The FATF continues to ignore public calls for excluding and black-listing Russia

Drafted by: Ievgen Vorobiov,
Advocacy Manager at the “No Finance for Russia” expert group

Executive summary

The Financial Action Task Force (FATF), a leading global body, has failed to take action against the biggest perpetrator and enabler of financial crime in the world: Russia.

This inaction of the FATF has been persistent, despite significant public pressure to change its stance, including almost four thousand signatories of the open petition to the FATF leadership. In March-April, official letters with the text of the petition and a list of signatories have been sent to the FATF President and to all heads of national FATF delegations (except Russia) by email, but so far neither the President nor national delegations have responded to these letters.

Instead, the FATF members are pursuing empty rhetoric, which appears to pursue the only purpose: stalling for time and refraining from decision-making in the hope that the problem will be forgotten. Such a stance undermines the FATF’s mission to counter the global threat of money-laundering and financial of terrorism. The Declaration of the Ministers of the FATF released in April 2022 proclaimed that “the FATF is at the centre of the international effort to take decisive, co-ordinated and effective action against these threats to the very fabric of our societies and global security”.

However, this bold assertion is clearly debunked by the FATF’s inaction in the face of the key threat emanating from its own membership. The FATF should change its lamentable attitude, that is why a broader public pressure on FATF officials and its members alike is now overdue. Every person – whatever their nationality – can ask their elected politicians to enact this policy change via their national representatives to FATF. To understand how to advocate this issue more effectively with your national politicians, please read the Q&A below.

1. What is the FATF and why does it matter?

FATF (Financial Action Task Force) is a Paris-based intergovernmental organization that develops global rules for anti-money-laundering (AML), countering the financing of terrorism (CFT), and the financing of WMD proliferation. It also monitors the implementation of those rules. FATF has 39 members: 37 countries plus 2 regional integration bodies ( European Commission and Gulf Cooperation Council). Russia is one of the FATF members. The FATF’s structure includes the rotating Presidency, the Plenary (representing the members), and the Secretariat (headed by the Executive Secretary), which carries out support functions.

FATF establishes policies by drafting so-called “Recommendations”: there are 40 “basic” ones on money-laundering + 9 “special” ones on terrorism financing. These recommendations are directed not only for the FATF members but affect all countries participating in the global financial system. The FATF monitors their compliance with these Recommendations through a mechanism of periodic peer reviews (“mutual evaluations”). In those cases when states fail to comply with the mentioned rules, FATF also has powers of sanctioning non-compliant jurisdictions, namely, by putting them on either a “black list” or a “grey list”.

2. What is the rationale of the petition and what are its key demands?

Following the beginning of Russia’s full-scale invasion of Ukraine and the well-documented war crimes that Russian troops have committed in Ukraine, a number of international institutions have excluded Russia from their membership. Most notably, Russia was excluded from the Council of Europe and its membership of UN Human Rights Council was suspended. Given the role of the FATF in enforcing global rules on fighting financial crimes, as well as the FATF’s powerful instruments to ensure compliance with the rule of law, the FATF was expected to take a more active and constructive position to respond to Russia’s systematic and flagrant breaches of international law. The petition calls for four important steps to be made by the FATF:

  • For the FATF President: to convene an additional extraordinary meeting of the FATF Plenary under para 25 of the FATF Mandate.
  • For the FATF Plenary: to immediately suspend Russia’s membership at FATF, and if Russia’s war of aggression continues, to proceed with its expulsion.
  • For the FATF President: to address the FATF-style regional bodies to terminate Russia’s membership and the observer status.
  • For the FATF Plenary: to add Russia to the “black list” (“List of High-Risk Jurisdictions subject to a Call for Action”) and to communicate this decision publicly.

If the FATF President fails to convene an extraordinary Plenary session any time soon, the FATF Plenary should review the issue at its next scheduled meeting in June 12-17 this year.

3. How would expulsion from FATF affect Russia? What would be the impact?

  • FATF includes large economies with highly-developed financial sectors. Russia’s exclusion from the FATF will be a clear signal to the Western (and Chinese) companies and financial institutions that Russia is no longer considered one of the credible financial centers, where their funds are well-protected.
  • Russia will not be able to impact the emerging rules on preventing money-laundering with new financial technologies ( such as virtual assets and NFTs). This lack of influence goes against the recent attempt of Russia’s financial regulators (especially the central bank) to clamp down on virtual assets as a “competitor” to fiat currency. This will mean that Russia’s new laws regulating such new technologies will not be supported by international enforcement ( including through FATF mechanisms);
  • Russia’s inability to participate in so-called “mutual evaluations”, as well as approval of mutual-evaluation reports, will also remove the influence that Russia could wield as a member of the FATF club. It is likely that Russia would no longer be able to use that leverage to pass such peer reviews of legislation and implementation. After Russia’s exclusion from the FATF, Western financial institutions will raise questions as to Russia’s compliance with the FATF rules on anti-money laundering. Conversely, Russia will not be able to participate in mutual evaluations of other countries’ compliance with FATF standards as an “assessor”. In such as a case, Russia will be losing its influence on legislative processes in other countries.

4. How would FATF’s black-listing affect Russia?

  • Blacklisting Russia as a “High-Risk Jurisdiction” will mean that foreign banks and other financial institutions will impose significant additional checks when dealing with any entities in Russia in cross-border transactions to check that they are not criminal/fraudsters (in financial speak: “customer due diligence”). For example, a Russian company that seeks to pay an invoice through a Western bank will be automatically presumed to be high-risk just because it is from Russia, and therefore the bank will have to go through additional scrutiny (type of business, ownership, sources of funds, etc). In many cases, Western financial institutions will find it much easier to simply refuse to deal with such entities than to apply more stringent controls, because they will opt to avoid higher expenses and higher regulatory risks;
  • It will help prevent sophisticated sanctions-evasion by Russia. Currently, the sanctions regime often allows Russian companies to bypass sanctions against Russia’s financial sector by, for example, structuring a transaction through a Russian bank that was not sanctioned. Given the large number of banks in Russia and a complete political dependence of Russia’s central bank, this creative “bank swapping” can happen ad nauseam. When Russia is black-listed as a country, there will be no such “safe havens” and leeways: for example, the very fact of a financial institution coming from Russia will incentivize a Western bank to apply more controls or to refuse to deal with the Russian entity altogether. Number of international sanctions
  • These obstacles will undermine Russia’s trade with the world, as it will be harder to both receive payments for exports and make payments for imports. For example: after Iran was blacklisted by FATF in 2020, its export of goods and services shrank by about 30%. Such constraints on export will be useful when Russia starts looking for new buyers of its oil ( if/when the EU decided to stop buying from Russia), as it may dissuade some buyers from doing business with Russia. Russia’s problems with importing goods will prevent its purchase of dual-use goods that may be necessary for its military industry in continuing to wage Russia’s war of aggression against Ukraine.
  • Finally, it will decrease foreign direct investment into Russia, and likely cause many of the remaining investors to leave. Foreign companies will face much higher costs of investing in Russia than in other comparable markets (that are not blacklisted): their transfers of funds to Russia will become problematic. Even those Western companies that continue investing in Russia may have to revise their position after several months of growing operational and compliance costs. Example: after Iran was FATF-blacklisted, foreign direct investment into the country fell by about 20%. Russia’s economy is likely to be hit even more, as it is more open than Iran’s.

5. Why has the international community been reluctant to push for Russia’s expulsion from the FATF so far?

  • The “regulatory cohesion” argument: Russia has been heavily integrated into global financial flows, so cutting it off from FATF (a crucial standard-setting body) will result in limiting the applicability of global anti-money laundering and counter-terrorism financing rules. Thus, Russia would have no incentive to stick to those rules if it does not participate in forging them as a FATF member.
    • Why is this argument wrong? It is not so much about laws on the books, it is whether a jurisdiction is ready to comply with internationally-imposed rules in practice. Russia has shown that it does not comply with those rules, and keeping Russia as a FATF member sends a detrimental message both to FATF members and other jurisdictions. This in turn threatens to impede the existing regulatory framework rather than strengthen it;
  • The “procedural limitations” argument. The argument goes: FATF is only a technocratic body that follows its narrow mandate, and following the procedures takes time.

    • Why is this argument wrong? The FATF has to react fast to the developments that threaten to undermine its mandate, especially if that threat comes from one of its members. Financial institutions, which are the main “recipients” of FATF-formulated rules, are driven by a risk-based approach, whereby they need to focus for the biggest risk first. They already perceive Russia as a risky jurisdiction due to sanctions and public opinion (some large Western banks, such as Citi and Credit Agricole, decided to suspend their operations). Other banks will be looking for guidance from regulators before they decide to exit. The FATF is now sorely behind these developments, which undermines trust in it as a global rule-setter.
  • The “geopolitical balance” argument. FATF publicly states that it seeks to preserve some geographic balance in its membership. Russia is the largest economy in the vaguely-defined “Eurasian region”; and Russia’s exclusion would “upset” the geographical composition of members.

    • Why is this argument wrong? This is a purely formalistic reason that has nothing to do with the FATF’s mandate and principles proper, which should obviously prevail over any “geographical balanced” considerations.