Financial Action Task Force (FATF)

Context: FATF is looking to revise its current recommendations aimed at safeguarding non-profit organizations (NPO) from being abused for terrorist financing.

PYQ: Q. Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels. (2021)

 More on News:

• At its October 2023 plenary, the FATF will take up proposals to revise the FATF Standards’ Recommendation 8 on non-profits, and its interpretive note, and also adopt an updated best practices paper on this issue.
  • FATF Recommendation 8: It requires that the laws and regulations that govern non-profit organisations be reviewed so that these organisations cannot be abused for the financing of terrorism.

About Financial Action Task Force (FATF):

•  FATF is an inter-governmental body established in 1989 during the G7 Summit in Paris to develop policies against money laundering. Participation:  Its meetings include 206 global network countries and observer organisations like the World Bank, United Nations offices, and regional development banks.
• Secretariat: Paris, France.
• Members:
  • The FATF currently has 39 members, including two regional organisations: the European Commission, and the Gulf Cooperation Council.
  • India became an Observer at FATF in 2006. On June 25, 2010 India was taken in as the 34th country member of FATF.
  • India is also a member of its regional partners, the Asia Pacific Group (APG) and the Eurasian Group (EAG).
  • Key Observers:
    • Indonesia
    • Asian Development Bank (ADB)
    • International Monetary Fund (IMF)
    • Interpol
    • World Bank
    • World Customs Organisation (WCO)
• Governance:
  • Presidency: The FATF President, chosen by the Plenary from its members, leads meetings, including those of the Plenary and Steering Group, while supervising the Secretariat.
  • Decision Making: The FATF Plenary is the decision making body of the FATF. It meets three times per year.
    • Decisions are taken by consensus in the 39-member group, where any three members can exercise a “veto” on an action.

Function of FATF:

• Targeting Illicit Activities: FATF has developed the FATF Recommendations, or FATF Standards, which ensure a coordinated global response to prevent organised crime, corruption and terrorism.
• Effective Money Pursuit:  FATF helps authorities go after the money of criminals dealing with illegal drugs, human trafficking, and other crimes.
• Evaluating Frameworks: FATF assesses the strength of a country’s anti-money laundering and anti-terror financing frameworks. It does not go by individual cases.
• Evaluating Frameworks: FATF conducts regular peer-reviewed evaluations called Mutual Evaluations (ME) of countries to check their performance on standards prescribed by it.
• Revised Mandate: 
  • 2001: After the 9/11 attacks, FATF expanded its mandate to incorporate efforts to combat terrorist financing.
  • 2012:  FATF added efforts to counter the financing of proliferation of Weapons of Mass Destruction (WMD).

Classification of Countries by FATF:

• FATF has 2 types of lists for classifying countries:  
  • Blacklist Countries: The Countries in this list known as Non-Cooperative Countries or Territories (NCCTs).
    • 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 and the body calls on members and non-members to apply enhanced due diligence.
    • Currently, North Korea and Iran are on the black list.
  • Grey List: In essence, countries on the Grey list are under global watch by FATF for not adequately preventing money laundering and terrorist financing.
    • This inclusion serves as a warning to the country that it may enter the blacklist. For Example: Currently, Barbados and Albania are on the grey list.

Consequences of being in the FATF’s list:

• Economic sanctions from IMF, World Bank, ADB
• Problem in getting loans from IMF, World Bank, ADB and other countries
•  Reduction in international trade
• International boycott
• It may also affect capital inflows, foreign direct investments, and portfolio flows.

Challenges Associated with FATF:

• Voluntary Implementation: FATF isn’t an enforcement agency but relies on voluntary implementation of its reports by its members who also fund and determine its mandate
• Lack of Transparency: Meetings of the FATF are carried out behind closed doors, and deliberations are not publicized.
• Tackling Emerging Challenges: The FATF’s response to modern challenges in global counter-terror and anti-money laundering efforts, like bitcoins, cyber currencies, wildlife trafficking for funding, AI in terror, and biowarfare during the pandemic, is yet to be observed.
• Balancing Regulation and Innovation: Striking a balance between implementing stringent regulations to combat financial crime while also fostering innovation and financial inclusion is a complex challenge.
• Global Coordination: Ensuring consistent implementation of FATF standards across diverse jurisdictions with varying legal, regulatory, and cultural contexts can be challenging.
• Innovation in Criminal Tactics: Criminals constantly adapt to new regulations and exploit vulnerabilities, requiring FATF to continually evolve its strategies to stay ahead of emerging risks.
• Political Considerations: Balancing international cooperation with the political and economic interests of member countries can complicate decision-making and enforcement efforts.
  • For Example: China has reiterated its support for Pakistan and warned member countries of the Financial Action Task Force (FATF) to refrain from politicizing the forum.
• Failure in controlling money laundering: Criminals exploit complexities in global financial systems, making it difficult for FATF to fully prevent money laundering across borders.

FATF and India’s Legal and Institutional Frameworks:   

• Unlawful Activities (Prevention) Act, 1967 (UAPA): It provides special procedures to deal with terrorist financing.
• The Foreign Contribution (Regulation) Act, 1976: It dealt with regulating the acceptance and utilization of foreign contribution and foreign hospitality by persons and associations working in the important areas of national life.
• The Narcotic Drugs and Psychotropic Substances Act, 1985: It made stringent provisions for the control and regulations of operations relating to narcotic drugs and psychotropic substances.
• The Prevention of Money Laundering Act, 2002 (PMLA): It was introduced to counter the trend of money laundering.
• The Financial Intelligence Unit-India (FIU-IND): It was established under the Ministry of Finance in 2004 and deals with suspected money laundering and terrorist financing to Intelligence / Enforcement Agencies and Regulatory Authorities.

Way Forward:

• Regular Reviews and Updates: Conduct periodic assessments of FATF’s standards and recommendations to ensure they remain relevant and adaptable to evolving financial crime trends.
• Capacity Building: Provide technical assistance and capacity-building support to developing countries to help them implement and enforce FATF standards effectively.
• Incorporate Technology Expertise: Include experts in emerging technologies, such as cryptocurrencies and artificial intelligence, to ensure that FATF’s recommendations address evolving risks.
• Enhanced Collaboration: Foster greater collaboration between FATF and other international organizations, such as Interpol and the United Nations, to coordinate efforts against financial crime more comprehensively.
• Transparent Assessments: Maintain transparency in FATF’s evaluation process, providing member countries with clear insights into assessment criteria, methodologies, and potential areas for improvement.

News Source : The Hindu