Banking Article, Banking Finance 2022, Banking Finance April 2022

Financial Action Task Force : Achievements and challenges

Task force FATF is the money laundering and terrorist financing watchdog. 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. It monitors countries to ensure implementation of FATF standards fully and effectively.

Formation on of FATF

The FATF was established in 1989 by a group of seven ( G- 7 ) summit in Paris. The G-7 is an organisation made up of the world’s seven largest advanced economy i.e. Canada, France, Germany, Italy Japan, the United Kingdom and the United States. FATF’s  initial aim was only to examine and develop measures to combat money laundering. After the 9/11 terror attacks in the US in 2001, the FATF expanded its mandate to incorporate efforts to combat terrorist financing, in addition to money laundering. In 2012 it added efforts to counter the financing of proliferation of weapons of mass destruction.

Composition and participation of FATF

FATF members are the jurisdictions and organizations that have agreed to work together in the form of a task force towards to common objective laid out in this mandate. As of January 2021, FATF has 39 members including two regional organizations – the European Commission and the Gulf Cooperation council.

Associate Members of FATF

Associate members are FATF Style Regional Bodies ( FSRBs), as designated by the FATF, that participate in the work of the FATF, to achieve global implementation of the FATF recommendations the FATF relies on FSRBs in addition to it’s own 39 members. The nine  FSRBs have an essential role in promoting the effective implementation of the FATF recommendations in their member jurisdictions. Asia/Pacific group on money Laundering (APG)  and Eurasian Group on combating money laundering and financing of terrorism ( EAG ) are examples of FATF Associate Members.

Focusing on participation of International institutions in the FATF

International Monetary Fund and the World Bank play a special role in the development, promotion and dissemination of measures for combating money laundering and the financing of terrorism and other related threats. The FATF works closely with the United Nations and the Egmont group of Financial Intelligence Units. The Egmont group is a united body of 166 financial intelligence units based in Torrento, Canada.

Observers

The decision as to whether a body may participate as an observer to the FATF is taken by the plenary.Observer have a stated role related to the combating money laundering and the financing of terrorism and proliferation.

Organisational  structure of the institution.

The Plenary

  • The FATF plenary consists of member jurisdiction and organisations.

The plenary is the decision making body of the FATF. It’s decisions are taken by consensus. The President convenes at least three plenary meeting every calendar year, normally in February, June and October.

The President and a Vice-President

  • The President is appointed by the plenary from amongst it’s members for a term of two years non- renewable.
  • The Vice-Principal is also appointed for two years, who assists the President in carrying out its responsibilities.

The Steering Group

  • The FATF, steering group is an advisory and is chaired by the President.

The Sacretariat

  • The FATF Sacretariat is composed of an Executive Secretery, whom the Plenary appoints at the proposal of the President and the Sacretariat staff.
  • The Sacretariat service is provided by the OECD and the sacretariat is located at the OECD headquarters in Paris.

Objectives and functions

  • To set standards of legal regulatory and operational measures for combating money laundering terrorist financing and other related threats to the integrity of the international financial system.
  • To promote effective implementation of the FATF recommendations globally.
  • To monitor countries progress in implementing the FATF recommendations.
  • To review money laundering and terrorist financing techniques and counter measures.

FATF : 40 + 9 recommendations

  • In 1990, the FATF issued a report containing a set of 40 recommendations.
  • To provide a comprehensive plan of action needed to fight against money laundering. In 2001 the FATF issued the eight special recommendations to deal with the issue of tourist financing.
  • Three years later a 9th recommendation was added together they are known as the 40 + 9 recommendations. They have been expanded to deal with the new threats such as the financing of proliferation of weapons of mass destruction and to be clear on transparency and tougher on corruption FATF has outlined the criteria for evaluating whether its standards are achieved in participating countries.

Focus on FATF’s list, the black list and grey list.

Black List : High risk jurisdictions subject to a call for action have strategic deficiencies in their regimes to counter money laundering, terrorist financing and financing of proliferation.

This list is often externally referred to as the blacklist. The first FATF blacklist was issued in 2000 with an initial list of 15 countries as of January 2021, Democratic People’s Republic of Korea or known as North Korea and Iran are the only two countries identified as high risks jurisdictions by FATF.

Consequences for black list countries

Firms, organisations and nations are called upon to apply counter measures to protect the International Financial system from the ongoing money laundering, terror financing and proliferation financing risks emanating from the blacklisted country.

A jurisdiction placed on the FATF black list often found itself under intense financial and diplomatic pressure which has a crippling effect on the economy.

Grey List

A country is placed under the FATF Grey list. It means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monetary. This inclusion serves as a warning to the country that it may enter the blacklist.

This list is often externally referred to as the grey list. Pakistan has been on the FATF’s gray list since June 2018. Consequences for grey listed countries. Problems in getting loans from IMF, World Bank, ADB and other countries. NGOs and businesses in such countries find it difficult to access funds due to strict FATF criteria reduction in international trade and set back to diplomatic prestige.

Now looking at the relationship between India and FATF. India became an observer at FATF in 2006. In 2010, India was taken in as the 34th country member of FATF. Recent reforms and actions undertaken by India in line with the objectives of FATF include

  • Anti Black Money Act 2015,
  • Fugitive Economic Offenders Act, 2018,
  • Amendments brought in the prevention of money Laundering Act, ( PMLA ) over the years,
  • Enactment of the GST ( Goods and Services Tax ),
  • New protocols to better regulate suspect transactions in banks and financial intermediaries
  • Demonitisation of 2016,

In India, the Enforcement Directorate ( ED) is the nodal agency to undertake investigations under the    PMLA and FATF conducts a review of India’s anti-money anti money laundering and terrorist financing regime as part of regular review cycle.

Achievements of FATF

  • Raised international awareness towards state and  institutional funding
  • Push for non-profit  organization (NPOs) for more financial transparency to make sure that they do not become easier for terrorist organisations to launder money through the organizations.
  • Harmonisation of legislation and enforcement efforts through effective checks and coordination against money laundering and terrorism financing.
  • Flexibility in response to new threats like use of cryptocurrencies for money laundering.
  • Adoption of the mutual evaluation process which advanced peer pressure on defaulting members.

Challenges in FATF’s functioning:

  • Nearly two-thirds of countries assessed are still not taking effective action to investigate and prosecute terrorist financing.
  • No real power to punish states that do not comply with their standards.
  • Fears of becoming hostage to International political rivalries.
  • The present categorisation of lists – grey and black- may be too rigid to effectively address the challenges of terror financing and money laundering.
  • The grey list has very low economic or political cost as compared to the blacklist which has lead to a high threshold and barrier in talking effective action capacity constraints of countries and inadequate operational resources and assessment complexities in the implementation of FATF standards.

Following measures are suggested to make FATF more effective.

  • There is a need for more gradations between the grey and the blacklist as it may increase policy options and leverage.
  • More needs to be done in terms of regulatory enforcement mechanisms than another ‘name and shame’
  • New approach of measuring effectiveness rather than technical compliance to the recommendations needed.
  • More international cooperation is needed to strengthen FATF’s operational resources and efficiency.

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