From UPSC perspective, the following things are important :
Prelims level : FATF
Mains level : Terror financing and money laundering
Pakistan which continues to face an economic crunch from the Financial Action Task Force (FATF), is hoping for some respite in the form of its removal from the FATF’s ‘grey list’.
What is the FATF?
- The FATF is an international watchdog for financial crimes such as money laundering and terror financing.
- It was established at the G7 Summit of 1989 in Paris to address loopholes in the global financial system after member countries raised concerns about growing money laundering activities.
- In the aftermath of the 9/11 terror attack on the US, FATF also added terror financing as a main focus area.
- This was later broadened to include restricting the funding of weapons of mass destruction.
- The FATF currently has 39 members.
Working of FATF
- The decision-making body of the FATF, known as its plenary, meets thrice a year.
- Its meetings are attended by 206 countries of the global network.
- It includes members, and observer organisations, such as the World Bank, some offices of the UN, and regional development banks.
Functions of FATF
- The FATF sets standards or recommendations for countries to achieve in order to plug the holes in their financial systems and make them less vulnerable to illegal financial activities.
- It conducts regular peer-reviewed evaluations called Mutual Evaluations (ME) of 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, time-bound action plans are drawn up.
- 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 the Black List and the Grey List?
- The words ‘grey’ and ‘black’ list do not exist in the official FATF lexicon.
- They however designate countries that need to work on complying with FATF directives and those who are non-compliant.
- Black List: The blacklist, now called the “Call for action” was the common shorthand description for the FATF list of “Non-Cooperative Countries or Territories” (NCCTs).
- Grey List: Countries that are considered safe haven for supporting terror funding and money laundering are put in the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist.
Consequences of being:
(1) In the grey list:
- Economic sanctions from IMF, World Bank, ADB
- Problem in getting loans from IMF, World Bank, ADB and other countries
- Reduction in international trade
- International boycott
(2) In the black list:
- High-risk jurisdictions subject to call for action
- Countries have considerable deficiencies in their AML/CFT (anti-money laundering and counter terrorist financing) regimens
- Enhanced due diligence
- Members are told to apply counter-measures such as sanctions on the listed countries
Note: Currently, North Korea and Iran are on the black list.
Pakistan and FATF
- Pakistan, which continues to remain on the “grey list” of FATF, had earlier been given the deadline till the June to ensure compliance with the 27-point action plan against terror funding networks.
- It has been under the FATF’s scanner since June 2018, when it was put on the Grey List for terror financing and money laundering risks.
- FATF and its partners such as the Asia Pacific Group (APG) are reviewing Pakistan’s processes, systems, and weaknesses on the basis of a standard matrix for anti-money laundering (AML) and combating the financing of terrorism (CFT) regime.
Why is Pakistan on the grey list?
- Pakistan has found itself on the grey list frequently since 2008, for weaknesses in fighting terror financing and money laundering.
- It never addressed concerns on the front of terror financing investigations and prosecutions targeting senior leaders and commanders of UN-designated terrorist groups.
- However, now steps had been taken in this direction such as the sentencing of terror outfit chief Hafiz Saeed, prosecution of Masood Azhar and seizure of their properties.
- India meanwhile, a member of FATF, suspects the efficacy and permanence of Pakistani actions.
Steps taken by Pakistan
- Pakistan is currently banking on its potential exclusion from the grey list to help improve the status of tough negotiations with the International Monetary Fund to get bailout money.
- Pakistan is now making a high-level political commitment to the FATF and APG to address its strategic AML/CFT deficiencies.