Any mention of a financial crime conjures up images of detectives, bank investigators, and high-profile international cases in people’s minds, just like in the movies. However, the reality is quite different and involves individuals working behind the scenes within an organization that has a major impact on how the world’s financial sector addresses money laundering, terrorist financing, and the proliferation of weapons of mass destruction. This organization is the Financial Action Task Force (FATF), which is best known as FATF.
Today, countries enact laws in line with FATF standards. Banks redesign their compliance programs to satisfy FATF rules. Crypto companies pause expansion plans until they understand FATF guidance. But still, few people truly understand what FATF is, where it came from, or how its recommendations become global law.
This article breaks it all down—starting with FATF’s origin story, how its standards are interpreted, how countries get evaluated, why companies fear its “Grey List,” and how FATF ended up controlling major parts of the global financial system without being a formal regulator.
What Is FATF?
The Financial Action Task Force (FATF) is an intergovernmental body formed to develop global standards to help prevent criminals and terrorists from abusing the financial system. No country is legally forced to follow its recommendations.
But what makes it more powerful is that most of the countries follow it, and some even restructure their entire legal systems just to stay compliant.
Why?
Its 40 Recommendations shape everything from bank KYC processes to crypto regulations, due diligence standards, cross-border payments, sanctions compliance, and law enforcement powers.
Whenever you come across terms like:
- Customer Due Diligence (CDD)
- PEP screening
- Ultimate Beneficial Owner rules
- Suspicious transaction reports
- Travel Rule (crypto)
- Targeted financial sanctions
All of these trace back to the FATF standards.
What Is the Origin Story?
The 1980s
By the mid-1980s, drug trafficking had turned into a multibillion-dollar business. Powerful criminal organizations that controlled the global cocaine trade appeared, and these groups were multinational empires with billions in revenue and deep influence across finance, politics, and law enforcement.
1. The Medellín Cartel, Colombia
During the 1980s, the Medellín Cartel was primarily responsible for the majority of cocaine entering the U.S. Due to their almost limitless cash flow, they could invest in real estate, businesses, ranches, and even political power. The violence related to these cartels was so extreme that it forced many governments to begin treating drug-related financial activity as a national security threat.
2. The Cali Cartel, Colombia
The Cali Cartel functioned as a corporation; they had accountants, logistics teams, and methods for laundering money internationally. Much of their business activity involved banks and import/export companies, as well as the use of shell corporations to launder their profits.
3. Norte del Valle Cartel, Colombia
The Norte del Valle Cartel was quite sophisticated, with highly developed financial systems and extensive use of offshore companies and banks to facilitate the movement and concealment of their money.
4. Mexican Traffickers
They initially acted as transporters for Colombian cartels, giving them early exposure to large-scale smuggling and laundering operations.
The problem wasn’t just the drug trade itself — it was the money it produced. Cartels needed to clean billions of dollars as fast as possible, and they were doing it through:
- global banks with weak controls,
- real estate markets with no transparency,
- offshore jurisdictions that didn’t ask questions,
- shell companies with hidden owners.
Governments were fighting cartels on the streets while their financial empires kept growing untouched.
The Birth of FATF
On 14 July 1989, during the G7 Summit in Paris, global leaders decided to create a new international task force. A group that would define how the world fights financial crime.
Its initial mandate focused on:
- Studying how criminals move money
- Developing global anti-money-laundering (AML) rules
- Pushing every country to implement them
In 1990, FATF published its first set of 40 Recommendations. At this stage, FATF dealt only with money laundering linked to drugs, aiming to face the biggest threat of the era.
Throughout the 1990s, FATF discovered that money laundering wasn’t just limited to drug money but also involved proceeds from
- corruption networks
- human trafficking
- smuggling
- tax evasion
- fraud and corporate crime
At that time, criminals were faster than regulators and financial systems were becoming more global, but AML laws were still nation-specific. FATF realized that if countries didn’t work together, criminals would always find the weakest link.
2001
In 2001, there was a shift in the world’s security systems when the United States experienced terrorist attacks on September 11, 2001, which led to an immediate re-evaluation of the need for a collective response to the threat of terrorism. This event was a turning point for FATF. After this date, FATF began to expand beyond its original purpose of creating an AML framework and started focusing on combating money laundering to combating terrorist financing.
In response to this escalating issue, FATF established its first Special Recommendations regarding terrorism prevention. Initially, 8 Special Recommendations were introduced (and eventually expanded to 9).
This shift forced banks and governments to rethink compliance:
(a) Terrorist assets had to be frozen immediately;
(b) Wire transfers required stronger monitoring;
(c) Suspicious activity related to terrorism became a priority;
(d) Countries had to criminalize terrorist financing.
For financial institutions, this was the beginning of modern compliance as we know it. Risk scoring, sanctions screening, name matching, and monitoring systems all accelerated after 9/11.
2003–2011
Throughout the 2000s, FATF worked on strengthening the global financial system. This era focused on turning the 40 Recommendations into a truly international standard.
FATF broadened its scope to cover proceeds from corruption, fraud, smuggling, environmental crime, tax offences, and more.
FATF recognised that criminals weren’t only using banks. They were misusing:
(a) real estate agents
(b) casinos
(c) lawyers
(d) accountants
(e) trust and company service providers
(f) dealers in precious metals
It highlighted the importance of countries having to cooperate on freezing assets, extradition, sharing intelligence, and cross-border investigations.
2012
This year FATF published the modern version of the 40 Recommendations, combining AML, CFT, which is considered the biggest transformation in FATF’s history.
Here’s what changed:
- The risk-based approach became the heart of everything;
- Beneficial ownership became a global priority;
- Counter-proliferation financing was added;
- Stronger financial intelligence units (FIU);
- More power for law enforcement;
- A clear framework for sanctions, and enforcement.
How FATF Works?
FATF is not a regulatory body, as many people believe. The FATF does not investigate criminals or close banks or prosecute anyone. Rather, the FATF is the organization that establishes the rules on how countries should combat money laundering, terrorist funding, and financing for the proliferation of weapons of mass destruction. Below is a brief overview of how the entire FATF system works.
1. The Plenary
The Plenary is where all of the members of FATF come together to make decisions about the global financial system. In addition to the 40+ country members of FATF, the European Commission, members of the Gulf Region, and a few international organizations will be sitting at the same table and voting on the matters that determine how the global financial system functions.
2. The Secretariat
The FATF makes its public decisions through the Secretariat, it is responsible for almost everything that keeps FATF running:
(a) drafting new standards and updating old ones
(b) preparing typology reports on global risks
(c) coordinating and training mutual evaluation teams
(d) conducting research and global risk assessments
(e) supporting the working groups and the Plenary
(f) working with FATF-style regional bodies
3. FATF-Style Regional Bodies (FSRBs)
You need to know that not every country is a direct FATF member. But, to ensure global reach, FATF works through Regional Bodies known as FSRBs.
Examples include:
- MENAFATF – Middle East & North Africa
- APG – Asia-Pacific Group
- MONEYVAL – Europe
- GAFILAT – Latin America
- ESAAMLG – Eastern & Southern Africa
- GIABA – West Africa
- EAG – Eurasian Group
4. Mutual Evaluations
FATF doesn’t enforce laws, but it does evaluate countries to see whether those laws actually are implemented.
This happens through a detailed process called a mutual evaluation. Teams of experts spend months reviewing a country’s legal framework, financial supervisors, law enforcement capabilities, and results.
Evaluations measure two things:
- Technical Compliance
- Effectiveness
5. Grey Listing & Black Listing
Grey List
Countries with strategic deficiencies but willing to fix them. Grey-listed countries face:
(a) higher due diligence from banks;
(b) reduced foreign investment;
(c) pressure from IMF, World Bank, and rating agencies.
How Countries Get Grey-Listed?
We can explain this process in simple 7 steps:
1. Mutual Evaluation
It starts with a mutual evaluation. FATF or an FSRB sends a team of experts to review a country’s laws, supervisors, FIU, law enforcement, and real. The team writes a report showing technical compliance and effectiveness.
2. Follow-up and Initial Dialogue
After the report, FATF asks the country for follow-up information and a plan to fix weaknesses. The country submits progress reports and timelines. FATF watches to see whether the country is serious and whether the plan is realistic.
3. International Cooperation Review Group Review
If serious, strategic deficiencies remain (for example weak beneficial ownership, poor FIU performance, or failure to apply sanctions), the case moves to the International Cooperation Review Group (ICRG).
4. Action Plan
FATF issues a formal action plan with specific, time-bound measures the country must take (e.g., new laws, improved supervision, increased prosecutions, better BO registries). The country must publicly commit and provide regular evidence of progress.
5. Plenary Vote
If the country fails to make adequate progress on the action plan or FATF judges the measures insufficient, the Plenary votes. If the Plenary agrees, the country is placed on the “Jurisdictions Under Increased Monitoring” list.
6. Public Announcement & Immediate Consequences
Grey listing is public. Banks and investors treat the country as higher risk. Which will make every financial institution face tougher KYC, possible de-risking, slower correspondent banking relationships, and reduced capital inflows.
7. Intensive Monitoring While on the List
Once grey-listed, the country is monitored closely. It must provide regular, detailed progress reports and meet deadlines. FATF may send technical assistance or urge international partners to help.
Black List
You can ignore FATF rules, but you cannot ignore the consequences.
This is considered the most severe category. Blacklisted countries face near-total financial isolation.
It is used by the Financial Action Task Force to signal countries with serious deficiencies in their strategic approach to the prevention of terrorist financing, money laundering, and proliferation finance. Countries that have been blacklisted by the FATF are generally viewed as unwilling or unable to correct these issues.
However, the result is that most banks worldwide will apply greater scrutiny toward, or refuse to do business with, any entity from a blacklisted country. Large global investors often pull money out of a blacklisted country, and correspondent banks operate with great caution or may sever ties altogether to account for risk exposure.
Countries that have been placed on the blacklist will be subject to a high level of increased sanctions or reduction in foreign aid and may be limited in their ability to trade with any country across national borders.
How Countries Can Avoid or Exit Grey Listing?
Being removed from the FATF grey list means showing tangible evidence of positive change and improvement in compliance, and responding to FATF recommendations.
A Financial Supervisory Authority should conduct regular inspections, and take action against any financial institution that violates local laws or regulations.
Another significant role of FATF is to provide clear communication regarding a country’s compliance with its recommendations. The country must present to FATF an honest and realistic plan of action with achievable and measurable deadlines to meet the FATF recommendations.
By following this strategy, a country can demonstrate its commitment to reform and provide assurance to the international community that the reforms will be persistent and permanent.
How FATF Affects Countries, Banks, Crypto Firms, and Businesses
A) Impact on Countries
When a country falls under FATF review, governments usually move fast. Laws that once took years to update can suddenly be rewritten within months. Authorities do all that is needed to show they are meeting FATF expectations, to avoid or exit the grey list.
B) Impact on Financial Institutions
Meeting FATF standards requires a major investment in technology, systems, and trained staff. This includes:
- Strong KYC and Customer Due Diligence (CDD)
- Advanced transaction-monitoring tools
- Sanctions screening and risk-based controls
- Dedicated compliance teams and regular training
C) Impact on Crypto Firms (VASPs)
FATF guidance has become the global model for how countries regulate crypto exchanges, wallet providers, and blockchain services.
Key expectations include:
- Applying the Travel Rule for cross-border transfers
- Getting the right licenses or registrations
- Using blockchain analytics to spot suspicious activity
- Implementing strong, risk-based onboarding and monitoring
In reality, FATF standards mean crypto firms must take AML/CFT seriously and build it into the core of their business, and not treat it as an optional requirement.
D) Impact on DNFBPs
FATF rules do not stop with banks and crypto firms. Lawyers, accountants, real estate agents, trust service providers, and dealers in luxury or high-value goods are also under supervision. Customer Due Diligence (CDD), record keeping, and reporting suspicious activity are responsibilities of those practicing these professions, to help prevent criminals from laundering and moving their illegal funds through non-financial businesses.
Critics of FATF
FATF is one of the main sources for global financial rule-making. It does have its share of criticism. One of the biggest criticisms of FATF is that it overreaches in authority. Some say that when FATF issues recommendations, it has a tendency to influence the policies of countries, although it does not have the legal power to enforce those recommendations. This has caused a lot of countries to comply with FATF in order to protect themselves from any negative repercussions.
Another criticism of FATF is that it takes a one-size-fits-all approach. If you consider how FATF applies the same expectations to both large financial institutions and smaller developing countries. For nations with limited resources, meeting these standards can be extremely challenging.
And the concept of being placed on the grey list can also have economic consequences. Even when a country’s shortcomings are minor or technical, grey-listing can slow investment and economic growth, creating unnecessary pressure.
Another sour point is crypto regulations. FATF’s strict rules on virtual assets can make it harder for crypto firms to innovate. The heavy compliance requirements may slow the development of new technologies and services in the digital asset space.
Why FATF Matters More Than Ever
Since 1989, when it was founded, and through its rapid development into “the backbone” of global efforts to combat financial crime, FATF has set standards for countries to follow, these standards directly guide the creation of National laws, Banking Practices, Crypto Regulation, Framework for Sanctions, and International Cooperation efforts on an international basis.
FATF does not have authority over National Governments or Financial Institutions, and still creates rules for the Global Financial System. FATF strict rules indirectly create how Countries attract Foreign Investments; Cross-Border Banking Accounts, and how Crypto Exchanges apply for Licenses.
All governments, financial institutions, and participants in global finance should prioritize understanding FATF and its standards to ensure effective compliance and secure international operations.
