FATF Launches New Procedure to Beat Unintended Consequences

The FATF has introduced a new procedure to address unintended consequences (UICs) of standards for non-profit organizations (NPOs).

As a financial crimes watchdog, the FATF aims to protect non-profit organizations, such as trusts, from money laundering and terrorist financing.

The Financial Action Task Force (FATF) recognizes the role of the non-profit sector in challenging circumstances. Therefore, it aims to protect them against money laundering and terrorist financing and safeguard their integrity. However, the misapplication of certain standards has resulted in various unintended consequences, such as donors’ withdrawal from NPOs, denied access to banking, and restricted charitable activities.

In response to the emerging challenges, the FATF’s latest procedural revision aims to review allegations of undue disruption to legitimate non-profit activities.

The FATF 5th Round Procedures (paragraph 136(bis) and 4th Round Procedures (at paragraph 101(bis)) has clarified that when “two or more parties report” that FATF’s standards unduly disrupt legitimate NPO activity, the Evaluations and Compliance Group (ECG) must assess and determine if there is sufficient evidence to proceed with further action. The FATF Secretariat will cooperate with the affected country and the parties in making the reports for ECG.

This mechanism enables countries, the International Monetary Fund (IMF), and the World Bank to raise concerns if a country misapplies the FATF standards, which can affect legitimate activities.

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In 2021, the FATF started a significant review of the unintended consequences of Recommendation 8, which means to implement Anti Money Laundering (AML) and Counter Terrorist Financing (CFT) measures in NPOs.

As per the report :

This initiative is part of FATF’s broader strategy for addressing the unintended consequences of some standards. It is enhancing transparency, accountability, and trust in global FATF efforts to combat illicit finance.

The 2023 Universal Procedures (paragraph 130(bis)) and the 2022 Universal Procedures (at paragraph 55(bis)) set out that both FATF and (FATF-Style Regional Body) FSRB members have to follow the FATF’s process unless it establishes “procedures equivalent to those of FATF,”.

If FSRB needs to implement its own procedures, it has to notify the FATF Secretariat. The FATF will review and determine whether they are relevant to the FATF or not and will advise the plenary accordingly.

By harmonizing this procedure across all evaluation frameworks, the FATF seeks to ensure consistency and oversight at every level of its peer review process. It aims to protect legitimate NPO activities while ensuring effective AML/CFT measures are not misapplied.

FATF President Elisa de Anda Madrazo underscored the significance of this step:

“Safeguarding the legitimate work of non-profit organisations is essential. This new procedure reflects FATF’s commitment to proportionality and responsiveness. It ensures that our Standards protect both people and principles, targeting terrorist financing without disrupting the crucial, often life-saving work of NPOs.”