Are recent FATF updates affecting your customers’ risk ratings?

On October 23, 2020, the Financial Action Task Force (“FATF”) released a notice addressing updates to the Jurisdictions under Increased Monitoring list. This notice addressed a recent update with the removal of Iceland and Mongolia from the list [1]. Countries listed on the jurisdictions under increased monitoring are "actively working with the FATF to address strategic deficiencies" to counter money laundering, terrorist financing, and proliferation financing.

FATF indicated that a “jurisdiction placed under increased monitoring, means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and that it is subject to increased monitoring.” The list of jurisdictions is referred to as the 'grey list'.

An important note to make is that FATF calls on the jurisdictions to complete the agreed upon plan within the given timeframe and does not require financial institutions to conduct enhanced due diligence on these jurisdictions. However, FATF recommends its members to consider the information about the jurisdictions in their risk analysis.

On April 28, 2020, FATF placed a pause on the review process due to the COVID-19 pandemic. On-site visits to countries that have made substantial changes to their programs were affected. Furthermore, Iceland and Mongolia were the two countries pending an onsite review. [2] As of the most recent notice released in October 2020, FATF was able to conduct the on-site visit and verify that the commitments made by the two countries were indeed implemented. The October 2020 notice also revealed that some countries are still affected by the COVID-19 pandemic and this has caused for delays in reporting progress to FATF.

FATF released a prior statement in February 2020, which was highlighted to remain in effect despite the updates issued in the most recent October 2020 notice. The countries identified in the February 2020 statement will remain on the list until FATF confirms the commitments have been met, with exception to Iceland and Mongolia. [3]  Below are the countries with open commitments and the date in which they pledged their efforts to FATF.

Countries with significant deficiencies to counter money laundering and terrorist financing were addressed in a February 2020 call for action. These countries are labeled by FATF as high-risk jurisdictions and members are urged to apply enhanced due diligence when dealing with entities in these areas. Members are also obligated to have countermeasures in place to protect the overall international financial system from potential money laundering and TF originating in these countries. This list is commonly referred to as the 'black list'. The two countries addressed in this call for action are the Democratic People’s Republic of Korea (DPRK) and Iran. FATF has identified these two jurisdictions for having significant deficiencies in their countermeasures and pose a threat to the overall integrity of the financial system.

Democratic People’s Republic of Korea (DPRK)

In the statement, FATF identified the DPRK as a threat to the overall financial system due to its failure to address its deficiencies and its proliferation of weapons of mass destruction and the method in which it is financing such activities. FATF reiterated its call for members to take a close look at business relationships and transactions dealing with the DPRK. This is not limited to companies based in DPRK, but includes financial institutions, and third parties transacting on behalf of those parties. The call for action also urged the application of countermeasures, targeted sanctions with accordance to the United Nations Security Council Resolutions (“UNSC”), and other measures to protect their systems against any risk initiated from the DPRK. FATF highlighted in its notice that members should take measures to close branches, subsidiaries, and offices of DPRK banks in their countries while terminating correspondent banking relationships with DPRK banks, which are guided by the UNSC.

Iran

In June 2016, Iran had committed to a plan to address deficiencies in their system with FATF. The action plan was set to be complete in January 2018. In February 2020, FATF indicated that Iran never completed the action plan in which they committed. Given Iran’s lack of commitment and failure to comply with terrorist financing countermeasures in line with FATF standards, members are urged to apply countermeasures against Iran. Until Iran provides substantial changes to its standards, FATF will remain worrisome of the threat of terrorist financing stemming from Iran, as it is a threat to the international financial system. [4]

FATF has highlighted that these changes may affect financial institutions’ risk-based due diligence approaches, especially those dealing with the affected jurisdictions. Financial institutions should consider, reevaluate, and maintain controls to ensure their risk based due diligence approaches are efficient and effective. FATF notices are issued frequently and many countries have recent commitments in place, with re-evaluation by FATF in the coming months. With the most recent October 2020 notice, it is echoed how fast countries can be removed from the list as Iceland was only on the “grey list” for one year. With consideration of the COVID-19 related delay, countries can remediate deficiencies and have FATF inspect and approve of the changes in a couple of months. Financial institutions may not be aware of these changes unless they are actively monitoring FATF and their updates. Ultimately, this may cause additional monetary loss as the institution can be mistreating activity stemming from these countries.

Sia Partners can help entities stay current with FATF and other regulatory body guidance by addressing all aspects of an effective program.

• Training: Sia Partners has extensive experience training financial institutions on the most current risk-based approach due diligence models.
• Screening Tools: Screening tools produced by Sia Partners are customized to be more accurate and efficient.
• Policy and Procedures: Sia Partners can create, edit, or enhance entities’ policies and procedures to emulate the most current regulatory requirements.

Performing Due Diligence: Sia Partners can provide a team of experienced individuals to perform due diligence for financial institutions 

In consideration to the recent COVID-19 Pandemic, financial crimes have been on an uptick. Bad actors are taking advantage of these times to facilitate illicit payments and activity through financial institutions. Countermeasures that are balanced and up to date will help financial institutions mitigate regulatory scrutiny and monetary losses in the future. FATFs notices and guidance on the different jurisdictions can assist your institution in applying the proper countermeasures in accordance to each country's risk rating specifically. These notices are frequent and may require detailed attention to insure proper implementations. Sia Partners has helped many clients with operating sound AML programs under various regulatory environments.

Zoya Ashirov
Senior Manager
917-330-5536
Zoya.ashirov@sia-partners.com

Jonathan Gold
Manager
914-320-4039
Jonathan.gold@sia-partners.com

Ahmad Hassan
Consultant
718-415-0823
Ahmad.Hassan@sia-partners.com

Sources

[1] Jurisdictions under Increased Monitoring – 21 February 2020 

[2] FATF extends its assessment and follow-up deadlines in response to COVID-19

[3] High-Risk Jurisdictions subject to a Call for Action – 21 February 2020