Baba’s Explainer – Pakistan off FATF ‘grey list’

  • IASbaba
  • October 28, 2022
  • 0
International Relations, Security Issues
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  • GS-2: Important International institutions, agencies and fora- their structure, mandate.
  • GS-3: Security

Context: Recently, the Financial Action Task Force announced it would take Pakistan off its “grey list” of countries under “enhanced monitoring”, and welcomed what it called Pakistan’s “significant progress” in improving legal and government mechanisms.

  • Pakistan, which has been trying to be taken off the list ever since it was listed in February 2018, hailed the decision after its hectic diplomatic efforts regarding the same.
What is Financial Action Task Force (FATF)?
  • The Financial Action Task Force (FATF) is an international watchdog for financial crimes such as money laundering and terror financing.
  • It was established at the G7 Summit of 1989 in Paris to address loopholes in the global financial system after member countries raised concerns about growing money laundering activities.
    • The seven countries are Canada, the USA, UK, France, Germany, Japan and Italy.
  • In the aftermath of the 9/11 terror attack on the U.S., FATF also added terror financing as a main focus area.
  • This was later broadened to include restricting the funding of weapons of mass destruction in 2012.
  • The FATF currently has 39 members (37 member countries and two regional organizations (European Commission and Gulf Cooperation Council)
    • India became an Observer at FATF in 2006 and on June 25, 2010 India was taken in as the 34th country member of FATF.
  • Its Secretariat is located at the Organisation for Economic Cooperation and Development (OECD) headquarters in Paris.
  • The decision-making body of the FATF, known as its plenary, meets thrice a year. Its meetings are attended by 206 countries of the global network, including members, and observer organisations, such as the World Bank, some offices of the United Nations, and regional development banks.
  • During the recent plenary session on October 2022 FATF countries, including India, reviewed the record of about 26 countries, and agreed unanimously to
    • Take Pakistan and Nicaragua off the “grey list”
    • Add The Democratic Republic of Congo, Mozambique and Tanzania to the “grey list”,
    • Moving Myanmar from the “grey list” to the black list for actions taken by the military junta since they overthrew the government in a coup in Feb 2021.
What does FATF do?
  • The FATF sets standards or recommendations for countries to achieve in order to plug the holes in their financial systems and make them less vulnerable to illegal financial activities.
  • It conducts regular peer-reviewed evaluations called Mutual Evaluations (ME) of countries to check their performance on standards prescribed by it.
  • The reviews are carried out by FATF and FATF-Style Regional Bodies (FSRBs), which then release Mutual Evaluation Reports (MERs).
  • For the countries that don’t perform well on certain standards, time-bound action plans are drawn up.
  • Recommendations for countries range from assessing risks of crimes to setting up legislative, investigative and judicial mechanisms to pursue cases of money laundering and terror funding.
What are FATF’s ‘grey’ and ‘black’ lists?
  • While the words ‘grey’ and ‘black’ list do not exist in the official FATF lexicon, they designate countries that need to work on complying with FATF directives and those who are non-compliant, respectively.
  • 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.
    • For such countries, the watchdog does not tell other members to carry out due-diligence measures vis-a-vis the listed country but does tell them to consider the risks such countries possess.
    • As of March 2022, there are 23 countries on the FATF’s increased monitoring list — officially referred to as “jurisdictions with strategic deficiencies” — that include Pakistan, Syria, Turkey, Myanmar, Philippines, South Sudan, Uganda, and Yemen.
    • Some of these countries are known tax havens while others have faced trouble with terrorism. In all cases, they are on the ‘grey list’ because it is deemed that their financial structures are susceptible to being exploited for prohibited dealings.
  • Black List: Tt means countries designated as ‘high-risk jurisdictions subject to call for action’. Countries knowns as Non-Cooperative Countries or Territories (NCCTs) are put in the blacklist.
    • These countries support terror funding and money laundering activities. The FATF revises the blacklist regularly, adding or deleting entries.
    • In this case, the countries have considerable deficiencies in their AML/CFT (anti-money laundering and counter terrorist financing) regimens and the body calls on members and non-members to apply enhanced due diligence.
    • In the most serious cases, members are told to apply counter-measures such as sanctions on the listed countries.
    • Currently, North Korea and Iran are on the black list.
  • Consequence of being listen in FATF Lists:
    • Being listed under the FATF’s lists makes it hard for countries to get aid from organisations like the International Monetary Fund (IMF), Asian Development Bank (ADB), and the European Union.
    • It may also affect capital inflows, foreign direct investments, and portfolio flows.
    • What suffers is also the perception regarding such a country among the international community.
Why was Pakistan removed from the ‘grey list’?
  • Deliberations of the FATF are made in complete secrecy, and decisions are meant to be made strictly on the basis of technicalities and procedure, so the grey listing of Pakistan has to be seen in the totality of the process and measures it has undertaken.
  • Pakistan was also on the “grey list” from 2012-2015, when FATF had mandated many steps. Since 2018, it has been handed two action plans, comprising 34 points (27+7), asking Islamabad to bring in laws on money laundering, and anti-terror laws in line with international requirements.
  • Pakistan also had to maintain a database of terrorists and terror groups operating on its soil and the actions taken against them.
    • This was different from previous decades, when terror groups like al-Qaeda, the Taliban, Tehrik-e-Taliban, Lashkar-e-Taiba and Jaish-e-Mohammad operated quite freely, and designated terrorists like Hafiz Saeed and Masood Azhar addressed public rallies and even took part in political processes.
What was the sticking point?
  • While Pakistan has completed many tasks, a major sticking point remained: In June 2021, then FATF President had asked Islamabad to address the last remaining item by “demonstrating that terror finance investigations target senior leaders and commanders of UN-designated groups”.
  • Under UNSC guidelines, member states must ensure that all designated terrorists don’t have access to funds, arms and travel, and that all such terrorists are effectively prosecuted.
  • In the last year, much of Pakistan’s FATF reporting has been about bringing those terrorists, including Hafiz Saeed, 26/11 commander Zakiur Rehman Lakhvi, 26/11 planner Sajid Mir, IC-814 hijacking planner Rauf Asghar to court — and a conviction.
  • However, Pakistan claimed it couldn’t trace JeM chief Masood Azhar, wanted for a number of attacks from the 2001 Parliament attack and the J&K legislature bombing to strikes on military camps at Uri, Pathankot and the Pulwama bombing in 2019.
  • It submitted to the FATF that he was believed to be operating from Afghanistan, a claim the Taliban denied.
  • At the June plenary session, the FATF decided Pakistan was ready for an on-site visit that took place from August 31-September 2, and concluded that Pakistan’s reporting was reflected in measures “on the ground”.
  • Having followed this procedure, it was only to be expected that at the October plenary, Pakistan would earn a reprieve, and even some praise from the FATF president for completing its action plans.
What has been India’s response?
  • India is a member, and hence party to all FATF decisions that are made by consensus.
  • As a result, it also agreed to the decision to take Pakistan off the list, conceding in a statement that due to the FATF, Pakistan had been “forced” to take “some action against well-known terrorists”, including those involved in the Mumbai 26/11 attacks.
  • However, Ministry of External Affairs spokesperson Arindam Bagchi indicated that India would have liked more global checks on Pakistan.
  • India stated that “It is in global interest that the world remains clear that Pakistan must continue to take credible, verifiable, irreversible and sustained action against terrorism and terrorist financing emanating from territories under Pakistan’s control.”
  • Another reason for some unease in India is that the USA appears to have become more lenient in the last few months, after a new government headed by Mr. Shehbaz Sharif took office.
    • It was seen that US developed soft corner after Pakistan’s support to the U.S. on counter-terrorism operations in Afghanistan including the recent drone killing of al-Qaeda chief Ayman al- Zawahiri.

Main Practice Question: Pakistan has been recently removed from FATF’s grey list. What security implications does this move have on India?

Note: Write answer his question in the comment section.

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