Financial Action Task Force (FATF)

Financial Action Task Force (FATF)

 

Basics and Background
  • The Financial Action Task Force (FATF) is an inter-governmental decision-making body. It wasestablished in 1989 during the G7 Summit in Paris to develop policies against money laundering and its Secretariat is located in Paris.
  • It brings national legislative and regulatory reformsin money laundering and it also works to stop funding for weapons of mass destruction.
  • The FATF reviews money laundering and terrorist financing techniquesand continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as crypto currencies gain popularity.
  • The FATF monitors countries to ensure they implement the FATF Standards fully and effectively and holds countries to account that does not comply with the standards.
  • India became an Observer at FATF in 2006.Since then, it had been working towards full-fledged membership. On June 25, 2010, India was taken in as the 34th country member of FATF.

 

Objectives of FATF:
  • To set standards and promote effective implementationof legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

 

Roles and Functions:
  • Initially it was established to examine and develop measures to combat money laundering.
  • In October 2001, the FATF expanded its mandate to incorporate efforts to combat terrorist financing, in addition to money laundering.
  • In April 2012, it added efforts to counter the financing of proliferation of weapons of mass destruction.

 

FATF On Terror Financing:
  • FATF’s role in combating terror financing became prominent after the 9/11 terror attacks in the US. In 2001 its mandate expanded to include terrorism financing.
  • Financing of terrorism involves providing money or financial support to terrorists.
  • As of 2019, FATF has blacklisted North Korea and Iran over terror financing and 12 countries are in the grey list, namely: Bahamas, Botswana, Cambodia, Ethiopia, Ghana, Pakistan, Panama, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen.

 

Lists of FATF:

 

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.
Black List:  §  Countries known as Non-Cooperative Countries or Territories (NCCTs) are put in the blacklist. These countries support terror funding and money laundering activities. The FATF revises the blacklist regularly, adding or deleting entries.

 

FATF & Pakistan:
  • Pakistan has been on the FATF grey list since June 2018 and was asked to implement the FATF Action Plan fully by September 2019. It was in the same category from 2012 to 2015 too.
  • Pakistan’s inclusion in the grey list can be attributed to the fact that the country’s anti-terror laws are still not in line with FATF standards and also with the latest UN resolution 2462 that pitches for criminalising terrorist financing.
  • Multiple internationally designated terrorist groups operate from its soil.
  • Notable among them are the Afghan Taliban, Haqqani Network, Lashkar-e-Taiba (LeT) and Jaish-e-Mohammed (JeM).
  • Pakistan detained both Masood Azhar and Hafiz Saeed for ‘apprehension’ of breach of peace in response to degradation to the grey list. The FATF seeks freezing of funds, denial of weapons access and travel ban.
  • While there were some arrests of LeT, JeM, JuD cadres, they were all apprehended under the country’s Maintenance of Public Order Act and not the Anti-Terrorism Act, 1997.
  • Pakistan, which continues to remain on the Grey List of FATF, had earlier been given the deadline till the June 2020 to ensure compliance with the 27-point action plan against terror funding networks and money laundering syndicates, or face “black listing”.
  • However, owing to the Covid-19 pandemic, the deadline has been shifted to October 2020.

 

Things To Do For Pakistan:
  • To improve the mechanisms for curbing terror financing.
  • To amend laws to curb ‘Hawala’ transactions and placing sanctions against cash couriers who facilitate terror groups.
  • To complete the prosecution of groups banned by the UNSC.
  • To convert the madrassas run by these groups into formal schools.
  • Each item demands more accountability by Pakistan on terror groups.

 

Consequence Of FATF Grey List:
  • Economic sanctions from IMF, World Bank, ADB.
  • The problem in getting loans from the IMF, World Bank, ADB and other countries.
  • Reduction in international trade.
  • International boycott.

 

FATF’S View on Crime Amid Covid-19:
  • The FATF which is actively monitoring the impact of the pandemic on measures to combat illicit financing, released a paper on “Covid-19-related Money Laundering and Terrorist Financing Risks and Policy Responses”.
  • It observed an increase in the Covid-19 related crimes, including fraud,cyber-crime, misdirection or exploitation of government funds or international finance assistance.

 

Effectiveness of FATF In Curbing Money Laundering and Terror Financing:
  • Over a period of time the FATF has gained perceptible credibility as a professional organisation, which has succeeded in not only increasing awareness regarding the challenges being faced by the global financial system, but also human security issues like terrorism.
  • The FATF has been at the forefront of international efforts to fight money laundering and combating finance to terrorism. Its efforts have been in conjunction with relevant resolutions of the United Nations Security Council (UNSC).
  • It has gained considerable influence over the regulatory framework that deals with financial transactions, in an attempt to make it less liable to exploitation by both profiteers and terrorists.
  • Terrorist financing investigation and prosecution ensures that terrorist financing offences and activities are investigated and persons who finance terrorism are prosecuted and subject to effective, proportionate and dissuasive sanctions.
  • FATF has become one of the major factors for countries like Pakistan being pressurised to take requisite action against terrorists operating from its soil. Terrorist financing preventive measures & financial sanctions require that terrorists, terrorist organisations and terrorist financiers are prevented from raising, moving and using funds, and from abusing the non-profit sector.
  • The naming and shaming policy of the FATF has a corrective underlying principle. A country can be placed on a list and then removed thereafter on receipt of assurance from the highest political authority, along with a judgment on the progress made to implement the guidelines, has ensured an improvement in the overall CFT standards.

 

Pakistan Unlikely to Exit FATF’s Grey List:
  • Pakistanmight remain on the grey list of the Financial Action Task Force (FATF) as it has been unable to comply with 6 of the 27 points in the global watchdog’s action plan.
  • The FATF had placed Pakistan on the grey list in June 2018 and asked Islamabad to implement a plan of action to curb money laundering and terror financing by the end of 2019, but the deadline was extended later on due to the coronavirus pandemic.
  • However, the country has managed to avert being blacklisted.
  • The country had completed its legal formalities and informed the watchdog that it had managed to comply with 21 of the points in the action plan.
  • Pakistan has succeeded in making 20 per cent progress in the remaining six points of the action plan.

 

Way Forward:
  • As Pakistan has now been placed in the grey list, it will now have to provide a detailed 27 point action plan to curbing funding for UN-designated terrorist groups.
  • If Pakistan fails, FATF will be ‘black listing’ it, a move that could virtually cut all financial flows.
  • Pakistan has only completed about 21 points so far.
  • The developments at FATF have frustrated many in Pakistan.
  • But no political party seems capable of asking the military to end its support for terrorists.
  • As there seems to be a lack of a genuine effort to curtail terrorist activity, all major economies must be persuaded to boycott Pakistan.
  • While China might continue to aid Pakistan financially, its funding model thus far has been only increasing Pakistan’s debt burden.
  • Given its precarious foreign exchange position, Pakistan will inevitably have to seek a bailout from international organisations like IMF and World Bank.
  • Consensus needs to be strengthened for not providing concessional credits unless terror infrastructure is irrevocably dismantled.