As financial institutions manage the increasing volumes of both local and cross-border transactions, they continue to understand and mitigate potential money laundering risks and employ leading practices to counter the ever-changing ML/TF risk landscape resulting from the rapid development of new products and technologies.
For the last four decades, FATF has been at the forefront of policymaking and standard-setting for AML/CFT measures for countries as well as their constituents, including the Financial Services Industry. The FATF, either by itself or through associated FATF style regional bodies (FSRBs), performs mutual evaluations of countries as per pre-defined standards and a published assessment calendar. FATF’s mutual evaluations assess country AML/CFT regimes against FATF’s 40 recommendations, the widely-accepted global standard for AML/CFT compliance.
FATF evaluates the specific requirements of the 40 recommendations, including how a country relates them to its legal and institutional framework and the powers and procedures of competent authorities.
The methodology comprises of two interlinked components:
- Effectiveness Assessment
The effectiveness assessment will assess the extent to which a country achieves a defined set of outcomes (Immediate Outcomes) that are central to a robust AML/CFT system and will analyze the extent to which a country’s legal and institutional framework is producing the expected results.
- Technical Compliance
The technical compliance assessment addresses the specific requirements of each of the FATF Recommendations, principally as they relate to the relevant legal and institutional framework of the country and the powers and procedures of competent authorities.
FATF had undertaken India’s 1st round of evaluation in 2009 and issued a Mutual Evaluation Report (MER) in 2010. For India, a majority of the material changes in the AML/CFT regime have occurred post-implementation of PMLA (Prevention of Money Laundering Act.), 2002, and more so post the 2009 first round of FATF evaluation. The PMLA, 2002 brought about regulatory enforcement action and continues to do so considering India’s next round of FATF on-site evaluation scheduled in 2021.
Not all FATF recommendations directly impact financial institutions and its operations. However, it becomes imperative for FIs to understand and appreciate the 40 recommendation against its AML program and operational value chain. The high profile nature of FATF evaluation sets the right tone for making the most informed decisions pertaining to AML/CFT program. Selecting a suitable action plan and engaging in the right set of protocols are key to maximizing efficiency and value out of the time invested on FATF evaluations.
This is partly an exercise of setting goals for compliance budgets, such as what a FI is willing to invest to manage the risk. It is equally a matter of establishing governance priorities. With accurate information, right planning, and involvement of key stakeholders, a FI can be efficient in terms of time, resourcing, and cost.
This publication further explores and reflects on FATF evaluation methodology, insights on 4th round of evaluation, India’s journey with regards to FATF evaluation and key takeaways for financial institutions.