FROM FORMALITY TO MATURITY

Over the past three years, Azerbaijan has made significant changes to its approach to combating money laundering and terrorist financing. While the initial focus was on aligning legislation with international standards, the 2023–2025 period marked a shift towards a more comprehensive, systemic reform, emphasising tangible risks, inter-agency coordination, and the practical implementation of norms.

This shift is clearly reflected in the first progress report under the 5th round of evaluation by the Council of Europe Committee MONEYVAL, approved in December 2025. The document demonstrates that reforms in the field of AML/CFT (Anti-Money Laundering and Countering the Financing of Terrorism) have evolved from a formal response to external remarks to becoming an integral component of the state's long-term financial policy.

Azerbaijan has initiated the establishment of a novel financial security paradigm that is characterised by enhanced transparency, enhanced manageability, and integration with the international FATF standard system.

The acceleration point

The fifth-round evaluation report published by MONEYVAL in 2023 presented a mixed picture for Azerbaijan. On the one hand, the country already possessed basic regulatory and institutional AML/CFT infrastructure. However, vulnerabilities persisted in the most sensitive segments, including electronic transfers, transparency of legal entities, supervision of financial institutions, and the completeness and comparability of statistical data. Following a thorough review, the FATF has decided to place Azerbaijan under enhanced monitoring for 11 out of the 40 FATF Recommendations.

However, this status did not present significant constraints; rather, it acted as an accelerator. Enhanced monitoring provided a clear framework of priorities and became a catalyst for rethinking the very architecture of the AML/CFT system. As Zaur Fatizade, Chairman of the Board of the Financial Monitoring Service, noted, the emphasis was placed not on point-by-point closure of "remarks," but on a fundamental revision of approaches. "The reforms being carried out are not limited to strengthening the legislative and regulatory base. We are consistently implementing institutional coordination, risk-oriented supervision, and operational mechanisms consistent with international standards," he remarked.

This logic, namely the transition from formal compliance to managing real risks, formed the basis of the progress report submitted to MONEYVAL. As Fatizade emphasised, the committee made positive decisions on all of Azerbaijan's submissions, raising the ratings for the corresponding recommendations. It is evident that this is not a one-off success, but rather a sustained movement in the direction of systemic change.

It is noteworthy that in the latest MONEYVAL report, the focus is less on the rating changes themselves and more on the qualitative shift in the operational logic of Azerbaijan's AML/CFT system. This is particularly evident among the non-profit organisations (NPO). This sector was considered one of the most vulnerable elements in the 2023 fifth-round report, and it is here that the current report records the most convincing and structured progress.

The new MONEYVAL report highlights a fundamental shift in this logic. In 2023–2024, the authorities conducted a full-scale sectoral risk assessment, covering all 3,777 NPOs registered in the country. The approach adopted was qualitatively different: for the first time, regulators moved away from generalised conclusions in favour of an individual risk classification for each organisation. Consequently, the risk-oriented model transitioned from being a mere declaration to a tangible, practical entity.

A key tool used was a two-tier analysis. At the first stage, a subgroup of NPOs falling under the FATF definition was identified, followed by a detailed calibration of risks within it. A number of factors were given full consideration, including financial reporting, the nature of activities, funding sources, organisational structure, and existing measures to mitigate vulnerabilities. The outcome of this work was of fundamental importance: the vast majority of NPOs in Azerbaijan were classified as low or moderate risk, while medium-high risk was identified in only a very small number of organisations. The report thus refutes the assumption of a systemic threat of terrorist financing through NPOs and confirms its pinpoint nature.

However, it is important to note that the risk assessment did not remain a purely analytical document. MONEYVAL explicitly states that its results were integrated into supervisory practice. Supervisory bodies received a risk matrix applied during both scheduled and unscheduled inspections, and the supervisory measures themselves became proportionate to the risk level of a specific organisation. The system has been made more resilient by the introduction of a new requirement for an annual review of the sectoral risk assessment. This change means that the reform will now be a continuous process rather than a one-off response to an international evaluation.

Concurrently, the philosophy of the state's interaction with the non-profit sector underwent a shift. The report emphasises a shift from a model of "top-down control" towards engaging NPOs in forming protective mechanisms. For instance, the Financial Monitoring Service, in collaboration with NPO representatives, established criteria for identifying suspicious donations, and training events functioned not only as a means of raising awareness but also as a channel for bilateral communication. This allowed regulators to better account for the sector's operational specifics and adjust supervisory requirements without excessive pressure.

This dialogue-based approach was reinforced by strengthening the regulatory framework, with the aim of increasing transparency and accountability. MONEYVAL has noted the introduction of codes of conduct for NGOs and religious organisations, which enshrine principles of transparency of financial information, openness of management structure, and regular reporting. The importance of these measures lies in their preventive nature: they work not only to identify violations after the fact but also to reduce risks at an early stage, while simultaneously strengthening public trust in the sector.

In light of these developments, the sanctions mechanism, which had been deemed inadequate in terms of deterrence, was also subjected to revisions. The December report acknowledges that the sanctions system has become more differentiated and proportionate, ranging from administrative fines for reporting violations to criminal liability and the liquidation of legal entities in cases of money laundering and terrorist financing. While liquidation is only possible through a court decision, the sanctions toolkit is considered sufficient to create a preventive effect.

Collectively, these changes enabled MONEYVAL to revise Azerbaijan's assessment under FATF Recommendation 8 and raise the level of technical compliance. The rating increase is interpreted not as a formal consequence of adopting new norms, but as the result of implementing a functioning risk-oriented model. This conclusion is supported by a comprehensive evaluation: Azerbaijan has demonstrated its capacity to transition from the formal fulfilment of FATF requirements to the management of the actual risks of terrorist financing and money laundering.

In light of this rationale, the decision by MONEYVAL to maintain Azerbaijan under enhanced monitoring is understandable, particularly in light of the progress made and the proposal to submit a country report on further system strengthening within a year. This approach demonstrates confidence in the reform process: the country is regarded not as a problematic jurisdiction, but as a system in an active phase of institutional strengthening and integration into the international financial security architecture.

An extension of this line of enquiry is the evaluation of coordination mechanisms. The new report shows that AML/CFT reforms have affected not only the regulatory base but also the practical architecture of interaction between state bodies, the financial sector, and international partners.

Legislative anchors of reform

One of the key elements supporting the reforms was the law "On Payment Services and Payment Systems". Its adoption has led to significant strengthening of control over the activities of payment agents, as well as the introduction of requirements for client identification and information transfer during electronic transfers. This has resulted in full compliance with FATF standards. The increased transparency of financial flows became a key signal for international assessors, demonstrating the maturity and functionality of the system, and not just its formal compliance.

The logical next step in this process was the adoption of a dedicated law on beneficial ownership in 2025. For the first time at the level of a standalone legislative act, the legal foundations for identifying the actual owners of legal entities, as well as mechanisms for verifying the reliability and timeliness of relevant data, were established.

Concurrently, a risk assessment of the misuse of commercial legal entities was conducted, and sectoral legislation regulating the banking and credit sector was updated. Collectively, these measures enhance risk management and linked transparency of ownership requirements with financial supervision practice.

As Fatizade observes, it was the combination of legal norms and applied mechanisms that became the key factor in restoring trust: "Strengthening transparency and data quality has allowed us not only to raise ratings, but also to fortify the system of internal control and international cooperation."

The practical substance of these reforms is clearly reflected in the assessment of FATF Recommendation 14 concerning money or value transfer services. MONEYVAL has observed that Azerbaijan has established a distinct and comprehensive market access framework. Such services are exclusively permitted to be provided by licensed legal entities, subject to the oversight of the Central Bank.

The report places a separate emphasis on the agent model. Money transfer service providers may engage agents only upon their mandatory registration with the Central Bank, and full responsibility for the agents' AML/CFT compliance rests with the financial institution. The territorial principle is another risk mitigator: agents' activities are limited to the borders of Azerbaijan, thereby reducing cross-border vulnerabilities and simplifying supervision. The sole remaining gap – the lack of a direct prohibition for the national postal operator to engage agents – is deemed insignificant, allowing the rating for Recommendation 14 to be raised to the level of "largely compliant."

The re-evaluation of FATF Recommendation 16, which relates to wire transfers, provides even more technically detailed yet indicative information. MONEYVAL has confirmed that Azerbaijan has successfully addressed the majority of previously identified gaps. All cross-border and domestic transfers are now accompanied by complete and verifiable information on the originator and beneficiary. Client identification requirements are now independent of the transaction amount, and financial institutions are obliged to suspend or reject transfers lacking the necessary data. The requirements for the storage and provision of information to supervisory and law enforcement bodies have been substantially strengthened.

Furthermore, the control system is structured so that financial institutions controlling both sides of a transaction must consider all available information. If suspicions arise, suspicious transaction reports must be sent, with particular emphasis on cross-border transactions. This approach is fully aligned with the FATF's logic, which categorises international flows as a high-risk area.

The only remaining comment regarding Recommendation 16, as per MONEYVAL's observations, pertains to the lack of sufficient specification of measures to identify transfers accompanied by incomplete information at the level of individual financial intermediaries. However, even in this instance, the issue is more a matter of technical clarification than a systemic flaw, which enabled the assessment to remain at the "largely compliant" level.

A review of Recommendations 8, 14, and 16 reveals that MONEYVAL considers Azerbaijan's reforms to be a transition to a mature and coherent AML/CFT system. This system relies on constant data exchange, clear distribution of responsibility, and the ability to respond promptly to risks both domestically and internationally, rather than on individual laws or formal procedures.

International recognition

The preparation of the progress report took place against the backdrop of active and substantive dialogue with the MONEYVAL Secretariat and the committee's member states. Engaging an international expert allowed arguments to be framed within the logic of international practice, while explanatory work ensured a correct understanding of the steps taken by Azerbaijan and their practical significance.

As Fatizade noted, the outcome of this process was significant: the decision to raise the country's ratings was adopted unanimously, the level of compliance with FATF standards reached 90.5%, and Azerbaijan rose from 24th to 14th place among the 32 countries participating in MONEYVAL's fifth evaluation round.

He emphasised the need for rapid and systemic solutions at this stage. Following a thorough review of the submitted justifications, the committee has reached positive decisions on all submissions concerning recommendations in the areas of electronic transfers, transparency of legal entities and arrangements, regulation and supervision of financial institutions, statistics, guidance, and feedback mechanisms. Consequently, the ratings for each of the relevant indicators were increased.

Mr. Fatizade emphasises that the combination of these efforts — the implementation of methodological and supervisory mechanisms, along with enhanced inter-agency coordination — has significantly strengthened Azerbaijan's position on the international financial security platform.

In his assessment, the achieved results have long-term significance: "As a result of the improvements made, the internal control system has been strengthened, opportunities for cooperation with international partners have expanded, and Azerbaijan has been recognised as a reliable and authoritative country in terms of financial security."

In practical terms, this means more stable positions within FATF, higher ratings in future assessments, and, crucially, the operation of a financial security system capable of not only complying with international standards but also working effectively under changing risk conditions.

A logical continuation of the institutional transformations has been the strengthening of Azerbaijan's international standing in the field of financial intelligence. The decision to hold the 32nd Egmont Group of Financial Intelligence Units Plenary Meeting in Baku in 2026 is further evidence of this trust. For a nation that has maintained full membership of the group since 2011, this event is not merely an image occasion, but a testament to the professional and institutional maturity of the Financial Monitoring Service.

Therefore, the high MONEYVAL assessments and Azerbaijan's growing role in international formats should be viewed not as the final point of reforms, but as an indicator of their qualitative nature. The AML/CFT system has evolved from a regulatory measure to a key component of the state's strategic financial policy, aimed at ensuring long-term stability and integration into the global financial security framework.