The Financial Action Task Force (FATF) recently gave Pakistan a temporary respite as it announced that the country could be potentially removed from its grey list. The decision will be taken at the upcoming plenary session in Berlin in October. Pakistan has been on this list consistently since June 2018. This article provides an understanding of what the FATF is, its structure and operation, along with the significance of the grey list and its implications for countries like Pakistan.
About the Financial Action Task Force (FATF)
The FATF is an inter-governmental body established in July 1989 after a G-7 Summit in Paris. Its primary aim was to set international standards to prevent global financial crimes that aid terrorism. Initially, it concentrated on developing strategies to combat money laundering. However, after the 9/11 attacks, it broadened its scope in October 2001 to include efforts to counteract terrorist financing. In 2012, the FATF extended its mandate further to address the financing of proliferation of weapons of mass destruction.
Mandate and Recommendations
The FATF has developed a set of recommendations, known as the FATF Standards, which ensure a coordinated global response to prevent organized crime, corruption, and terrorism. Over 200 jurisdictions globally have committed to these recommendations through nine FATF-Style Regional Bodies (FSRBs) and FATF memberships.
Composition and Headquarters
Currently, the FATF comprises 37 member jurisdictions and two regional organizations, the European Commission and the Gulf Cooperation Council. These represent most major financial centers worldwide. India has been a member of the FATF since 2010, also aligning with its regional partners, the Asia Pacific Group (APG), and the Eurasian Group (EAG). The FATF Secretariat is situated at the Organization for Economic Cooperation and Development (OECD) headquarters in Paris.
FATF Lists: Grey and Black
The FATF maintains two lists – grey and black. Countries perceived as safe havens for supporting terror funding and money laundering are included in the grey list. The black list, also known as the list of Non-Cooperative Countries or Territories (NCCTs), consists of countries seen as aiding terror funding and money laundering activities.
Understanding the ‘Grey List’
The ‘grey list’ is essentially a watchlist where FATF puts countries under increased monitoring to verify if they are taking necessary measures against money laundering and terrorism financing. This list includes 23 countries as of March 2022, including Pakistan, Syria, Turkey, Myanmar, Philippines, South Sudan, Uganda, and Yemen.
Removal from the Grey List
For a country to be removed from the grey list, it must fulfill the tasks recommended by the FATF, such as confiscating properties associated with terrorist groups. If FATF is satisfied with a country’s progress, it removes it from the list. For instance, Zimbabwe was recently removed from the grey list after implementing successful measures to strengthen its Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regime.
Pakistan’s Inclusion in the Grey List
Pakistan first entered the grey list in 2008 and then again from 2012 to 2015. Since 2018, it has remained on the list. After being placed on the ‘Grey List’ in June 2018, the FATF issued Pakistan a 27-point action plan to curb money laundering and terror financing.
The Impact of Grey-listing on a Country
Being grey-listed signals to the global financial and banking system an increase in transaction risks with the respective country. Generally, such countries also face complications accessing international lending instruments, given that major financial institutions like the IMF and World Bank are affiliated with FATF as observers. For example, Pakistan, with its struggling economy and low foreign exchange reserves, has had to comply with the FATF’s action to secure a USD 6 billion IMF loan contract.