Background

Kenya is, once again, on the international financial market radar, not for Eurobond reasons but this time round for money laundering and terrorism financing (ML/FT). The Financial Action Task Force (FATF) placed Kenya on the ‘grey list’ – putting the country under increased monitoring and supervision – citing that, while it has grown in leaps and bounds in terms of tackling ML/TF, grey areas still exist in Kenya’s anti-money laundering and counter-terrorism financing (AML/CFT) framework.

The Action Plan presented to the country by FATF is prodding the country to cause amendments to its AML/CFT legislation to bring its framework in closer compliance with the FATF recommendations and establish a case management system to better manage its international cooperation requests.

As vital as the fight against ML/TF is, questions continue to linger as to whether the FATF approach corresponds to the intrinsic contexts and circumstances of developing countries. Is it leaving more grey areas as opposed to solving them?

FATF: From an oddity to the accepted yardstick

FATF’s genesis lies in 1990 when a one-year task force fronted the idea of having a sound international anti-money laundering (AML) regime. This proposal would see the G7 come with the Financial Action Task Force on Money Laundering, largely motivated by the need to be seen as doing something, anything, to respond to expanding transnational illicit narcotics markets.

In the intervening years, FATF has since become the focal institution of financial governance. Consequently, governments, institutions and investors greatly rely on its architecture to counter crimes of all kinds, including transnational organised crime, terrorism, and weapons proliferation. Fundamentally, almost all nations have committed to adhering to the FATF standards. Other nations have also joined regional iterations of the FATF. For instance, Kenya is a party to the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). International organisations that wield great influence, such as the World Bank, have also integrated the FATF standards into their set-ups.

What was once an oddity is now the go-to model of global financial governance. In a landscape characterised by contested multilateralism, plurilateralism, regime complexes and varying models of governance, it has become the yardstick for global financial governance.  

Experimentalism in decision-making

Perhaps the best way to explain this rapid evolution of what was a body that was initially on the fringes to a key cog in the wheel of a challenging field as illicit finance as it is now, lies in its intrinsic characteristics. It embodies a hybrid of material and social pillars or what you could call coercive and persuasive mechanisms.

More importantly, the ultimate strength of the FATF lies in the threats of exclusion from major markets raising the cost of non-compliance, which provides an incentive to cooperate. While this position is valid, there is more to the FATF approach. In application, FATF is modelled as a case of experimentalist governance.

Experimentalist decision-making encompasses an inclusive, multi-level network of stakeholders who establish, evaluate, contest, and consistently revise standards to generate new knowledge about challenges and solutions. Experimentalist processes do not exclude material sanctions but insist that players should use such sanctions to encourage deeper engagement rather than enforce narrow compliance.

Also, at the core of the current FATF approach is increased knowledge sharing and social learning. Knowledge creation, social learning, and persuasion are critical tools for promoting cooperation. Proponents argue that such governance systems create more democratic deliberative spaces that simultaneously promote normative convergence and the ratcheting up of standards through a forward-looking, problem-solving dynamic.  It has been through this decision-making process that FATF members have built a far-reaching and influential anti-money laundering regime.

When members abandon this approach, FATF’s influence becomes more contested and its progress more inconsistent. In this way, experimentalism as an analytical framework performs better than approaches that focus primarily on material mechanisms of change in the AML regime.

Inadequacies in the experimentalist approach

From a FATF perspective, the experimentalist approach involves giving serious consideration to the internal operations and process of FATF. As herculean as it may seem, this process that revolves around tracing and identification to inform sanctions has been the modus operandi. FATF argues that anything otherwise is to risk imputing causation to what, in fact, is a correlation.

As a result, opponents contend that the U.S. and European Union drive FATF because their interests align. In doing so, FATF not only overlooks the substantial disagreements among the U.S. and the many diverse members of the E.U. but also ignores the possibility that the causal inclinations could, in some cases, tilt towards the opposite direction. On interpretation, FATF’s experimentalist approach means that its network has grown to be a key shaper of actor preferences in the global space, a role not initially anticipated.

The listing model, the diagnostic application of monitoring, and reliance on the experience-based development of the risk-based approach are examples of how experimentalism plays out in the AML regime.

FATF has found itself, either inadvertently or deliberately, ratcheting up dynamism in its experimentalist approach. This, combined with emerging concerns that FATF embodies a power-free realm, has caused concerns, more so for developing countries. In its ideal sense, FATF’s experimentalist approach to governance should tilt the coin of power real from coercion to learning, and that forms the basis of its effectiveness, but admittedly, and history has shown, it has done the inverse through the listing approach.

Problems abound when the FATF veers from the experimentalist track and turns to a more coercive model, as has been the case, more often than not, undermining its role as an effective tool in tackling illicit finance.

Perhaps the perfect example of the inadequacies of the FATF experimentalist approach is underscored by the fact that states face a mutual evaluation only once every eight years or more now. If the goal is to generate more information that helps states react to a fast-moving environment, mutual evaluations should happen more frequently, as they did in the beginning.

This approach backs up the notion that while experimentalist institutions sprout in response to uncertainty, experimentalist governance is not a power-free governance system and, as such, is subject to misuse by the powerful.

Conclusion

Policymakers, more so in developing nations, are finally grappling with the question of whether the FATF appreciates its unique contexts. Succinctly put, the most pressing question revolves around its overall effectiveness. Is it slowing money laundering? Is its approach more grey than anticipated? Concerns from global players have shown varying levels of uncertainty regarding how best to measure the effectiveness of the FATF.

It is indeed long overdue that FATF reverts to experimentalism as anticipated in its formative stage, harnesses it effectively and applies it, appreciating the salient contextual nuances of each state. The assured result with this would be a better FATF and better AML regime.

Food for thought: How flexible are experimentalist approaches to governance? Are they open to changes in policymaking? While the responses to these questions require detail and attention, the preliminary hypothesis indicates that experimentalism requires a longer time horizon for results and greater tolerance for deviation across local contexts. It also seems to require an openness to critique to promote learning. As a result, governments consider these conditions double-edged, hence difficult to accept. But recourse lies in convincing leaders that improvements in problem-solving techniques are truly worth the hustle.