The FATF Recommendations are international standards set by the FATF to combat money laundering and terrorist financing, which countries must implement within their territories. In this post, we will analyze FATF Recommendation 1, which calls on countries to identify, assess, and understand their exposure to money laundering and terrorist financing risks.
In essence, the concept of FATF Recommendation 1 is to identify, analyze, and understand vulnerability to the dangers associated with money laundering and terrorist financing. To achieve this, FATF has established a set of standards for fulfilling this recommendation.
The central element of this Recommendation is the need to establish a risk-based approach to effectively anchor preventive measures within each country’s jurisdiction. This risk-based approach promotes internal analysis within each country, encouraging improvements in legislative frameworks or aiding in resource allocation by the relevant authorities.
Spain, for example, after completing this phase, presents its National Risk Assessment. This document outlines aspects such as the national framework for fighting and preventing money laundering and terrorist financing in Spain and highlights general vulnerabilities within the system.
By employing this risk-based approach, FATF notes that countries may encounter higher or lower risks. For high-risk cases, obligated entities may be required to take more restrictive measures, applying enhanced due diligence measures. Conversely, for cases of lower risk, simplified due diligence measures may be applied.
Additionally, Recommendation 1 also mandates the identification of “proliferation financing” risks. It defines these risks as the failure to apply the financial sanctions obligations outlined in Recommendation 7. In this case, the risk would be the lack of implementation of these measures by the state. Therefore, FATF recommends establishing mechanisms to detect non-compliance with Recommendation 7.
Countries may reduce the application of proliferation financing risks to low-risk entities. However, FATF notes that “the full implementation of targeted financial sanctions, as required by Recommendation 7, is mandatory in all cases.”
Furthermore, this risk-based approach is not limited to the country’s risk assessment but also requires entities to apply this methodology to identify risks related to their clients, countries, or products with which they operate, taking into account the risks established by the country. FATF also mentions that when countries determine how to implement a risk-based approach within a sector, they should consider “the sector’s expertise and knowledge on anti-money laundering and counter-terrorist financing issues.”
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