FATF's Asia Pacific Group

Why in NEWS ?

• Noting that Pakistan's measures against money laundering and terror financing "are not yet sufficient to justify a re-rating", Asia Pacific Group(APG), a regional affiliate of the Financial Action Task Force’s (FATF’s), on October 12 th has retained the country on its enhanced follow-up list.

About

• Financial Action Task Force (FATF) Asia Pacific group has kept Pakistan in its ‘Enhanced Follow Up’ list. The organisation had downgraded Pakistan status from “regular follow-up” to “enhanced follow up”.
• The Asia-pacific group of FATF submitted its report called “Follow up report on mutual evaluation of Pakistan”.
• In the report, it was highlighted that the progress of Pakistan to combat the Financing of terror system and anti-money laundering made by the Financial Action Task Force has remained unchanged in 2020 as compared to that of 2019.
• The development came only a few weeks ahead of the meeting of the FATF -- the Paris-based global money laundering and terrorist financing watchdog -- to decide on Pakistan's grey list status.

Background and reason for the move

• The 41-member APG in August last year had downgraded Pakistan's status to 'Enhanced Follow-up' category from 'Regular Follow-up' over technical deficiencies to meet normal international financial standards by October 2018.
• 'Enhanced follow-up' is an intensive process of correction that deals with members with significant deficiencies (for technical compliance or effectiveness) in their AML/CFT systems. The APG's report came ahead of the virtual FATF plenary scheduled for October 21-23 during which it would be decided if Pakistan should be excluded from its grey list, based on a review of Islamabad's performance to meet global commitments and standards on fight against money laundering and terror financing (ML&TF).
• FATF had placed Pakistan on its grey list in June 2018 and asked Islamabad to implement a plan of action to curb money laundering and terror financing by the end of 2019 but the deadline was extended later on due to COVID-19 pandemic.
• Seeking to wriggle out of the FATF's grey list, debt-ridden Pakistan in August imposed financial sanctions on 88 banned terror groups and their leaders, including 26/11 Mumbai attack mastermind and Jamaat-ud-Dawa (JuD) chief Hafiz Saeed, Jaish-e- Mohammed (JeM) chief Masood Azhar and underworld don Dawood Ibrahim.
• Pakistan was put under the FATF grey list in 2019. After that, Pakistan passed three bills to combat the terrorism and money laundering:

1. Anti-terrorism act (Amendment) Bill 2020,
2. Anti-money laundering (Amendment) Bill and
3. Islamabad capital territory Waqf properties bill.

• In February, the FATF gave Pakistan, which missed 13 targets, a four-month grace period to complete its 27-point action plan against ML&TF committed with the international community.
• In its third plenary held virtually in June, the FATF decided to keep Pakistan in the grey list as Islamabad failed to check flow of money to terror groups like Lashkar-e- Taiba (LeT) and Jaish-e-Mohammed (JeM).
• It also noted that the National Risk Assessment (NRA) 2019 has confirmed that abuse of non-profit organisations for terror financing purposes continued to pose a significant threat both domestically and externally and that charities and fund-raising was a source of funds for almost all EOCs

Impact of move on Pakistan

• With Pakistan's continuation in the 'grey list', it is increasingly becoming difficult for the country to get financial aid from the International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and the European Union, thus further enhancing problems for the nation which is in a precarious financial situation

What is Terror-Funding ?

• Terrorism financing is the provision of funds or providing financial support to individual terrorists or non-state actors.
• Most countries have implemented measures to counter terrorism financing (CTF) often as part of their money laundering laws.

What is Money Laundering ?

• It is the illegal process of making large amounts of money generated by a criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source.
• Money laundering is the illegal process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions.
• The overall scheme of this process returns the "clean" money to the launderer in an obscure and indirect way.

Mutual Evaluation Report (MER)

• The first Follow-Up Report on Mutual Evaluation of Pakistan released by the Asia- Pacific Group (APG) underlined that the country's progress on the 40 FATF recommendations on the effectiveness of anti-money laundering and combating financing terror (AML/CFT) system largely remained unchanged -- non-compliant on four counts, partially compliant on 25 counts and largely compliant on nine recommendations.
• Pakistan has improved its full compliance on only two of the 40 FATF recommendations
• The MER also highlighted the gaps in the process of developing and identifying threats, vulnerabilities and risks.
• This report came after Pakistan published a National Risk Assessment (NRA) 2017, on Money Laundering and Terrorism Financing.
• The MER highlighted that 2017 NRA had not been circulated to private sector stakeholders and they were are not yet subjected to the comprehensive Anti-money Laundering and Terrorist Financing measures.

Financial Action Task Force (FATF)

• It is an inter-governmental organization, formed in 1989 by the G7 Summit which was held in Paris, established to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
• It is a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in various areas.
• The FATF Secretariat is housed at the OECD headquarters in Paris.

Objectives

• To set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
• The FATF has developed a series of recommendations that have become global standards for fighting money laundering and terror financing, as well as the proliferation of weapons of mass destruction. The first set of recommendations was issued in 1990 followed by revisions in 1996, 2001, 2003, and lastly in 2012.

FATF Activities, Roles and functions

• Initially it was established to examine and develop measures to combat money laundering.
• In October 2001, the FATF expanded its mandate to incorporate efforts to combat terrorist financing, in addition to money laundering.
• In April 2012, it added efforts to counter the financing of proliferation of weapons of mass destruction.
• The organization monitors its member countries on the progress they have made in implementing reform measures and reviews their counter-measures to money laundering and terror financing.
• The decision-making body of FATF is called the FATF Plenary. It meets three times annually.
• The organization has included even combating terror financing among its objectives after the September 11 terror attacks on the USA in 2001.

FATF’s Blacklist and Greylist

• Black List : Officially called the “Non-Cooperative Countries or Territories (NCCTs), the FATF Blacklist is a list of countries which the FATF considers to be non- cooperative in the international fight against terrorist financing and money laundering.
• This list is regularly updated, with countries being either deleted off the list or new countries being added to the list. It is to be noted that some names are on the list not because of their non-cooperative stance towards fighting this menace, but because they lack the necessary infrastructure and mechanisms to engage in this fight.
• Grey List: Countries that are considered safe haven for supporting terror funding and money laundering are put in the FATF grey list.
• This inclusion serves as a warning to the country that it may enter the blacklist.

Considered in the grey list may face:

• 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.

India and FATF Countries (Composition)

• Currently, there are 38 member countries in the FATF.
• India is a member of the organization since June 2010.
• It had earlier acquired ‘Observer’ status at FATF in 2006.
• FATF Observers are two in number, namely, Saudi Arabia and Indonesia. There are many other Observer organizations and Associate Members.

FATF President

• The FATF President is a senior official appointed by the FATF Plenary from among its members for a term of one year.
• The current President of the FATF is Dr Marcus Pleyer of Germany who assumed the position of President on 1st July 2020. Its Executive Secretary is David Lewis of the United Kingdom.