Financial Action Task Force and its lists

Syllabus: General Studies Paper 2

Context

• The global financial crime watchdog Financial Action Task Force (FATF) in its latest plenary meeting, decided to retain Pakistan on its terror financing ‘grey list’, asking the neighbouring country to expeditiously address the remaining deficiencies in its financial system.
• It has also added UAE to the list this time, which has promised to take “robust” actions in countering terror financing and money laundering.

About FATF

• The Financial Action Task Force is an international watchdog for financial crimes such as money laundering and terror financing.
• As per the official definition, it is an inter-governmental body that sets international standards that aim to prevent these illegal activities and the harm they cause to society.
• Origin
  • The FATF was established at the G7 Summit of 1989 in Paris, over concerns of the member countries about growing money laundering activities. The heads of G7 countries and the president of the European Commission brought together a Task Force after addressing loopholes in the global financial system.
  • Later, in the aftermath of the 9/11 terror attack on the United States, FATF also added terror financing as a main focus area. This was broadened in 2012, to include restricting the funding of weapons of mass destruction.
• The FATF currently has 39 members. The decision making body of the FATF is known as its plenary, which meets thrice a year. Its meetings are attended by 206 countries of the global network, including members, and observer organisations, such as the World Bank, some offices of the United Nations and regional development banks.

Working of FATF

• The FATF sets standards or recommendations for countries to achieve in order to plug the holes in its financial system and make it less vulnerable to illegal financial activities.
• According to the last update in 2012, FATF has 49 consolidated recommendations for countries to follow in order to set up an Anti-Money Laundering/Combating the Financing of Terrorism (AML/ CFT) regime.
• The FATF conducts regular peer-reviewed evaluations called Mutual Evaluations (ME) of countries, starting with member countries, to check their performance on standards prescribed by it. The reviews are carried out by FATF and FATF-Style Regional Bodies (FSRBs), which then release Mutual Evaluation Reports (MERs). For the countries that don’t perform well on certain standards, the FATF and FSRBs draw up time-bound action plans to fight financial crimes.
• The FATF recommendations for countries range from assessing risks of crimes to setting up legislative, investigative and judicial mechanisms to pursue cases of money laundering and terror funding.

What are FATF’s ‘grey’ and ‘black’ lists?

At the end of every plenary meeting, FATF comes out with two lists of countries.

1. The Grey countries are those that are “actively working” with the FATF to counter criminal financial activities. In their cases , the watchdog does not tell other members to carry out due-diligence measures vis-a-vis the listed country but does tell them to take into account the risks such countries possess.
   • Currently, there are 23 countries on the grey list, with one new addition and one removal. The United Arab Emirates was added to the list at the end of this plenary meet while Zimbabwe was taken off it. Besides, some of the other countries on the list are Pakistan, Myanmar, Morocco, Philippines, Panama, Senegal, Albania, Jamaica and Turkey.
2. As for the black list, it means countries designated by the FATF as ‘high-risk jurisdictions subject to call for action’. In this case the countries have considerable deficiencies in their AML/CFT regimens. For such countries, the body calls on members and non-members to apply enhanced due-diligence and in the most serious cases, apply counter-measures such as sanctions. Currently, two countries- North Korea and Iran are on the black list.

Being listed under the FATF’s two lists makes it difficult for countries to get aid from organisations like the International Monetary Fund (IMF), Asian Development Bank (ADB) and the European Union. According to an IMF study, it may also affect capital inflows, foreign direct investments and portfolio flows in the country.

The Hindu link

https://www.thehindu.com/news/international/the-lists-of-the-fatf-and-pakistans-position/article65200676.ece#:~:text=Besides%2C%20some%20of%20the%20other,subject%20to%20call%20for%20action‘.

Question- Write a short note on Financial Action Task Force and its operations in prevention of money laundering and terrorism financing.