FATF ¦ Mitigating Unintended Consequences of the FATF Standards

Mitigating the Unintended Consequences of FATF Standards: A Review

Since 2021, the Financial Action Task Force (FATF) has embarked on a significant review to address the unintended consequences arising from anti-money laundering and counter-terrorist financing (AML/CFT) measures. These consequences include the phenomena of de-risking, financial exclusion, undue restrictions on non-profit organizations (NPOs), and potential curtailment of human rights. This initiative underscores FATF’s commitment to refining its standards to balance effective risk management with inclusivity and respect for civil society.

De-Risking and Financial Exclusion: Complex Phenomena

De-risking refers to financial institutions terminating or restricting relationships with certain clients or sectors to avoid risk rather than managing it. While it can reduce correspondent banking relationships and limit access for some money transfer and NPO operators, FATF’s analysis indicates that profitability concerns and compliance costs are often primary drivers rather than AML/CFT rules alone. Misapplication of the risk-based approach (RBA) contributes but is not the sole cause. Financial exclusion remains a persistent challenge, with an estimated 1.7 billion adults worldwide lacking basic financial accounts. Factors such as poverty, infrastructure gaps, and mistrust compound this issue. FATF’s standards promote risk-based proportionality, yet improper implementation and underuse of simplifications exacerbate exclusion.

Protecting Non-Profit Organizations Without Overreach

The FATF revised Recommendation 8 in 2016 to clarify the scope of supervision on NPOs vulnerable to terrorist financing abuse, aiming to ensure targeted and proportionate measures. However, some countries have implemented overly restrictive policies under the guise of FATF compliance, leading to operational burdens and funding restrictions that hinder legitimate charitable activities. FATF’s ongoing efforts include enhancing risk assessments and facilitating dialogue with civil society to prevent undue targeting.

Bastian Schwind-Wagner_Follow "The FATF is actively addressing the unintended effects of its AML/CFT standards by improving guidance on financial inclusion, refining oversight of non-profit organizations, and integrating human rights considerations to ensure balanced, proportionate risk management globally."

Addressing Human Rights Concerns

While FATF standards reference due process and fundamental legal principles, their consistent application in evaluations has been limited. Concerns include broad counterterrorism offenses leading to disproportionate sanctions, inadequate protections during investigations, and challenges to asset freezing procedures. The FATF recognizes the need to better integrate human rights considerations into AML/CFT frameworks.

Moving Forward: FATF’s Proactive Approach

The 2024 FATF Ministerial Declaration emphasizes ongoing work to mitigate unintended consequences through updated guidance, methodology revisions, training, and stakeholder engagement. By fostering financial inclusion, refining supervision of NPOs, and protecting human rights, the FATF aims to uphold its core philosophy of a balanced and effective risk-based approach.

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