The FATF and Pakistan’s position on its ‘grey list’

Context: Ahead of the plenary session of the Financial Action Task Force (FATF), in Berlin, Pakistan is hoping for a removal of its name from the FATF’s ‘grey list’ or the list of countries presenting a risk to the global financial system.

In its last plenary meeting in March, the FATF had retained Pakistan’s listing, asking it to expeditiously address the remaining deficiencies in its financial system.

What is FATF?

The Financial Action Task Force is an international watchdog for financial crimes such as money laundering and terror financing.

It was established at the G7 Summit of 1989 in Paris to address loopholes in the global financial system after member countries raised concerns about growing money laundering activities.

The FATF currently has 39 members.

The FATF sets standards or recommendations for countries to achieve in order to plug the holes in their financial systems and make them less vulnerable to illegal financial activities.

It conducts regular peer-reviewed evaluations called Mutual Evaluations (ME) of countries to check their performance on standards prescribed by it. The reviews are carried out by FATF and FATF-Style Regional Bodies (FSRBs), which then release Mutual Evaluation Reports (MERs).

For the countries that don’t perform well on certain standards, time-bound action plans are drawn up.

For more details: Read here.

What are FATF’s ‘grey’ and ‘black’ lists?

At the end of every plenary meeting, FATF comes out with two lists of countries.

Grey list: The grey countries are designated as “jurisdictions under increased monitoring”, working with the FATF to counter criminal financial activities.

For such countries, the watchdog does not tell other members to carry out due-diligence measures vis-a-vis the listed country but does tell them to consider the risks such countries possess.

The words ‘grey’ and ‘black’ list do not exist in the official FATF lexicon.

Black list: As for the black list, it means countries designated as ‘high-risk jurisdictions subject to call for action’.

In this case, the countries have considerable deficiencies in their AML/CFT (anti-money laundering and counter terrorist financing) regimens.

– In these cases, the FATF calls on members and non-members to apply enhanced due diligence. In the most serious cases, members are told to apply counter-measures such as sanctions on the listed countries.

Currently, North Korea and Iran are on the black list.

What is the impact of being on FATF’s grey or black list?

Being listed under the FATF’s lists makes it hard for countries to get aid from organisations like the International Monetary Fund (IMF), Asian Development Bank (ADB), and the European Union.

It may also affect capital inflows, foreign direct investments, and portfolio flows.

Why is Pakistan on the grey list?

Pakistan was retained on the grey list in March as it was yet to address concerns on the front of terror financing investigations and prosecutions targeting senior leaders and commanders of UN designated terrorist groups.

Steps have been taken in this direction by Pakistan, such as the sentencing of terror outfit chief Hafiz Saeed, prosecution of Masood Azhar, but India suspects the efficacy and permanence of these actions.

Pakistan has found itself on the grey list frequently since 2008, for weaknesses in fighting terror financing and money laundering.

Source: This post is based on the article “The FATF and Pakistan’s position on its ‘grey list’ ” published in The Hindu on 13th June 22.

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