Financial Action Task Force (FATF)

04 Aug 2023 Financial Action Task Force (FATF)

This article covers “Daily Current Affairs” and the topic details “Financial Action Task Force (FATF)”. The topic “Financial Action Task Force (FATF)” has relevance in the “International Relations” section of the UPSC CSE exam.

For Prelims:

What is the Financial Action Task Force (FATF)? 

For Mains:

GS2:  Important International Institutions, agencies, fora their structure and mandate

Why in the news?

The Delhi High Court has recently declared that PayPal, the US online gateway, falls under the category of a “reporting entity” according to the anti-money laundering law. This decision could potentially aid India in its FATF review of the measures taken to combat illicit funds (black money).

Financial Action Task Force (FATF)

• The Financial Action Task Force (FATF) is responsible for addressing money laundering, terrorist financing, and proliferation financing globally.
• The FATF was established in 1989 and is headquartered in Paris.
• It comprises 39 member countries and sets international standards to combat illicit funds related to serious crimes such as drug trafficking, illicit arms trade, and cyber fraud.
• The FATF conducts research on money laundering and terrorism financing methods and promotes global standards to mitigate these risks.
• Over 200 countries and jurisdictions have committed to implementing the FATF’s Standards as part of a coordinated global effort against organized crime, corruption, and terrorism.
• Nine FATF Associate Member organizations and other global partners, including the IMF and World Bank, help assess countries and jurisdictions.

Processes of FATF

• The FATF Plenary, the policymaking body, meets three times a year to hold countries accountable for adhering to the Standards.
• Countries failing to implement FATF Standards repeatedly may be named as Jurisdictions under Increased Monitoring or High-Risk Jurisdictions, often referred to as “grey and blacklists.”

Recommendations and Standards 

The recommendations and standards mentioned are part of the framework established by the Financial Action Task Force (FATF) to combat money laundering and terrorist financing. 

• Recommendations: 

• • • These are a set of guidelines that member countries and jurisdictions are encouraged to implement to prevent money laundering and terrorist financing. 
    • Originally, there were 40 Recommendations, but they were later expanded to a total of 49 to cover a broader range of issues and evolving challenges in the financial sector.

• 9 Special Recommendations: 

• • They specifically focus on countering terrorist financing and cover various aspects, such as freezing terrorist assets, preventing the provision of financial and other services to terrorists, and international cooperation in tackling terrorist financing.

Black List:

• The FATF maintains a blacklist of countries known as Non- Cooperative Countries or Territories (NCCTs). 
• These countries are identified for their support of terror funding and involvement in money laundering activities. 
• The blacklist is subject to regular revisions by the FATF, with entries being added or removed accordingly.
• North Korea, Iran, and Myanmar are currently on the Financial Action Task Force’s (FATF) blacklist.

Grey List: 

• Countries that provide a safe haven for supporting terror funding and money laundering are placed on the FATF grey list. 
• Such inclusion serves as a warning to the country, indicating that it is at risk of being moved to the blacklist.

Consequences of being on the FATF lists :

• • Increased scrutiny from financial institutions and regulators in other countries:
    • This can make it more difficult for banks and other financial institutions in the greylisted country to do business with their counterparts in other countries.

• Increased reputational risk:

• • • This can make it more difficult for the country to attract foreign investment and trade.

• Increased compliance costs:

• • This can involve a significant investment of time and resources.

FATF in India: 

• India began its association with FATF as an ‘observer’ in 2006 before becoming a full-fledged member in 2010. 
• Additionally, India is actively engaged with its regional counterparts, being a member of both the Asia Pacific Group (APG) and the Eurasian Group (EAG).

Challenges in Adoption and implementation of FATF codes:

• Difficulty in domestic coordination among government agencies, financial institutions, and law enforcement bodies.
• Capacity constraints in smaller or less economically developed countries.
• Inadequate operational resources, hindering robust AML/CFT measures.
• Complexities in implementing FATF standards and conducting assessments.
• Poor understanding of ML/TF threats and risks.
• Inability to identify, assess, and mitigate ML/TF risks.
• Limitations of traditional risk assessment tools.
• Lack of coordination between international organisations.
• Weaknesses in national regulatory schemes.
• Informal transfer and movement of assets across borders.
• High costs of implementing risk-based approaches for non-state actors.

Way forward: 

To strengthen FATF and the global fight against money laundering and terrorism financing, there is need to–

• Emphasise risk assessment and adoption of risk-based approaches.
• Improve data sharing among relevant stakeholders.
• Utilise modern technology like machine learning for real-time data analysis.
• Strengthen international cooperation between organisations and countries.
• Provide technical assistance and capacity-building support to resource-constrained countries.

Sources: 

PayPal ruling will help India during FATF review of its anti-black money regime, claim insiders

Citing FATF, Centre urges Supreme Court to let S.K. Mishra continue as Enforcement Directorate chief – The Hindu

Yojna daily current affairs eng med 4th August 2023

Q1. With reference to Financial Action Task Force (FATF), consider the following statements: 

1. The Financial Action Task Force (FATF) is responsible for addressing money laundering, terrorist financing in India.
2. The FATF Plenary, the decision-making body, meets once in three years.
3.  India is currently on the FATF greylist. 

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 3 only 

(d) None 

Answer: (a) 

Q2. Consider the following:

1. The FATF conducts research on cyber fraud and promotes global standards to mitigate this risk. 
2. The 9 Special Recommendations by FATF focus on combating drug trafficking and money laundering in the financial sector.
3. India is not a member of any regional counterparts in the FATF framework.

How many of the abovementioed statements are correct ?

(a) Only one 

(b) Only two 

(c) Only three 

(d) None

Answer: (d)

Q3. Discuss the role of the Financial Action Task Force (FATF) in addressing money laundering and terrorist financing globally. Also, highlight the challenges faced by countries in adopting and implementing FATF standards.

Gaurav N