standards to prevent these activities. The task force consists of 39 member states, and its standards “ensure national authorities can effectively go after illicit funds linked to drugs trafficking, the illicit arms trade, cyber fraud, and other serious crimes,” the FATF website said. “In total, more than 200 countries and jurisdictions have committed to implement the FATF’s standards as part of a coordinated global response to preventing organized crime, corruption, and terrorism.”

In a FATF plenary in late February 2023, the task force announced that Cambodia and Morocco had made sufficient progress in improving anti-money laundering and counter-terrorism financing regimes to warrant removing them from increased monitoring. The two countries will continue to work with the FATF-Style Regional Body to bolster those financial crime response capabilities, Morocco World News reported.

So far in 2023, 23 other countries remain on the FATF’s gray list, including two new additions—Nigeria and South Africa.

South Africa made a high-level political commitment this month to work more closely with the FATF and other organizations to strengthen its responses to financial crimes, and it will implement its FATF action plan by improving risk-based supervision of accounts; monitoring and responding to financial activity around sanctioned individuals; enhancing its ability to identify, seize, and confiscate proceeds of crimes; and ensuring the effective implementation of targeted financial sanctions, among other goals.

Nigeria agreed to a similar action plan, with an additional commitment to demonstrating an increase in sharing financial intelligence for law enforcement agencies and other stakeholders.

Being added to the gray list has serious ramifications for nations—the International Monetary Fund found in 2021 that being added to the list can disrupt capital flows, as banks sometimes exit relationships with customers in higher-risk countries to reduce compliance costs, Reuters reported. Gray list status can also complicate a nation’s attempts to obtain funding and support from multilateral development institutions, which could have notable implications for South Africa.

Other members of the gray list continue to make progress but not enough yet to remove themselves from the increased monitoring category. Qatar’s technical compliance with standards was very strong, for example, but FATF said that the state still needed to make improvements, especially when it comes to getting information on the ultimate ownership of companies and strengthening measures to stop any financing for weapons of mass destruction, according to Reuters.

But things could be worse—the FATF has a black list for jurisdictions identified as high risk. As of February 2023, three countries are on the list of “high-risk jurisdictions subject to a call for action:” the Democratic Republic of Korea (North Korea), Iran, and Myanmar. The review process for Iran and North Korea has been paused since 2020 due to COVID-19 pandemic effects, but Myanmar failed to complete its action plan in 2022. As a result, the FATF called on its members to “apply enhanced due diligence measures proportionate to the risk arising from Myanmar.”

Other outcomes from the plenary session:

Russia Suspended from Taskforce

The FATF took an unusual step during this plenary—it suspended Russia’s membership in the task force, saying the country’s war against Ukraine violated the organization’s principles.

In a statement on the move, the FATF said, “Over the past year, the Russian Federation has intensified its inhumane and brutal attacks targeting critical public infrastructure. The FATF is also deeply concerned by the reports of arms trade between the Russian Federation and United Nations sanctioned jurisdictions, and malicious cyber-activities emanating from Russia.

“The Russian Federation’s actions unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system,” it continued. “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.”

Ransomware and Financial Crime

The FATF noted that the scale and number of ransomware attacks is increasing.

“Criminals are exploiting the latest technologies to develop increasingly powerful tools to carry out their attacks,” the organization said. “These attacks target individuals, businesses, and government agencies, across the world. They can have a crippling impact on business activity and lead to disruptions of essential infrastructure and services. At the same time, the criminals responsible are getting away undetected with large amounts of money, predominantly using virtual assets.”

Jurisdictions with weak or non-existent anti-money laundering controls are tempting sites for cyber criminals to use, and it will be necessary for countries to build up and leverage existing international cooperation mechanism to successfully detect and tackle ransomware money laundering, the task force said.

The FATF is researching the methods that criminals use to carry out ransomware attacks and launder payments, and that report will be released in March 2023.

Art, Antiquities, and Financial Crimes

The FATF finalized a report—published today, 27 February—that explores the connections between money laundering and art and antiquities. The report explores how terrorist groups use cultural objects to finance operations.

“Many jurisdictions do not have sufficient awareness and understanding of the risks associated with these markets,” FATF noted. “This results in a lack of investigative resources and expertise, and difficulties with pursuing cross-border investigations.”

This traditional money laundering tactic has been complicated further by the proliferation of digital art, including NFTs (non-fungible tokens). While crimes involving NFTs have not been quantifiable so far, the FATF report said that “regulation and supervision of NFTs is nascent or non-existent in many jurisdictions, certain activities involving NFTs may not be in compliance with applicable laws in other jurisdictions.”

The task force identified vulnerabilities in the NFT marketplace related to both money laundering and activities that generate illicit proceeds—the ease of transferring ownership, the absence of a need to physically transfer the art, the ability to exploit contract flaws, the lack of monitoring of NFT wallets and the ability to conceal virtual asset transactions, the inherent exposure to online theft, and more.