The FATF: Cleaning up their act

Every year, according to International Monetary Fund figures, somewhere between $500bn and $1.5 trillion is laundered.

Of course, given the secretive nature of the business, knowing the exact amount of money laundered is impossible, hence the wide disparity in the IMF’s calculations.

But whatever the true figure it will not be a small amount. Every year capital roughly equivalent to the size of Spain’s economy gets lost in the international money system.

However, even given that money laundering is not a trade that usually craves the limelight it has been making a lot of headlines in recent months.

Following September 11 the scrutiny of monetary transactions has been cranked up to an unprecedented level in order to gauge how dubious organisations are able to squirrel their money away from the prying eyes of bankers and legislators and use them to fund terrorist operations.

After a meeting in Washington DC last October, the world’s major economies decided on taking unprecedented collective action to track down secret cash flows.

The task of overseeing all this has fallen to the Financial Action Task Force (FATF, pronounced ‘fat F’).

Based in Paris within the offices of the Organisation of Economic Cooperation and Development (OECD), FATF has within little more than a decade become the leading international body designed to clamp down on money washed illegally through the international finance system.

The decision to hand it the task of tracking down terrorist funding is not only recognition that here was a ready made organisation with the staff and resources to begin work immediately but also an approval of the work it has already carried out.

It now boasts 29 country members plus two organisations, the European Commission and the Gulf Cooperation Council.

Established at the G7 meeting in Paris in July 1989, just thirteen short years ago though the guest list of Mitterand, Thatcher and Bush snr dates it, FATF started life quietly.

Its efforts initially were focused on the art of gentle persuasion. It would cajole and nudge governments it saw as not doing enough on combating money laundering and gently remind that maybe, just maybe, they might like to look again at their lax laws which allowed the illegal transfer of moneys.

It took FATF about a decade to get bored of that. In 1999 it published for the first time an international blacklist of countries that it claimed was not doing enough in the fight against laundering.

The impact of this international name and shame – or Non Cooperative Countries and Territories (NCCTs) as they are known in the official jargon – has been profound.

As soon as the list is published, usually sometime between summer and autumn, there are howls of protest by those countries on the list fearful of becoming financial pariahs usually followed by very visible efforts to prove that the same countries are putting their house in order to make sure they get off the list the following year.

Currently the list of NCCTs stretches to 19 countries. Among those on the list include the Cook Islands, Egypt, Hungary, Israel, Myanmar, Nigeria, the Philippines, Russia and St Kitts and Nevis.

Being placed on the list has stirred both big and small into action.

The Cook Islands signed up to membership in 2001 of the Asia/Pacific Group on Money Laundering to prove its determination in combating laundering.

Liechtenstein, which came off the list last year, overhauled its finance laws when it was first placed on the NCCT list.

And earlier this month Russia, regarded as the biggest target in FATF’s sights, announced it was establishing a money-laundering watchdog within its finance ministry.

‘We have met all the requirements of FATF. We must show them we are moving in the right direction,’ Viktor Zubkov, Russia’s deputy finance minister told the press.

If a country the size of Russia feels it has to prove itself to FATF then that is a sure sign of the task force’s clout.

Already the banks within Russia are feeling the squeeze though one of the big fears is that there is so much illegal activity that the new watchdog could become snowed under with paperwork.

Part of the reason it has clout is that its members is made up of the most financially powerful countries in the world, the US, European Union countries and even the institutionally shy Switzerland.

They represent the international financial order and have the power to flex their muscles although critics say these are flexed selectively.

The International Tax and Investment Organisation, a grouping of small countries with similar tax policies, this month called for a ‘level playing field’ in terms of tax and money laundering initiatives.

Lynette Eastmond, the ITIO director complained that its members, which includes the blacklisted Cook Islands and St Kitts and Nevis, ‘have long objected to being asked to implement standards that OECD member states themselves refuse to accept’.

Certainly there has been some disquiet among smaller countries that OECD countries such as Argentina, Mexico and the USA do not always comply with FATF rules when it comes to money laundering.

It is unlikely though that the smaller states’ grievances will change much especially now FATF is covering the issue of terrorism funding.

This year it will for the first time publish a NCCTs list which will include those countries that are not thought to be doing enough in the fight against terrorism funding.

It is pretty clear that the USA will not be put on that. The list will be published in June.