By Terrance S. Carter, Nancy E. Claridge and Sean S. Carter

FATF Plenary Project Synopsis Highlights Negative Consequences of Standards on NPOs

A high-level synopsis for a Financial Action Task Force (“FATF”) Plenary project examining the unintended consequences of the FATF Standards highlights the negative impact that those consequences can have on non-profit organizations (“NPOs”). FATF published a synopsis of a stock-take of unintended consequences on October 27, 2021, focusing on four broad themes: (1) De-risking; (2) Financial Exclusion; (3) Undue targeting of NPOs; and (4) Curtailment of Human Rights (with a focus on Due Process and Procedural Rights). The synopsis was published “to facilitate further discussion with stakeholders” during the second phase of the FATF Plenary project, which was established in February 2021 to analyze and understand the unintended consequences resulting from FATF Standards, as amended in 2012 and 2016, and the implementation of those standards.

De-risking is defined as “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk, in line with the FATF’s risk-based approach.” De-risking has created “narrower access to banking services” for NPOs where it is “not based on a case-by-case assessment of risk and ability to mitigate that risk.” As such, the synopsis notes that de-risking is inconsistent with the risk-based approach promoted by FATF. NPOs may face delayed and higher-cost transactions and some of these transactions may be outside the regulated financial system as a result of de-risking, the synopsis states. Emerging market economies, financially isolated economies and conflict zones are more impacted by the effects of de-risking. The causes of de-risking are “complex and interwoven” and not entirely clear, according to the synopsis, but analysis suggests that high compliance costs that impact profitability are the “primary driver”. Implementing anti-money laundering and combatting financing of terrorism (“AML/CFT”) requirements as well as a failure to apply the risk-based approach are other contributing factors. Fear of supervisory actions, “reduced risk appetite in banks, and reputational concerns” are other “drivers of de-risking”. A proper implementation of the risk-based approach in the FATF Standards, improvements in AML/CFT “can be part of the solution” the synopsis states.

The synopsis outlines the motivation for revising Recommendation 8 of the FATF Standards in 2016 in response to concerns that AML/CFT measures “were having a chilling effect on NPOs’ legitimate activity”, to protect NPOs from terrorism-financing abuse while also ensuring that “focused risk-based measures do not unduly disrupt or discourage legitimate charitable activities.” Such measures should be in line with the risk-based approach, as stated in the Interpretive Note. However, the synopsis states that countries continue to incorrectly implement the FATF Standards “and justify restrictive measures to NPOs in the name of ‘FATF compliance’,” intentionally in some cases. Reported constraints applied to NPOs included (1) intrusive supervision; (2) restrictions on access to funding and bank accounts; and (3) forced dissolution, de-registration or expulsion of NPOs. Each of these involved “a variety of restrictions, burdens and requirements that impede the ability of NPOs to operate and pursue their missions effectively, to access resources, and in some cases, to continue their operations.” Most countries are still not conducting adequate risk assessments of their NPO sector, according to FATF’s assessment, “and fewer are conducting risk-based outreach and monitoring.” Analysis concludes that undue targeting of NPOs “in the context of purported or real AML/CFT implementation (both legitimate or otherwise) may be related in some cases to poor or negligent implementation of the FATF’s [risk-based approach].”

FATF analysis is also exploring ways in which the misapplication of FATF Standards negatively affect due process and procedural rights, including:

• excessively broad or vague offences in legal counterterrorism financing frameworks, which can lead to wrongful application of preventative and disruptive measures including sanctions that are not proportionate;
• issues relevant to investigation and prosecution of [terrorist financing] and [money laundering] offences, such as the presumption of innocence and a person’s right to effective protection by the courts; and,
• incorrect implementation of UNSCRs and FATF Standards on due process and procedural issues for asset freezing, including rights to review, to challenge designations, and to basic expenses.

Phase 2 of FATF’s Plenary project seeks potential options to mitigate the negative consequences, although the synopsis states that “FATF is already actively responding to unintended consequences, with a significant percentage of FATF’s activity and attention over recent years devoted to mitigating de-risking, financial exclusion, and undue targeting of NPOs.” Further mitigation efforts are needed to address issues related to due process and procedural rights, the synopsis states, and “this may entail additional guidance, best practices, training, and possible revisions to FATF’s Methodology, Procedures and Standards, as well as continuing engagement on the FATF’s work with key external stakeholders.”

FATF Updates Guidance to Clarify Definitions and Application of Standards for Cryptocurrencies

The FATF has updated its 2019 Guidance for Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (VASPs). FATF published the updated 2021 Guidance on October 28 (“Updated Guidance”), which includes updates in six key areas:

1. clarification of the definitions of virtual assets and VASPs,
2. guidance on how the FATF Standards apply to stablecoins,
3. additional guidance on the risks and the tools available to countries to address the money laundering and terrorist financing risks for peer-to-peer transactions,
4. updated guidance on the licensing and registration of VASPs,
5. additional guidance for the public and private sectors on the implementation of the “travel rule”, and
6. Principles of information-sharing and co-operation amongst VASP Supervisors

A brief published on the FATF website summarizes the sections and key changes in the Updated Guidance. The Updated Guidance “reflects input from a public consultation in March–April 2021” and addresses areas identified in the FATF 12-Month Review of the Revised FATF Standards on virtual assets and VASPs. Charities that carry on a related business, such as a money-services business, and deal with virtual assets, such as cryptocurrencies, should familiarize themselves with the Updated Guidance. For background on the initial publication of the 2019 Guidance, see Carters’ August 2019 Charity & NFP Law Update.

Read the November 2021 Charity & NFP Law Update