FATF: Pakistan On Greylist- UPSC Current Affairs

Here is our today's edition of Current Affairs Dialog Box wherein we will talk about FATF: Pakistan on Greylist and its relevance from UPSC Preparation.

For Prelims: Current Events of National and International Importance.

For Mains: Bilateral, Regional, and Global Groupings and Agreements involving India and/or affecting India’s interests. 

Why in the News?

Recently, 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’.

Probable Question

To what extent the global financial crime watchdog Financial Action Task Force (FATF) has been successful in its mandate? Suggest measures to improve its functioning.

Key Points

Background

Formation of Financial Action Task Force (FATF):

• 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 the main focus area. 
• This was broadened in 2012, to include restricting the funding of weapons of mass destruction.

Image Source: Hindustan Times

About Financial Action Task Force (FATF)

• The FATF is an inter-governmental body established in 1989.
• Headquarters: Paris
• Membership: The FATF currently has 39 members including two regional organizations — the European Commission and Gulf Cooperation Council.
  • India is a member of the FATF consultations and its Asia Pacific Group.
• It aimed to combat money laundering, terrorist financing, and other related threats to the integrity of the international financial system.
•  It lays down international standards with an objective to prevent money laundering and terror financing. 
• FATF depends on the voluntary implementation of its reports by member countries.
• India became an observer in the grouping in 2006 and was inducted as a full member in 2010.

Also Read: Pakistan is OFF FATS Grey List

Organizational Framework

• The decision-making body of the FATF is known as its plenary, which meets thrice a year — in February, June, and October.
• Its meetings are attended by 206 countries of the global network, including members, and observer organizations, such as the World Bank, some offices of the United Nations, and regional development banks.

How does the FATF do its work?

• The FATF sets standards or recommendations for countries to achieve in order to plug the holes in their 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.

Recommendations of FATF

• 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?

• While the words ‘grey’ and ‘black’ list do not exist in the official FATF lexicon, they designate countries that need to work on complying with FATF directives and those who are non-compliant, respectively.
• At the end of every plenary meeting, FATF comes out with two lists of countries:
  • The Grey List Countries:
    • These are the countries 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. Some of the other countries on the list are: Pakistan, Myanmar, Morocco, Philippines, Panama, Senegal, Albania, Jamaica and Turkey.
• The Black List Countries:
  •  These are the countries which are 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.

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Why is Pakistan on the Grey List?

• The case of Pakistan is significant as it has found itself on the grey list frequently since 2008, for weaknesses in fighting terror financing and money laundering. 
• Through 2009, the FATF reaffirmed its designation of Pakistan in the grey list, as the country began to cooperate with the FATF-like regional body, Asia Pacific Group (APG), for a Mutual Evaluation (ME) process.
• Due to significant progress made by Pakistan by early 2015, Pakistan was no longer on the grey list.
  • However, it came back to the list in 2018, and was given an action plan to restrict terror financing activities and monitor the actions of UN designated terrorists in the country.
• In October 2019, Pakistan was warned by FATF for addressing only five out of the 27 tasks given to it in controlling funding to terror groups like the Lashkar-e-Taiba, Jaish-e-Mohammad and Hizbul Mujahideen, responsible for a series of attacks in India
• In June 2021, however, Pakistan was given another seven-point action plan by the APG, focused specifically on combating money laundering. 
• During the latest meeting that concluded on March 4, Pakistan informed that it had completed 32 of the total 34 action items in the two plans and was told to complete the rest at the earliest.
• The FATF appreciated Pakistan’s commitment to fight financial crimes and said that the country now aims to complete the 2021 action plan by January 2023.

Implications of Listing of Countries on FATF

• Being listed under the FATF’s two lists makes it difficult for countries to get aid from organizations 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.

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