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The lists of the FATF and Pakistan’s position

Why has the neighbouring country been repeatedly featured in the ‘grey list’ of the Financial Action Task Force?​


The story so far: 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’, asking the neighbouring country to expeditiously address the remaining deficiencies in its financial system. It has also added UAE to the list this time, which has promised to take “robust” actions in countering terror financing and money laundering.


What is the FATF?

The Financial Action Task Force is an international watchdog for financial crimes such as money laundering and terror financing. As per the official definition, it is an inter-governmental body that sets international standards that aim to prevent these illegal activities and the harm they cause to society.

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

The FATF currently has 39 members. The decision making body of the FATF is known as its plenary, which meets thrice a year. Its meetings are attended by 206 countries of the global network, including members, and observer organisations, 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 its 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.

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 countries are those 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, with one new addition and one removal. The United Arab Emirates was added to the list at the end of this plenary meet while Zimbabwe was taken off it. Besides, some of the other countries on the list are Pakistan, Myanmar, Morocco, Philippines, Panama, Senegal, Albania, Jamaica and Turkey.

As for the black list, it means countries 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.

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

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.

On completion of the ME in June 2010, Pakistan made a “high level political commitment” to the FATF and APG to address its strategic AML/CFT deficiencies. At the time the country did come up with a permanent legislation against money laundering, but was prescribed an action plan which required demonstrating adequate criminalisation of money laundering and terrorist financing as well as showing adequate measures to identify, freeze and confiscate terrorist assets.

Due to significant progress made by the country, 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 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.


 

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