Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog set up in 1989 out of a G-7 meeting of developed nations in Paris.
FATF is an inter-governmental organization established to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
The FATF is really a policy-making bodythat works with governments to bring about national legislation and regulatory reforms in these areas.
Initially, its objective was to examine and develop measures to combat money laundering.
After the 9/11 attacks on the US, the FATF in 2001 expanded its mandate to incorporate efforts to combat terrorist financing.
In April 2012, it added efforts to counter the financing of proliferation of Weapons of Mass Destruction (WMD).
Members and Observers of FATF:
As of today, it is a 39-member body representing most major financial centres in all parts of the globe.
Out of 39 members, there are two regional organisations: the European Commission, and the Gulf Cooperation Council,
Countries that are the members of FATF Include:
Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, ,Greece, Hong Kong (China), Iceland, India, Ireland, Israel, Italy, Japan, Republic of Korea, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Türkiye, the UK and the US.
India and FATF:India joined with ‘observer’ status in 2006 and became a full member of FATF in 2010.
India is also a member of its regional partners, the Asia Pacific Group (APG) and the Eurasian Group (EAG).
Indonesia is the only observer country of FATF.
Some important organisations that have observer status with the FATF include:
Asian Development Bank (ADB)
International Monetary Fund (IMF)
International Organisation of Securities Commissions (IOSCO)
Organisation for Economic Co-operation and Development (OECD)
United Nations Office on Drugs and Crime (UNODC)
United Nations Counter-Terrorism Committee Executive Directorate (UNCTED)
World Customs Organisation (WCO)
The FATF Secretariat is located at the OECD headquarters in Paris.
The Secretariat supports the substantive work of the FATF membership and global network.
The funding for the FATF Secretariat and other services is provided by the FATF annual budget to which members contribute.
The FATF Plenary is the decision making body of the FATF.
It meets three times per year.
The FATF President is a senior official appointed by the FATF Plenary from among its members.
S/He convenes and chairs the meetings of the FATF Plenary and the Steering Group, and oversees the FATF Secretariat.
S/He is the principal spokesperson for the FATF and represents the FATF externally.
The term of the President begins on 1 July and ends on 30 June two years after assuming office.
Grey and Black Lists of the FATF
The FATF Plenary meets tri-annually – in February, June and October, to take stock of “Mutual Evaluation Reports” (MERs) of the countries it reviews.
If a country appears to have major deficiencies in its AML/CFT regime, it is put on a list of “jurisdictions under increased monitoring” – “grey list” and if it fails to address FATF concerns, it is put on a “high-risk jurisdictions” list – “black list”.
AML/CFT refers to “Anti-Money Laundering/Combating the Financing of Terrorism”.
To be pulled out of the grey list, a country has to fulfill the tasks recommended by the FATF, for instance, confiscating properties of individuals associated with terrorist groups.
If the FATF is satisfied with the progress, it removes the country from the list.
Grey List: The Grey List includes countries that are considered safe haven for supporting terror funding and money laundering.
It serves as a warning that the country may enter the blacklist.
Black List: The Black List includes Non-Cooperative Countries or Territories (NCCTs) that support terror funding and money laundering activities.
As of now, Iran, North Korea and Myanmar are the three black listed countries.
Myanmar has been recently added to the list due to actions by the military leadership after the 2021 coup.
Consequences of Being Enlisted in FATF Lists: The enlisted countries are subjected to:
Economic sanctions from financial institutions affiliated with FATF (IMF, World Bank, ADB etc.)
Problem in getting loans from such financial institutions and countries
Reductions in international trade
India, Pakistan and FATF GreyListing:
Recently, the FATF removed Pakistan from the grey list lauding “Pakistan’s significant progress”.
The country was removed from the list after four years. It was first put on the list in 2008, removed in 2009 and before adding it again in 2018, it remained under increased monitoring from 2012 to 2015.
India agreed to the decision to take Pakistan off the list, as the latter had submitted “documentary evidence” of its actions against designated terrorists.
Being removed from the grey list, Pakistan essentially received a reputational boost and a clean bill of health from the international community on terrorist financing.
Issues Associated with FATF
The challenges associated with the adoption and implementation of FATF codes in member states include:
Difficulty in domestic coordination
Capacity constraints of countries
Inadequate operational resources
Assessment complexities in the implementation of FATF standards
The challenges associated with the implementation of new technologies for AML/CFT include:
Poor understanding of ML/TF (Money Laundering /Terror Funding) threats and risks.
Inability to adequately identify, assess and mitigate ML/FT risks.
Traditional risk assessment tools do not allow data to be analysed at a large scale, limiting the potential for correlations and analysis to generate a more fine-grained picture of the risks.
The other factors that encourage ML/TF include:
Lack of coordination between international organisations and the huge burden of legislations created
Weaknesses in national regulatory schemes
Informal transfer and movements of assets across national boundaries
High costs of implementing the risk approach for private non-state actors (financial and non-financial institutions)
What can be Done to Strengthen FATF?
Risk Assessment: The risk-based approach should be the cornerstone of an effective AML/CFT system, and is essential to properly managing risks. A robust knowledge and awareness of risks, which allows for the capacity to mitigate and address risks proportionately is crucial to the effective implementation of FATF Standards.
Data Sharing: A greater capacity to collect and process data, as well as share it among stakeholders, could offer significant advantages in combating ML/TF.
Application of Modern Technology: The application of machine learning and other Artificial Intelligence based tools which allow for real time, quick and more accurate data analysis may offer the solution to the above-mentioned issues.
FATF blacklist is a list of countries that are considered non-cooperative in the global effort to combat money laundering and the financing of terrorism. It is officially known as High-Risk Jurisdictions subject to a Call for Action.
It is officially referred to as Jurisdictions Under Increased Monitoring. The countries on this list may face economic sanctions from institutions like the IMF and the World Bank and experience adverse effects on trade.