Financial Action Task Force (FATF)

The Financial Action Task Force (on Money Laundering) (FATF), also known by its French name, Groupe d'action financière (GAFI), is an intergovernmental organization founded in 1989 on the initiative of the G7 to develop policies to combat money laundering. In 2001, its mandate was expanded to include terrorism financing. 

  • The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. 
  • With more than 200 countries and jurisdictions committed to implementing them. The  FATF has developed the FATF Recommendations, or FATF Standards, which ensure a coordinated global response to prevent organised crime, corruption and terrorism. They help authorities go after the money of criminals dealing in illegal drugs, human trafficking and other crimes. The FATF also works to stop funding for weapons of mass destruction. 
  • The FATF reviews money laundering and terrorist financing techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets,  which have spread as cryptocurrencies 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.


WHAT DOES THEY DO? 

  • The Financial Action Task Force (FATF) was established in July 1989 by a Group of Seven (G-7) Summit in Paris, initially to examine and develop measures to combat money laundering. Click here to see the Economic Declaration from that G-7 Summit. 
  • 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. 
  • Since its inception, the FATF has operated under a fixed life-span, requiring a specific decision by its Ministers to continue. Three decades after its creation, in April 2019, FATF Ministers adopted a new, open-ended mandate for the FATF. 
  • The objectives of the FATF are 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.  Starting with its own members, the FATF monitors countries' progress in implementing the FATF Recommendations; reviews money laundering and terrorist financing techniques and counter-measures; and promotes the adoption and implementation of the FATF Recommendations globally. 

Functions: 

The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures and promotes the adoption and implementation of appropriate measures globally. In collaboration with other international stakeholders, the FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse. 

FATF President 

The FATF President is a senior official appointed by the FATF Plenary from among its members for a term of one year (see also FATF Presidencies since 1989). 

The term of the President begins on 1 July and ends on 30 June of the following year. The  President convenes and chairs the meetings of the FATF Plenary and the Steering Group, and he/she oversees the FATF Secretariat. 

FATF Vice-President 

The FATF Vice-President is appointed by the Plenary from among its members for a term of two years. The Vice-President assists the President in carrying out his/her responsibilities and stands in for the President when necessary.

FATF Secretariat 

  • The FATF Secretariat is a highly motivated, multicultural and dedicated team of professional support staff and experts from all over the world.  
  • It brings together individuals from 15 countries, with 10 languages, and many years’  experience and expertise from law enforcement and intelligence agencies, financial intelligence units, policy advisors and the legal profession. 
  • The FATF Secretariat is located at the OECD headquarters in Paris.  


History of the FATF 

  • In response to mounting concern over money laundering, the Financial Action Task  Force on Money Laundering (FATF) was established by the G-7 Summit that was held in  Paris in 1989. 
  • Recognising the threat posed to the banking system and to financial institutions, the G-7  Heads of State or Government and President of the European  
  • The commission convened the Task Force from the G-7 member States, the European  Commission and eight other countries.

FATF Recommendations 

  • The Task Force was given the responsibility of examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering. In April 1990, less than one year after its creation, the FATF issued a  report containing a set of Forty Recommendations, which were intended to provide a  comprehensive plan of action needed to fight against money laundering. 
  • In 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF. In October 2001 the FATF issued the Eight Special  Recommendations to deal with the issue of terrorist financing. The continued evolution of money laundering techniques led the FATF to revise the FATF standards comprehensively in June 2003. In October 2004 the FATF published a Ninth Special  Recommendations, further strengthening the agreed international standards for combating money laundering and terrorist financing - the 40+9 Recommendations. 

o Implement relevant international conventions 

o Criminalise money laundering and enable authorities to confiscate the proceeds  of money laundering 

o Implement customer due to diligence (e.g., identity verification), record keeping  and suspicious transaction reporting requirements for financial institutions and  designated non-financial businesses and professions 

o Establish a financial intelligence unit to receive and disseminate suspicious  transaction reports, and 

o Cooperate internationally in investigating and prosecuting money laundering 

  • In February 2012, the FATF completed a thorough review of its standards and published the revised FATF Recommendations. This revision is intended to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass destruction, and to be clearer on transparency and tougher on corruption. The 9  Special Recommendations on terrorist financing have been fully integrated with the measures against money laundering. This has resulted in a stronger and clearer set of standards.

FATF Activities 

  • The organisation monitors its member countries on the progress they have made in implementing reform measures and reviews their counter-measures to money laundering and terror financing. 
  • The decision-making body of FATF is called the FATF Plenary. It meets three times annually. 
  • The organisation included combating terror financing among its objectives after the  September 11 terror attacks on the USA in 2001. 
What are the Blacklist and Grey list? 
  • FATF maintains two different lists of countries: those that have deficiencies in their  AML/CTF regimes, but they commit to an action plan to address these loopholes and those that do not end up doing enough. The former is commonly known as the grey list and the latter as a blacklist. 
  • Once a country is blacklisted, FATF calls on other countries to apply enhanced due diligence and countermeasures, increasing the cost of doing business with the country and in some cases severing it all together. As of now, there are only two countries in the blacklist — Iran and North Korea — and seven on the grey list, including Pakistan, Sri  Lanka, Syria and Yemen. 

FATF Blacklist 

  • Officially called the “Non-Cooperative Countries or Territories (NCCTs), the FATF Blacklist is a list of countries which the FATF considers to be non-cooperative in the international fight against terrorist financing and money laundering.  
  • This list is regularly updated, with countries being either deleted off the list of new countries being added to the list.  
  • It is to be noted that some names are on the list not because of their non-cooperative stance towards fighting this menace, but because they lack the necessary infrastructure and mechanisms to engage in this fight. 

Pakistan’s status 

  • Pakistan has been under the FATF’s scanner since June 2018, when it was put on the greylist for terror financing and money laundering risks, after an assessment of its financial system and law enforcement mechanisms. 
  • In June 2018, Pakistan gave a high-level political commitment to work with the FATF and the Asia Pacific Group (APG) to strengthen its anti-money laundering/combating the financing of terrorism (AML/CFT) regime.  

o Based on this commitment, Pakistan and the FATF agreed on the monitoring of  27 indicators under a 10-point action plan, with deadlines.

  • Successful implementation of the action plan and its physical verification by the APG  will move Pakistan out of the greylist; failure by Pakistan will result in its blacklisting by  September 2019. 
  • FATF wants to see effective implementation of targeted financial sanctions against all  terrorists designated under UN Security Council Resolutions 1267 and 1373. 
  • The Joint Group of the APG has recently informed Pakistan that the country’s compliance on 18 of the 27 indicators is unsatisfactory, though the FATF has agreed that there have been improvements in the AML/CFT regime and the integrated database for currency declaration arrangements. 
  • At least three votes (out of 36) would be needed to block a move to blacklist Pakistan.  Pakistan may make a diplomatic push to thwart blacklisting. 

FATF’s latest Review of Pakistan 

  • Pakistan addressed only 5 of the 27 tasks given to it to control funding to terror groups like the Lashkar-e-Taiba and Jaish-e-Mohammad — both responsible for a series of attacks in India. 
  • The FATF noted the insufficiency of Pakistan’s implementation as “serious concerns”. 
  • The latest decision to keep the country in ‘Grey List’ means that Pakistan has been given time until February 2020 to fulfil its commitments or risks being blacklisted.
  • The main purpose behind the decision is to not punish rather than incentivise, to make the required changes and make them faster. 

Impact of being Blacklisted 

  • Pakistan’s $6 billion loan agreement with the International Monetary Fund (IMF) could  be threatened. 
  • Pakistan faces an estimated annual loss of $10 billion if it stays in the greylist; if blacklisted, its already fragile economy will be dealt with a powerful blow. 

India’s Role 

  • India is a voting member of the FATF and APG, and co-chair of the Joint Group.
  • India was not part of the group that moved the resolution to greylist Pakistan in 2018 in  Paris. The movers were the US, UK, France, and Germany and China did not oppose.
  • As of now, India is pushing for Pakistan to be blacklisted. 
  • There is also an opinion that by keeping Pakistan in the grey list one can continue to  pressure the country as well as scrutinise its actions 
  • The country is facing a number of economic challenges with its economy expected to grow at 3.3 % in 2019 and 2.6% in 2020, according to the IMF.  
  • Inflation is set to touch 7.3% in 2019, up from 3.9% in 2018, and rise to 13% in 2020. 
  • The fiscal deficit is projected at 7.1% of GDP in 2020, the highest in the last seven years.

EFFECT OF FATF 

  • The effect of the FATF Blacklist has been significant and arguably has proven more important in international efforts against money laundering than has the FATF  Recommendations.  
  • While, under international law, the FATF Blacklist carried with it no formal sanction, in  reality, a jurisdiction placed on the FATF Blacklist often found itself under intense  financial pressure 
  • The FATF began to become a big figure shortly after the 9/11 attacks to help combat the financing of terrorist organizations.  
  • FATF makes sure funds are not easily accessible by terror organizations that are causing these crimes against humanity.  
  • FATF has helped to fight against corruption by ‘grey-listing’ countries that do not meet  Recommended Criteria and this helps to cripple economies and states that are aiding  terrorist and corrupt organizations 
  • FATF continues to work with other monetary agencies to control terrorist finance activity and to bring an end to illegal financial organizations, terrorism and corruption.  
  • FATF has made it difficult for NGOs in countries to access funds to aid in relief situations due to strict FATF criteria.  
  • FATF criteria have mainly impacted NGOs that are located in Middle Eastern and terror-ridden countries.  
  • Some argue that the FATF Recommendations do not specifically set out restrictions for  NGOs which often results in them going against FATF Recommendation.

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Blog Post written by:
Anurag Trivedi
UPSC Mentor