TOPIC: GS PAPER-3; Money- Laundering and role of external non state actors in internal security
Why in News: After its latest review, the Financial Action Task Force (FATF) has decided to keep Pakistan on its ‘grey’, list.
Financial Action Task Force (FATF)
- The Financial Action Task Force is an intergovernmental organization founded in 1989 on the initiative of the G7 to develop policies to combat money laundering. In 2001 its mandate expanded to include terrorism financing. It is also termed as “international terror financing watchdog”.
- The FATF is seen as a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
- The FATF has developed a series of recommendations that are recognised as the international standard for combating of money laundering and terror financing.
- The FATF Secretariat is housed at the OECD headquarters in Paris.
Currently, FATF consists of 39 members, including:
- 37 member jurisdictions with voting powers
- Two regional organisations – the European Commission and the Gulf Co-operation Council
- India is a member, as well as important countries like China, US, UK, France, Germany, Russia and Saudi Arabia.
- Interestingly, Hong Kong is also a separate member jurisdiction.
Asia/Pacific Group on Money Laundering (APG), Eurasian Group (EAG), Caribbean Financial Action Task Force (CFATF), and Financial Action Task Force of Latin America (GAFILAT) etc. are FATF Associate Members.
- It Sets international standards to combat money laundering and terrorist financing, and promotes effective implementation of legal, regulatory and operational measures
- It Assesses and monitors compliance with the FATF standards
- It Conducts studies and research on money laundering and terrorist financing methods, trends and techniques
Lists maintained by FATF
FATF maintains two different lists of countries
This refers to countries under “increased monitoring” by the FATF. These are countries that have deficiencies in their Anti Money Laundering /Counter Terrorist Financing (AML/CTF) regimes but they commit to an action plan to address these loopholes. For e.g., Pakistan was made to commit to a 27 point action plan
There are eight countries in Grey list: Pakistan, Ethiopia, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen. As per the FATF charter, fifteen members need to support a country’s move off of the Grey list.
Though ‘grey-listing’ a country doesn’t amount to international sanctions, countries will be wary of investing in grey-listed knowing that it is not a jurisdiction seen as compliant with FATF rules.
The FATF black list means the country concerned is a “high risk jurisdiction” and “non-cooperative” in the global fight against money laundering and terrorist financing. There are two countries in the blacklist: Iran and North Korea.
As per the FATF charter, to stay off of the FATF blacklist, the support of at least three of a total of 36 (excluding two regional organisations) FATF members is required. For example, Pakistan has often managed to stay off the blacklist with the support of China, Malaysia and Turkey.
Once a country is blacklisted, FATF calls on other countries to apply enhanced due diligence and counter measures, increasing the cost of doing business with the country and in some cases severing it altogether. Companies planning to invest in blacklisted countries will find it difficult to raise money or will have to pay higher rates of interest while borrowing to invest.
Following grey listing, three reviews are conducted, followed by a round at which it will be decided whether a country is to be blacklisted.
- After its latest review, the Financial Action Task Force (FATF) has decided to keep Pakistan on its ‘grey’, or ‘increased monitoring’, list till February 2021. This was mainly due to Pakistan’s failure to address 6 items in its 27-point action plan to check terror-financing. One of the items where Pakistan failed relates to action against UNSC proscribed terrorists like Masood Azhar.
- At the FATF plenary, India highlighted that Pakistan continued to provide a safe haven to terrorists and that it had not acted against the likes of Azhar, Dawood Ibrahim and Zaki-ur-Rehman Lakhvi, all proscribed by the UNSC. FATF described the fact that Pakistan had not yet complied with 6 important items in the action plan as “serious deficiencies”.
- The agency acknowledged progress made by Pakistan in mostly addressing 21 items on the action plan related to terror-financing and money laundering.
The agency urged Pakistan to swiftly complete its action plan by February 2021 as all FATF action plan deadlines have already expired. Most of the six remaining issues are related to terror-financing. FATF asked Pakistan to address its strategic deficiencies by taking effective action against all UN 1267 and 1373 designated terrorists and those acting for or on their behalf by:
- Demonstrating effective implementation of targeted financial sanctions
- Preventing the raising and moving of funds including in relation to NPOs (non-profit organisations)
- Identifying and freezing assets (movable and immovable), and prohibiting access to funds and financial services