Will Russia be allowed to decide on the global rules for the integrity of finance?

 Date: June 14, 2022

by Sergii Rybchenko and Ievgen Vorobiov

Few laypeople realize this, but this week will see a major test of the integrity of the global regulatory system for the financial industry. On 14-17 June 2022, the Financial Action Task Force (FATF), the global bureaucracy that fights money laundering and terrorist financing, will convene its Plenary in Berlin.

FATF’s Russia problem

The agenda of this jaw-jaw is not publicly available, we can only peruse the vague outline on the organisation’s website. The outline hides that the meeting will have an elephant – or rather, a bear – in the room: Russia. Lest you forget, Russia is still a full-fledged member of the FATF, after more than three months of its full-scale war of aggression against Ukraine. In this capacity, Russia essentially co-decides on the rules of global finance, which then affect almost everyone in the world who uses financial servies. Reportedly, the issue of expelling the Russian Federation will be on the table during the Plenary. Yet it remains unclear whether the FATF is going to consider designating Russia as a High-Risk Jurisdictions subject to a Call for Action – that is bureaucratic speak for including Russia in the so-called “blacklist”, where Iran and North Korea currently find themselves.

Over the past three months, the FATF has shown a glaring lack of public accountability over its implicit decision to turn a blind eye to Russia’s continued presence in this club of rule-setters. The FATF President, Dr. Marcus Pleyer, has failed to provide any response to the public petition for expelling and blacklisting Russia addressed to him. The FATF limited itself to the Secretariat’s formal confirmation of receiving the letter back in March. Neither did the member-state delegations respond to the petition’s demands, even though they all received individual letters with detailed information about the petition back in April this year.

One would think it obvious that the country which makes a mockery of international law should not keep its seat as a global rule-maker. It was not only the civic initiative “No Finance for Russia” that called on the FATF to take action against Russia and its flagrant violations of international law. Ukrainian authorities, including the Parliament, the Financial Intelligence Unit (FIU), the Ministry of Finance and the Office of the President all appealed to the FATF with detailed reasoning and facts on why Russia should be kicked out of the FATF’s standard-setting system.

Do as I say, not as I do

The FATF’s foot dragging and its muted reaction to obvious breaches of basic international standards pose an important question about its role in the global system of anti-money laundering (AML), countering financing of terrorism and financing of WMD proliferation. What’s the point in evaluating technical compliance and effectiveness of compliance with the international standards if the standard-setter itself fails to act in response to the obvious breach of rules by one of its members?

The FATF has – unfortunately – failed to practise what it preaches. In its only public communication on Russia’s aggressive war against Ukraine back in March, the FATF noted that all jurisdictions should be vigilant to the possibility of emerging risks from circumvention of measures taken in order to protect the international financial system from the ML/TF/PF risks resulting from Russia’s aggression against Ukraine. However, the organisation has failed to take steps in light of obvious breaches of the sanctions regime, financing of terrorist activities and state support of terrorism and genocide. The financial firms that are supposed to implement the FATF-produced rules would be perfectly entitled to ask the FATF: why do you expect us to be ethical in our business operations when you have failed to ensure integrity among your own ranks?

The FATF presents itself as a technical, apolitical organisation. It should therefore act as one: the easiest way to do so is to compare the principles of the organisation vis-à-vis the actual deeds of Russia. A simple question to ask is whether the FATF would accept the membership of such a country as Russia in its ranks if it had to make that decision from scratch. It is obvious that the majority of FATF members, at least those who have a genuine respect for the rule of law, would not. The same goes for taking the decision on the blacklisting: the overwhelming majority of FATF members understand the risks to the global financial system emanating from Russia. That is why it would be the right thing to formally designate Russia to protect the integrity of the global financial system instead of just “outsourcing” this responsibility to the private sector.

Financial In-action Task Force?

The FATF delegates at the Plenary should also take a hard look at how their club stands in stark contrast to the decisive actions of other reputable organizations in the field of fighting financial crime. Since 24 February 2022, Russia was expelled from the OECD and even a FATF-style regional body: the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL). This obvious singularity of the FATF’s position is evidence that its inaction is a conscious choice – and not just a bureaucratic accident.

The entire democratic world is now trying to stop Russia’s unrelenting war of aggression and war crimes with increasing sanctions pressure, which has turned the Russian Federation into the most sanctioned state in the world within a couple of months. However, the FATF remains a tacit spectator in this regulatory landslide, as if waiting for the public outrage and calls for decency to blow over. Unfortunately, such a cowardly position is a blow to the FATF’s potential leverage in punishing Russia’s murderous war machine. The previous experience of the FATF – including the black-listing of individual jurisdictions, such as Iran – has demonstrated how impactful the institution’s response can be when it seeks to protect the financial system from state actors undermining international law.

The analysis above paints a gloomy picture of an institutional paralysis in the face of a major international conflict. However, there is still a narrow window of opportunity for the FATF to restore its credibility and trust as a global standard-setter among finance professionals and regulated entities in the financial sector, as well as the broader public. To do so, the FATF will have to make well-reasoned and overdue decisions during the upcoming Plenary.