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How Countries are Financially Protected on Global level?

How Countries are Financially Protected on Global level?

Understanding Financial Action Task Force with Apurva Joshi

  • What is Financial Action Task Force (FATF)? Who all are the members?

The Financial Action Task Force (FATF) is created to combat money laundering, terrorism financing, and other associated risks to the integrity of the global financial system. It is an intergovernmental organisation founded in 1989. The European Commission and the Gulf Cooperation Council are two regional organisations that are among the FATF’s 39 current members. India participates in the Asia Pacific Group and FATF discussions.

  • How does FATF work?

FATF is a policy-making body which designs international standards and a regulatory framework to fill up the existing gaps in the financial systems can be fixed. There are 40 recommendations of FATF which countries are mandated to follow. It conducts regular peer-reviewed evaluations called mutual evaluations of countries to check their performance on standards prescribed by it.

If a country is not following the rules or recommendations defined by FATF then it gives a time-bound action plan to that country to apply. Further, if a country fails to comply then as per the FATF rules, name of such country is mentioned in Lists published by FATF. FATF member countries are obliged to follow international conventions and UN resolutions related to counter-terrorism, money laundering and organized crimes. A nation must carry out the recommendations made by the FATF, such as seizing the property of those connected to terrorist organisations, to be removed from the grey list. The country is removed from the list if the FATF is pleased with the development.

Another aspect is big financial organizations like IMF and the World Bank also suggest countries to comply with FATF recommendations before giving loans. One such case is a USD 6 billion IMF loan agreement from July 2019 that made clear Pakistan’s need to follow the FATF’s action.

  • How does FATF classify country into their lists and what do these lists mean?

The FATF’s goals are to establish norms and encourage the efficient use of legal, regulatory, and operational measures to combat money laundering, terrorism financing, and other associated challenges to the integrity of the global financial system. It is mandatory for 200 member nations of FATF to comply with FATF standards and they have to implement standards in their laws. Moreover, they are also expected to follow international conventions, the UN resolutions as FATF keeps an eye on them.

FATF has recommended that every country should introduced anti-money laundering laws under which money- laundering should be criminalized. Another compulsory recommendation is to empower directorate authorities to attach seize properties or wealth generated by money laundering activities. Lastly, the countries are obligated to set up the Financial intelligence units (FIUs).

For example, In India, the Centre has written to the police departments of three states, asking them to nominate one officer each to oversee preparations for the FATF evaluation of India. India had submitted to a mutual evaluation of the country’s anti-money laundering regime and legal measures to check financial crimes by the FATF.

Agencies such as the Enforcement Directorate (ED) has done a large amount of work to counter money laundering operations in the country. Along with this, understanding the need to educate financial institutions and bankers, an India-based agency has introduced a Certified Anti-Money Laundering Expert Program which enables the Indian bankers to identify suspicious financial transactions. These certified members help financial institutions to identify the legitimate source of money and analyze suspicious transactions.

The FATF routinely notes nations with lax anti-money laundering and counter-terrorist funding policies. Through its following publications (List), the Financial Action Task Force routinely highlights nations as follow.

High-Risk Jurisdictions subject to a Call for Action (Black List) – The blacklist includes nations categorised as Non-Cooperative Countries or Territories (NCCTs). These nations aid in the financing of terrorism and the laundering of money.

Jurisdictions under Increased Monitoring (Grey List) – The FATF grey list includes nations that are seen as havens for terrorism financing and money laundering.

  • Presently, which countries are a part of FATF’s Grey and Black List?

There are 23 countries in FATF’s grey list, Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Democratic Republic of the Congo, Gibraltar, Haiti, Jamaica, Jordan, Mali, Morocco, Mozambique, Panama, Philippines, Senegal, South Sudan, Syria, Tanzania, Türkiye, Uganda, United Arab Emirates and Yemen. There are 3 countries on black list Myanmar, North Korea and Iran.

  • What kind of repercussions a country faces when it is listed in FATF’s Grey list?

A country’s inclusion on the FATF list alerts the international banking and financial system to higher risks when conducting business with that country. This is usually conducted through sharing the detail information with the global network of nine FATF-Style Regional Bodies (FSRBs) and FATF memberships, more than 200 governments worldwide have endorsed the FATF Recommendations. Therefore, inclusion of a country in the grey list stops Foreign Direct Investment inflows significantly. A country that is on the FATF’s “grey list” has difficulties obtaining international financing, even though major financial organisations like the IMF and World Bank are connected with FATF as observers.

If we take Pakistan as an example, Pakistan is included and excluded in the grey list 3 times, 2008-2010, 2012-2015 and 2018-2022. The country saw its biggest inflow in 2007, the year before it was included on the grey list for the first time, with a total of 3.67% of GDP, for the year. It fell in 2008, and the decline accelerated.

  • To come out of the list, what kind of steps these countries are expected to follow?

A nation must carry out the recommendations made by the FATF, such as seizing the property of those connected to terrorist organisations, to be removed from the grey list. The country gets taken off the list if the FATF is pleased with the development. FATF issues guidelines or recommendations to the country and gives a timeline. FATF conduct inspections periodically and tracks improvements towards recommendations for example Zimbabwe.

To fulfill its obligations in its action plan regarding the strategic shortcomings that the FATF found in October 2019, Zimbabwe has improved the efficacy of its AML/CFT regime and addressed related technical flaws.

(Acknowledgement: The Expert is has been assisted by her colleague Pranav Joshi who works in financial crime domain)

*The views/opinions expressed in the above article exclusively belong to the writer. Tatvita may have different opinions on the subject.*

About the Expert

Dr. Apurva Joshi is the Executive Director of Riskpro Management Consulting, Independent Director on Nihilent Limited, AABL, Fidel Softech, Minda Rinder Pvt Ltd, and Quickheal Technologies Limited. She is one of the Youngest Certified Forensic Accounting Professionals and Certified Fraud Examiner. She is featured in various magazines and media articles. Management stories author Ms. Rashmi Bansal dedicated a chapter on her life and work in her bestseller “Arise, Awake”. She has authored a book “Student’s Handbook on Forensic Accounting.”

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