Financial Action Task Force (FATF)

• FATF is an intergovernmental body dedicated to combating money laundering and terrorist financing.
• Objective: To establish international standards, and to develop and promote policies, both at national and international levels, to combat money laundering and the financing of terrorism.
• Origin:
  • It was established in 1989 during the G7 Summit in Paris to develop policies against money laundering.
  • In 2001, its mandate expanded to include terrorism financing.
  • Headquarters: Paris, France.

FATF Regional Bodies: 

• These are 9 regional bodies established for the purpose of disseminating the International standards on combating money laundering, financing of terrorism, & proliferation.

Key Role: 

• It is international watchdog to combat money laundering, terrorist financing, and other related threats to international financial system
• It sets the standards for countries and regulated entities (both financial and non-financial).
• FATF has also launched ‘project on unintended consequences’ which includes a focus on financial exclusion.
• Members:
  • To become a member, a country must be considered strategically important (large population, large GDP, developed banking and insurance sector, etc.), must adhere to globally accepted financial standards, and be a participant in other important international organizations.
  • FATF members include 39 countries:- 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 joined with ‘observer’ status in 2006 and became a full member of FATF in 2010.  
  • Once a member country or organization must endorse and support the most recent FATF recommendations, commit to being evaluated by other members.
  • The FATF holds countries to account that do not comply with the FATF Standards.
  • If a country repeatedly fails to implement FATF Standards, then it can be named a Jurisdiction under Increased Monitoring or a High-Risk Jurisdiction. These are often externally referred to as “the grey and black lists”.

What are FATF 'grey list' and 'blacklist'?

• Black List: Countries known as Non-Cooperative Countries or Territories are put on the blacklist. These countries support terror funding and money laundering activities. The FATF revises the blacklist regularly, adding or deleting entries. Three countries-North Korea, Iran, and Myanmar are currently in FATF’s blacklist.
• Grey List: Countries that are considered a safe haven for supporting terror funding and money laundering are put on the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist. 
• Consequences of being on the FATF blacklist:
  • No financial aid is given to them by the International Monetary Fund (IMF), the World Bank, the Asian Development Bank (ADB), and the European Union (EU).
  • They also face a number of international economic and financial restrictions and sanctions.

Challenges before FATF

Emerging source of terrorism financing: 

• The rise of cryptocurrencies and other virtual assets has provided terrorists with new avenues to transfer funds anonymously and internationally.
• However, there still exist lack of action against terrorism and terrorist financing emanating from territories under its control.

Lack of impartiality: 

• FATF makes decisions by consensus, and there are no formal rules about how many members must object to reject a resolution or prevent a country from being added to the gray list.

Weaknesses in the listing regime: 

• The grey list makes no distinction between jurisdictions that lack the technical or administrative capacity needed to implement the FATF recommendations and those that have the capacity but are unwilling to do so.

Lack of effectiveness: 

• FATF relies on assurances without considering actual performance. For example, Pakistan was removed from the grey list because it technically implemented FATF recommendations. 
• However, the lack of action against terrorism and terrorist financing emanating from territories under its control still exists.