Financial Action Task Force

The Financial Action Task Force (FATF) is an intergovernmental policy-making body established to develop and promote global standards for combating money laundering, terrorist financing, and the proliferation of weapons of mass destruction. It plays a crucial role in safeguarding the international financial system from illicit activities by setting guidelines and monitoring member compliance through periodic evaluations.
FATF’s recommendations serve as the foundation for national laws and regulations worldwide, influencing the financial, banking, and law enforcement sectors of more than 200 countries.

Establishment and Background

The Financial Action Task Force (FATF) was established in 1989 by the Group of Seven (G7) industrialised nations during a summit held in Paris. Its initial focus was on addressing the growing threat of money laundering, particularly arising from drug trafficking and organised crime.
Following the terrorist attacks of 11 September 2001, the FATF expanded its mandate to include measures against terrorist financing and later, in 2012, added the prevention of proliferation financing (relating to weapons of mass destruction).
FATF operates as a policy-making body, setting international standards but leaving implementation to individual member states through domestic legislation.

Objectives of FATF

1. Develop International Standards: To create a global framework of laws, regulations, and measures aimed at preventing the misuse of financial systems for illegal purposes.
2. Monitor Implementation: To assess and ensure that member countries effectively implement FATF recommendations through periodic Mutual Evaluation Reports.
3. Promote Global Cooperation: To foster coordination and information sharing among governments, financial institutions, and law enforcement agencies.
4. Identify High-Risk Jurisdictions: To maintain and publish lists of countries with deficiencies in anti-money laundering (AML) and counter-terrorist financing (CFT) systems — commonly known as the Grey List and Black List.
5. Policy Guidance: To provide technical assistance and policy advice to countries for improving their legal and regulatory frameworks.

Structure and Membership

FATF is an intergovernmental organisation comprising 39 members, including 37 countries and 2 regional organisations — the European Commission and the Gulf Cooperation Council (GCC).

Key Structural Components:

1. Plenary: The main decision-making body, meeting three times a year, where policies, reports, and evaluations are discussed and adopted.
2. President and Vice-President: Elected from member countries for one-year terms. The President oversees FATF meetings and represents the organisation internationally.
3. Secretariat: Based at the Organisation for Economic Co-operation and Development (OECD) headquarters in Paris, the Secretariat provides administrative and analytical support.
4. Regional Bodies (FATF-Style Regional Bodies or FSRBs): FATF works with several regional organisations such as APG (Asia/Pacific Group on Money Laundering), ESAAMLG (Eastern and Southern Africa Anti-Money Laundering Group), and MONEYVAL (Europe), which extend FATF principles globally.

FATF Recommendations

FATF has developed a comprehensive set of 40 Recommendations, first issued in 1990 and periodically updated, most recently in 2012. These recommendations provide a framework for countries to combat money laundering, terrorism financing, and proliferation financing.
Key areas covered include:

• Criminalisation of Money Laundering and Terrorist Financing
• Customer Due Diligence (KYC) for financial institutions
• Record Keeping and Reporting of Suspicious Transactions
• Regulation of Financial Institutions and Non-Financial Businesses
• International Cooperation and Mutual Legal Assistance
• Freezing and Confiscation of Assets Derived from Crime
• Regulation of Virtual Assets and Cryptocurrencies

These standards form the basis for national anti-money laundering (AML) and counter-terrorist financing (CFT) laws across the world.

FATF Lists: Grey List and Black List

FATF identifies countries that fail to adequately combat money laundering and terrorist financing and classifies them into two categories:

1. Grey List (Jurisdictions under Increased Monitoring):
   • Countries on this list have strategic deficiencies but are actively working with FATF to address them.
   • Placement on the Grey List can lead to enhanced monitoring, reduced investor confidence, and potential financial sanctions.
2. Black List (High-Risk Jurisdictions):
   • Countries that show persistent non-compliance and fail to cooperate with FATF’s standards.
   • Being blacklisted can lead to severe economic sanctions, international isolation, and restricted access to global financial markets.

India and the FATF

India became a member of the FATF in 2010, after demonstrating compliance with international AML and CFT standards. Since then, India has actively participated in FATF plenary sessions and regional working groups.

Indian Regulatory Framework in Line with FATF Recommendations:

• Prevention of Money Laundering Act (PMLA), 2002 — the primary legislation to combat money laundering.
• Financial Intelligence Unit-India (FIU-IND) — responsible for receiving, analysing, and disseminating information about suspicious financial transactions.
• RBI, SEBI, and IRDAI — regulate banks, stock markets, and insurance sectors to ensure compliance with AML/CFT norms.
• National Investigation Agency (NIA) and Enforcement Directorate (ED) — agencies involved in investigating terror financing and money laundering cases.

India also supports FATF’s global initiatives to counter terror funding and illicit financial flows, especially in the context of South Asian regional security.

Importance of FATF in Global Financial Governance

1. Enhancing Financial Transparency: FATF promotes accountability in the financial system by enforcing customer identification and monitoring of transactions.
2. Deterring Criminal Activities: Helps nations combat organised crime, corruption, and terrorism by targeting the financial channels supporting these activities.
3. Encouraging International Cooperation: Facilitates cross-border sharing of intelligence and investigative cooperation among member states.
4. Strengthening Financial Institutions: Encourages banks and financial institutions to adopt strict compliance mechanisms, reducing the risk of financial crime.
5. Supporting Economic Stability: By mitigating financial crime risks, FATF helps maintain investor confidence and ensures a stable financial environment.

Challenges and Criticisms

1. Implementation Disparities: Some developing countries face difficulties in implementing FATF’s recommendations due to limited resources and institutional capacity.
2. Political Bias Allegations: Critics argue that FATF decisions regarding grey or blacklisting are sometimes influenced by geopolitical considerations.
3. Evolving Nature of Financial Crime: The rapid emergence of digital currencies, cybercrime, and complex financial instruments challenges FATF’s monitoring capacity.
4. Compliance Burden: Strict compliance requirements can impose significant administrative costs on financial institutions and small economies.

Recent Developments

• FATF has intensified its scrutiny of virtual assets and cryptocurrency exchanges, recognising their potential misuse for money laundering.
• The organisation continues to update its monitoring lists regularly, adding and removing countries based on compliance progress.
• FATF’s current focus areas include beneficial ownership transparency, environmental crime financing, and terrorist funding through non-profit organisations.