Updated Mar 30, 2022

What are Financial Action Task Force (FATF) and its role?

What are Financial Action Task Force (FATF) and its role?

The Financial Action Task Force (on Money Laundering) (FATF), also known as Groupe d'action financière (GAFI) in French, is an intergovernmental organization created in 1989 on the initiative of the G7 to develop policies to combat money laundering. In 2001, its scope was expanded to include terrorism financing.

FATF's mission is to develop standards and support the effective implementation of legal, regulatory, and operational measures to combat money laundering, terrorist financing, and other risks to the international financial system's integrity. FATF is a "policy-making group" tasked with generating the political will necessary to implement national legislative and regulatory reforms in these areas. FATF monitors member countries' progress in implementing its Recommendations through "peer reviews" ("mutual evaluations").

FATF has maintained the FATF blacklist (officially known as the "Call for Action") and the FATF greylist since 2000. (formally called the "Other monitored jurisdictions"). Financial institutions have shifted resources and services away from the named as a result of the blacklist. This has prompted domestic economic and political actors in the listed nations to put pressure on their governments to enact FATF-compliant policies.

FATF & Pakistan

Pakistan has been on the FATF grey list since June 2018 and has been given until September 2019 to completely follow the FATF Action Plan. From 2012 to 2015, it was in the same category. Pakistan's presence on the grey list is because the country's anti-terror laws are still in violation of FATF guidelines, as well as UN Resolution 2462, which calls for the criminalization of terrorist financing. In the past, Pakistan has detained both Masood Azhar and Hafiz Saeed on the grounds of "apprehension" of a violation of peace. The FATF wants finances frozen, weapons access denied, and travel restrictions imposed.

While several LeT, JeM, and JuD members were detained, they were all arrested under the country's Maintenance of Public Order Act, rather than the Anti-Terrorism Act of 1997.

The following are the consequences of being on the FATF's grey list:

• IMF, World Bank, and ADB economic sanctions
• Difficulty obtaining loans from the IMF, the World Bank, the Asian Development Bank, and other institutions
• International trade is being reduced.
• Boycott on a global scale

Origin of FATF

The Financial Action Task Force (FATF) was established by the G7 Summit in Paris in 1989 to fight the rising problem of money laundering. The task force was tasked with researching money laundering trends, monitoring legislative, financial, and law enforcement operations on a national and international level, reporting on compliance and issuing money laundering recommendations and guidelines. FATF had 16 members when it was founded, but by 2021, it had grown to 39. FATF published a report in its first year that included forty recommendations for combating money laundering more effectively. These guidelines were updated in 2003 to reflect changing money laundering patterns and strategies.

Following the September 11 terrorist attacks, the organization's mandate was expanded in 2001 to encompass terrorist financing.

Effects of FATF

The FATF has been praised for its success in influencing legislation and policies to prevent illegal financial flows. Through its public noncompliance list, the FATF encourages financial firms to relocate resources and services away from nations on the blacklist, resulting in stronger rules. As a result, domestic economic and political actors in the listed nations exert pressure on their governments to enact FATF-compliant policies.

The FATF Blacklist has had a considerable impact, and it is perhaps more important than the FATF Recommendations in worldwide efforts to combat money laundering. While the FATF Blacklist carries no legal consequence under international law, a territory put on the list frequently finds itself under severe financial pressure.

FATF's tough requirements have made it difficult for non-governmental organizations (NGOs) in countries to get cash to help in humanitarian crises. The FATF standards have primarily impacted NGOs in Middle Eastern and terror-torn countries. Some believe that because the FATF Recommendations do not expressly set forth constraints for NGOs, they frequently go against them.

Ronald Pol claims in a 2020 paper that while the FATF has been very successful in getting its policies adopted around the world, the actual impact of those policies is small: according to Pol's estimates, less than 1% of illegal profits are seized, with the costs of implementing the policies being at least a hundred times higher. Industry and governments, according to Pol, frequently ignore this, judging programs based on mostly irrelevant success criteria.

What are the reasons for blacklisting or greylisting countries?

The FATF has placed a country on its grey list that it deems to be a haven for terrorist financing and money laundering. Inclusion on the list, however, is not as serious as getting blacklisted. It serves as a wake-up call for the country to confront the issues at hand. If a country does not vigorously tackle money laundering or terrorist financing, it will be blacklisted. So far, Iran and North Korea are the only two countries that have been placed on a blacklist.

Pakistan accuses India of putting it on the FATF's blacklist.

The Pakistani government has filed a compliance report to the Financial Action Task Force on its 27-point action plan (FATF). Separate assessments are underway, and the results will determine whether Pakistan gets removed from the anti-money laundering watchdog's grey list. Imran Khan, Pakistan's prime minister, recently stated that his administration believes New Delhi is actively attempting to place Islamabad on the blacklist. Imran explained that the logic was straightforward. This would result in severe international penalties on Pakistan, effectively bankrupting Islamabad, which is now experiencing one of its worst economic crises in recent memory.

Conclusion

The FATF keeps track of its members' progress in putting relevant measures in place, examines money laundering and terrorist funding strategies and countermeasures, and advocates for the adoption and implementation of appropriate policies around the world.