FATF: global terrorist financing watchdog

What is the FATF?

Established in 1989 by the G7 group of countries, the Financial Action Task Force (FATF) is an inter-governmental body that sets standards for implementing regulatory, legal and operational measures that will combat money laundering and terrorist financing activities.

Membership and funding

The FATF is made up[1] of, and funded by, its 36 member countries and two regional organisations, the Gulf Cooperation Council and the European Commission. Pakistan is a full member of the FATF. Indonesia and Saudi Arabia have observer status along with 23 international organisations that have, among other functions, a specific anti-money laundering mission or function. These include the IMF, World Bank, Interpol and the UN.

FATF’s role

The FATF sets standards, policies, measures on money laundering and financing of terrorist activities, and issues guidelines on the reporting of suspicious transactions, freezing of terrorist assets and confiscation of the proceeds of crime.

FATF’s Famous 40

The FATF’s famous 40 standards[2] were developed in 1990 and have been revised periodically since 1996, the most recent being in October 2018. These include:

highlighting the need to enhance transparency by making the beneficial ownership information[3] of legal persons and arrangements accessible. (For India, this has implications for curbing tax evasion and black money.);
listing out the powers and responsibilities of competent authorities like regulators, supervisors and law enforcement agencies. (In India, this requires strengthening regulatory agencies like the securities and banking regulators SEBI and RBI, investigative agencies like the CBI, and judges)
calling on countries to take immediate steps to ratify and fully implement extant global and regional conventions (like the Vienna Convention) and conventions undergoing negotiations with respect to corruption and money laundering, terrorist financing and cybercrimes.

Organisational structure and leadership

The FATF is led by a president, an appointee from one of the member countries who has a year-long tenure. The president heads the FATF secretariat, which is tasked with organising meetings, preparing policy papers and assessment reports. The FATF Secretariat is based in Paris at the headquarters of the Organisation for Economic Cooperation and Development (OECD).

The current 2018-2019 president of the FATF is Marshall Billingslea[4] of the United States Treasury. The vice president is Xiangmin Liu of the People’s Bank of China.

The FATF hosts three, all-member plenary sessions a year. It conducts review meetings, such as the one held on 22 February 2019, to craft action plans for countries to implement the AML/CFT measures and review the progress made. It also holds private sector consultations and meets out of session if required.

The FATF and the G20

The G20 is the preeminent body on global economic governance, comprising of 20 developed countries and emerging market economies. It represents 85% of the world’s GDP and 65% of its population.

The FATF submits a yearly report[5] to the G20, highlighting the activities and initiatives it has undertaken during the year to implement its standards.

On its part, the G20 calls on the FATF to prepare reports based on specific issues related to anti-money laundering and terrorist financing. For example, under the Argentine presidency[6] of the G20 in 2018, the FATF prepared a report for the G20 on how its anti-money laundering standards apply to crypto-assets.

The G20 countries also make individual and collective commitments to the full and effective implementation of the FATF’s standards. In its G20 Leaders’ declaration[7] of December 2018, the G20 committed to “regulate crypto-assets for anti-money laundering and countering the financing of terrorism in line with FATF standards” and to “step up efforts in fighting terrorist and proliferation financing, and money laundering.”

Non-compliance with FATF

Non-compliance with FATF means economic isolation for countries. Punitive measures begin with putting countries on a ‘watch’ list: a grey watch list for countries that have been partially compliant, and the black list for those which are delinquent. The result: denial of access to international banking networks, including multilateral and bilateral development funds.

A consistent blacklister is North Korea;[8] Iran has been on and off the black list and is now on the grey list; and so is Pakistan.

FATF and Pakistan

Pakistan has already been on FATF’s grey list from 2012 to 2015 and is now back on the grey list for non-compliance with its FATF commitments.

On 22 February, 2019, as part of its ongoing review of compliance with its standards, the FATF reviewed the progress of 11 countries, including Pakistan, which had anti-money laundering and terrorist financing deficiencies. The goal was to have concrete action plans to enable expeditious compliance within the proposed timeframes. Another review will take place in the coming months.

In June 2018, Pakistan had made a commitment to comply with FATF’s standards and while it took some measures, it did not fulfil its obligations, especially those on the risks posed by the financing of terrorist groups like Da’esh, Al Qaeda, Jamaat-ud-Dawa, Lashkar-e-Taiba, Jaish-e-Mohammad, Haqqani Network, and persons affiliated with the Taliban. Since Pakistan did not meet the FATF deadline of January 2019, the FATF retained Pakistan on the ‘grey’ list. However, it did not accede to a recommendation by India to blacklist Pakistan for its terrorist financing activities.

The next deadline for Pakistan is May 2019. If it fails to meet its obligations, it risks being blacklisted by the FATF, effectively shutting down its access to international banking networks. Other punitive measures include targeted financial sanctions in accordance with United Nations Security Council Resolutions and further economic isolation.

The FATF will urge member countries to close existing branches, subsidiaries and representative offices of Pakistani banks that operate in its member countries and terminate all correspondent banking relationships with Pakistani banks. The FATF will advise foreign banks to withdraw their presence from Pakistan. Its sovereign credit ratings will be further downgraded and the country will be unable to access funds from multilateral development banks and international markets. Significantly, Pakistan will also be forced to reveal the safely guarded details of some projects under the China Pakistan Economic Corridor (CPEC).

One way for Pakistan to get around FATF is the ancient money route of hawala,[9] a fund transfer system that exists outside the formal financial system. FATF’s scrutiny does not cover hawala transactions.

India is once again pressing to put Pakistan on the black list. After the Pulwama attack, on 22 February 2019, India presented evidence[10] to the FATF that reveals links between Pakistani agencies and the Jaish-e-Mohammad, which has taken responsibility for the attack, including funding support.

India will be supported by the U.S, Britain, France and Germany, which took the early lead on putting Pakistan on the grey list. But there will surely be opposition from China, Pakistan’s all-weather friend, and countries of the Gulf Cooperation Council (GCC), Turkey and Russia.

Purvaja Modak is Researcher, Geoeconomic Studies, and Assistant Manager, Research Office, Gateway House: Indian Council on Global Relations.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in

References

[1] Financial Action Task Force, Members and Observers, <http://www.fatf-gafi.org/about/membersandobservers/>

[2] Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation – The FATF Recommendations, October 2018, <http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf>

[3] Vaidyanathan, K.N., Akshay Mathur, and Purvaja Modak, Gateway House: Indian Council on Global Relations, A global framework for tracing Beneficial Ownership, 2 July 2018,

<https://www.gatewayhouse.in/a-global-framework-for-tracing-beneficial-ownership/>

[4] Financial Action Task Force, FATF Presidency, <http://www.fatf-gafi.org/about/fatfpresidency/>

[5] Financial Action Task Force, FATF report to G20 Leaders’ Summit,

<http://www.fatf-gafi.org/publications/fatfgeneral/documents/report-g20-leaders-nov-2018.html>

[6] Financial Action Task Force, FATF report to G20 Leaders’ Summit,

<http://www.fatf-gafi.org/publications/fatfgeneral/documents/report-g20-leaders-nov-2018.html>

[7] G20 Information Centre, G20 Leaders’ Declaration: Building Consensus for Fair and Sustainable Development, 1 December 2018, <http://www.g20.utoronto.ca/2018/2018-leaders-declaration.html>

[8] The FATF sanctions added to the pre-existing sanctions on North Korea and Iran, for their nuclear policies. Thus, it is difficult to examine the direct impact of FATF’s sanctions on the two countries.

[9] Patil, Sameer, Gateway House: Indian Council on Global Relations, How ‘hawala’ impacts national security, 9 November 2016, <https://www.gatewayhouse.in/how-hawala-impacts-national-security/>

[10] Business Today, FATF gives Pakistan a breather, escapes getting blacklisted, 22 February 2019, <https://www.businesstoday.in/current/economy-politics/fatf-gives-pakistan-a-breather-escapes-getting-blacklisted/story/321209.html>