‘Stronger Compliance…. Evidence of improved effectiveness, but system outcomes are not yet being delivered at scale”
In the 5th round of FATF country evaluations results are now in for the first 7 countries that have reported, Austria, Belgium, Italy, Latvia, Malaysia, Serbia and Singapore. In many ways this round could be better described as the second round of effectiveness evaluations, as this is where the real focus is, moving beyond technical compliance with the 40 Recommendations to the so what, which are evaluated by the 11 Immediate Outcome scores.
Their were many common threads that ran through the FATF reports. In particular the increased focus on the traditional threats which were better understood and the emerged, new and emerging threats too. FATF looked for evidence of the highest threats that should be prioritised and the system should respond to. These higher risk threats were identified in improved national risk assessments, but moving resources to target all identified high risk which should be priorities beyond existing resource allocations is easier said than done. When it comes to priorities these can’t be identified in terms of crimes or organised crime or terror groups, but less obviously are identified by official commentary which requires a response. For example the underground financial crime ecosystem is hidden from sight, and the response is traditionally reactionary but is expected to collect, assess and analyse all relevant signals and design a comprehensive response that addresses the threats. This is no easy task. See below for examples of risk factors and those that seek to exploit the financial system and those that support it which demonstrates the complex nature of the task involved in combatting it, whilst at the same time ensuring access to the financial system is not unfairly restricted.
Technical Compliance: 40 Recommendations:
Reviewing and comparing the FATF Technical Compliance scores. Belgium and Malaysia come out on top with either “Compliant’ or “Largely Compliant’ ratings for all 40 Recommendations. This is no surprise for Belgium, which has long been a past master on technical compliance but it has also unfortunately been a laggard and remains so with much work to do to close the gap between technical compliance and effectiveness (see below).
Austria and Latvia are close behind with 39/40 positive technical compliance ratings. Austria has a “Partially Compliant” rating for R23 DNFBP Other Measures and Latvia has a “Partially Compliant” rating for R25 BO Transparency for Legal Arrangements. Singapore has two PC ratings for R24 & R25 also.
Italy and Serbia have 4 “Partially Compliant” ratings each. Italy’s has PC ratings for some key recommendations R8 NPOs, R12 PEPs and R13 Correspondent Banking as well as R24 BO Transparency Legal Persons, which is a surprise. Serbia has PC ratings for R4 Confiscations, R8 NPOs, R25 BO Transparency for Legal Arrangements & R31 LEA Powers.
Effectiveness
For before and after results on Effectiveness see below.
Fot comparative data with regards IO 6, 7 & 8 see below.
In addition there is something of concern about the findings in IO3.
- IO3 FI/VASP Preventative Measures and Supervision: The results are overall positive, for the first time, due to changes to to the methodology. Moving DNFBPs into IO4 meant this Immediate Outcome would be dominated by FIs which are much more highly regulated so the results were always likely to produce overall better results. 5/6 Countries received positive effectiveness results, with Belgium the outlier. This hides an uncomfortable truth, as VASPs are also included in this rating, and it’s common knowledge that the AML/CTF/CPF standards are less robust here than in the traditional FI space and that regulatory oversight is less developed. For example:
- Global Financial Assets – 2025: Financial Assets (2025): USD600 Trillion; USD500 Trillion in assets held by FIs; Global Money USD150 Trillion; Global Financial Flows USD2,000 Trillion (McKinsey); Crypto Assets (2025) USD4.35 Trillion (Chainalysis) & Global Crypto Financial Flows USD13.2 Trillion (TRM Labs).
- Global Illicit Funds – 2025: USD4.4 Trillion (headline estimate UNODC – 3.6% (midpoint) of Global GDP); USD4.4 Trillion represents 0.73% of total Financial Assets/0.22% Total Financial Flows; USD158 Billion in reported illicit criminal funds (TRM Labs); USD158 Billion represents 3.6% of Total Crypto Assets/1.2% Total Crypto Financial Flows. Note: USD158 Billion is reported/observed. The actual amount is likely to be 3-5 times the reported/observed amount, which would generate estimates at 4 times of 10.8%/4.8%.
Positive results in IO3 should not therefore mask the need for action to understand the risks and responses in the cryptocurrency space as whilst the overall size if the market is much smaller than that of fiat and traditional finance the concentration levels are estimated as much greater. Their use also as the medium of choice in some key areas like fraud and scams and sanctions evasion and PF/TF makes these markets critical ares to continue to focus on, whatever the overall IO3 result.
With the publication of the first 7 Country reports, we can see the shape of things to come, at least for advanced industrial countries. As expected these advanced countries will have addressed almost all of their technical compliance weaknesses, but almost half still struggle to achieve levels of effectiveness which are up to the FATF standard. In one sense there is stronger compliance, particularly in traditional financial areas as well as in government and by delegated agencies including increased reporting but when you follow that through to enforcement and ultimately asset recovery, some are doing better, but the system is still not delivering outcomes at scale.
All countries are on a journey to address system realities and to embrace the necessary actions to improve overall performance and desired outcomes. A number of the countries have worked extremely hard and achieved significant progress, demonstrating and evidencing tackling the system realities and moving forward to achieving improved levels of effectiveness (see chart below).
Based on the ratings given by FATF for those countries doing better and receiving positive ratings there is an argument that ratings for IO7 and IO8 may have been benchmarked too low.
The results even for countries with very positive ratings can’t genuinely be described as “highly effective” in this area, even if they pass today’s benchmarks set by FATF, and more effective than before would be a better way to describe the results. Overall current results whilst improving need to continue to improve, even where positive ratings have been achieved, otherwise it will not be enough to tackle legacy and current money laundering challenges, let alone those of the future.
Still countries have strengthened their defences, and raised the bar, with some higher than others.
Based on the forst 7 Countries FATF reports FCN have a number of key takeaways for consideration.
10 Key Final Takeaways from first 7 Country Reports in the FATFs 5th Round:
- System Technical Compliance has substantially achieved its goal, but compliance is not a one time event, it requires continuous and evolving commitment to compliance, including increasing compliance obligations. Some countries have seen their TC ratings slightly worsen as a result.
- Effectiveness has doubled across 7 countries in aggregate, from the 4th round to 5th round, from a low base of 31% (24/77 positive ratings) to 56% (43/77 positive ratings). The first HE ratings have been given for IO1,5,6,7 & 9 which set potential benchmarks for achieving these ratings. These results will likely be negatively impacted once Countries that are not advanced economies are reviewed and included.
- Countries that do best all have positive IO1results (Risk Assessment and National Policy Coordination. The reverse is also true.
- None FI/DNFBPs preventative measures and supervision have most to do to improve effectiveness. This is no surprise and only one country, Singapore achieved positive ratings. Another area that remains stubborn to improvements that FATF have focussed on since 1990 relates to BO Transparency (IO5). Whilst FATF is not calling for public registries, most countries (4/7) still continue to underperform against FATF expectations.
- FI Preventative measures and supervision (IO3) and TF Investigations and Prosecutions (IO9) are rated the most effective areas overall (6/7). IO3 includes VASPs, but these ratings should not disguise the fact that VASP inherent risks are increasing and financial crime risk in VA markets is much greater than in the FIAT market, though the FIAT market is of course much larger. Further action by VASPs and Supervisors is still urgently required. VA risks concentrations include CEF and Sanctions circumvention in particular and so represent higher risk areas.
- The system is still inefficient. Some linkages from the private sector through SAR/STRs to FIUs and via Financial Intelligence to LEA leading to ML Investigations, Prosecutions and Convictions and Asset Recovery clearly exist but insufficient evidence is presented that there is a material correlation, and no definition of what material would be. The absence of genuine evidence and specificity disables the ability to truly power the risk based approach.
- ML investigations prosecutions and convictions have generally increased, but many are still self laundering cases and not as many 3rd party laundering or mixed cases which should be the priority.
- There have been continued outperformance versus the norm in terms of asset recovery in a limited number of countries, but whilst these are welcome improvements, it’s unclear they can be maintained and or will be scaled further and will be replicated by many other countries.
- Despite the focus on the risk based approach and financial inclusion by the Current FATF President, information on how financial inclusion has been tackled and the balance between inclusion where inherent risks may exist but could be managed versus avoiding inherent risks is largely absent from information and or considerations in relation to effectiveness ratings for the countries where reports have been issued. An addendum on this special topic as a cross cutting issue should be required going forward for future reports.
- Reports include a focus on fraud and in particular the increase in prevalence of Cyber enabled fraud, but the threat and responses are not captured and assessed holistically. There is a strong argument for FATF considering a new IO12 to cover this predicate in the way TF and PF have focussed IOs, not least because of its prevalence and speed of growth and the likely acceleration if AI is weaponised by bad actors in this area. Not for this 5th Round as that may not be possible, but for the 6th Round. Nevertheless an addendum on this special topic as a cross cutting issue should be required going forward for future reports.
