The Financial Action Task Force FATF last year placed Pakistan on the grey list of countries whose domestic laws are considered weak to tackle challenges of money laundering and terrorism financing. The Financial Action Task Force (FATF) established in July 1989 by the Group of Seven (G-7) in Paris is celebrating its 30^th year in 2019.

What is FATF ?

The Financial Action Task Force (FATF) is an inter-governmental body established in on the initiative of the G7.  It is a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in various areas. The FATF Secretariat is housed at the OECD headquarters in Paris.

Objectives of Financial Action Task Force 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.

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. It maintains two different lists of countries as blacklist and grey list.

Blacklist and Greylist

• 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 grey list and 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.

Status of Pakistan

• Pakistan has been under the FATF’s scanner since June 2018, when it was put on the grey list 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.
• 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 grey list; 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.

Impact on Pakistan

• 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 grey list; if blacklisted, its already fragile economy will deal with a powerful blow.

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Role of India

• 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 grey list 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.