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Explained | What is the FATF and why is Pakistan on its “grey list”?

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How is Pakistan aiming to get off the Financial Action Task Force gray list?

How is Pakistan aiming to get off the Financial Action Task Force gray list?

The story so far: Ahead of the plenary session of the Financial Action Task Force (FATF), the global financial crime watchdog, June 14-17 in Berlin, Pakistan, which continues to grapple with an economic crisis, hopes for respite under the form of its removal from the FATF “grey list” or the list of countries posing a risk to the global financial system.

At its last plenary meeting in March, the FATF maintained Pakistan’s listing, calling on it to quickly address remaining shortcomings in its financial system.

What is the FATF?

The Financial Action Task Force is an international watchdog for financial crimes such as money laundering and terrorist financing. It was created at the 1989 G7 Summit in Paris to fill the gaps in the global financial system after member countries expressed concerns about increasing money laundering activities. In the aftermath of the September 11 terrorist attack on the United States, the FATF also added terrorist financing as a priority area. This was later expanded to include restricting the funding of weapons of mass destruction.

The FATF currently has 39 members. The FATF’s decision-making body, known as its Plenary, meets three times a year. Its meetings bring together 206 countries from the global network, including members and observer organizations, such as the World Bank, some United Nations offices and regional development banks.

The FATF establishes standards or recommendations that countries must follow in order to close gaps in their financial systems and make them less vulnerable to illegal financial activities. It regularly conducts peer-reviewed assessments called mutual evaluations (MEs) of countries to check their performance against the standards it prescribes. Reviews are conducted by FATF and FATF-like regional bodies (FSRBs), which then issue mutual evaluation reports (MERs). For countries that are not performing on certain standards, time-bound action plans are developed. Recommendations to countries range from crime risk assessments to establishing legislative, investigative and judicial mechanisms to prosecute money laundering and terrorist financing cases.

What are the FATF “grey” and “black” lists?

Although the terms “grey list” and “black list” do not exist in the official FATF lexicon, they refer respectively to the countries which must endeavor to comply with the FATF guidelines and those which do not. .

At the end of each plenary meeting, the FATF produces two lists of countries. Gray countries are designated as “jurisdictions under heightened surveillance”, working with the FATF to combat criminal financial activity. For these countries, the watchdog does not tell other members to do due diligence on the listed country, but does tell them to consider the risks these countries pose. Currently, 23 countries including Pakistan are on the gray list.

As for the blacklist, it designates the countries designated as “high-risk jurisdictions subject to a call to action”. In this case, countries have significant gaps in their AML/CFT (anti-money laundering and countering the financing of terrorism) regimes and the body calls on members and non-members to apply enhanced due diligence. In the most serious cases, members are asked to apply countermeasures such as sanctions against listed countries. Currently, North Korea and Iran are blacklisted.

Being on the FATF lists makes it difficult for countries to get help from organizations such as the International Monetary Fund (IMF), Asian Development Bank (ADB) and the European Union. It can also affect capital inflows, foreign direct investment and portfolio flows.

Why is Pakistan on the gray list?

Pakistan was held on the gray list in March because it had yet to address concerns over terrorism financing investigations and prosecutions of top leaders and commanders of UN-designated terror groups. Diplomatic sources in Pakistan said The Hindu that steps had been taken in this direction, such as the conviction of the leader of the terrorist group Hafiz Saeed, the prosecution of Masood Azhar, the arrest of approximately 300 other designated terrorists and the seizure of more than 1,100 properties belonging to terrorist groups. India, for its part, a member of the FATF, suspects the effectiveness and permanence of the Pakistani actions.

Pakistan is currently banking on its potential exclusion from the gray list to help improve the status of difficult negotiations with the International Monetary Fund to secure bailout funds.

Pakistan has found itself frequently on the gray list since 2008, for weaknesses in the fight against terrorist financing and money laundering. In 2009, the country began cooperating with the FATF-like regional body, the Asia-Pacific Group (APG), for an MA process.

At the end of the MA in June 2010, Pakistan made a “high-level political engagement” with FATF and APG to address its strategic AML/CFT deficiencies. He was entrusted with an action plan that required demonstrating adequate criminalization of money laundering and terrorist financing as well as adequate measures to identify, freeze and confiscate the assets of terrorists.

He was delisted in 2015 due to his progress, but was put back on it in 2018. He received a 27-point action plan to restrict terrorist financing activities. After warnings and two deadline extensions on the first plan, Pakistan has been prescribed another seven-point action plan by the APG in 2021, specifically focused on combating money laundering. In March, Pakistan informed the FATF that it had completed 32 of the 34 actions under the two plans, but remained on the list. The FATF gave him time until January 2023 to complete the 2021 plan.

THE ESSENTIAL

Ahead of the plenary session of the Financial Action Task Force from June 14 to 17, Pakistan hopes to have its name removed from the FATF’s “grey list”.

Gray countries are designated as “jurisdictions under heightened surveillance”, working with the FATF to combat criminal financial activity. The countries on the blacklist are “high-risk jurisdictions subject to a call to action”. These countries have huge gaps in their anti-money laundering and anti-terrorist financing regimes.

Pakistan was held on the gray list in March because it had yet to address concerns over terrorism financing investigations and prosecutions of top leaders and commanders of UN-designated terror groups.