Mint Explainer: What Pakistan’s exit from the FATF Grey list means for the world

The FATF is among the alphabet soup of international organizations that serve as nodes of coordination of national conduct to enable international coherence in the globalized world of mutual interdependence of nations. Think of the World Trade Organization (WTO), the Financial Stability Board (FSB), the Bank for International Settlements (BIS), the International Court of Justice (ICJ), the International Organization of Securities Commissions (IOSCO), the International Labour Organization (ILO) and so on. Countries voluntarily cede some bit of their sovereignty to accept the norms set by these organizations, not because they have to, but because other countries might find it difficult to transact with them, if they decide to march to their own unique beat.

FATF was set up following a decision of the G7 (the Group of rich, pro-West nations, the US, Japan, Germany, France, Britain, Italy and Canada) in its Paris meeting of 1989 to find ways to combat money laundering. In 2001, after the 9/11 attacks on America, the body’s mandate was extended to countering terror financing. In 2012, checking the funding of nuclear proliferation was added to its tasks. It is housed in the secretariat of the Paris-based Organization for Economic Cooperation and Development, but is altogether distinct from OECD.

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Membership and coverage

Originally, it comprised the G7 countries, the European Commission and eight other states, but its membership has increased to 39, comprising 37 nations, and two regional organizations, the European Commission and the Gulf Cooperation Council. It has one Observer (as is common with other international organizations, the path to membership goes through becoming an observer), Indonesia. It has Associate Members: regional organizations such as the Asia Pacific Group that work on advancing the FATF agenda in different regions of the world; and a number of Associate Observers, mostly financial organizations. India is a member, as is China, apart from most large economies. Pakistan is not a member, but is one of the more than 200 countries that have signed up to observe FATF norms and are observed by FATF-Style Regulatory Bodies, such as the Asia Pacific Group.

What does the FATF do?

Its function is to “to set standards and promote effective implementation of legal, regulatory and operational measures,” to prevent money laundering, combat financing of terror and check funding of nuclear proliferation.

Its members hold plenary meetings thrice a year under a rotating, two-year presidency. The current president is from Singapore. The FATF carries out so-called “Mutual Evaluation Reports” that spot weaknesses and recommend measures to remove them. FATF-style regulatory bodies carry out such reviews for countries in their jurisdiction and inform the FATF of their findings. The FATF has worked out FATF Recommendations, the international anti-money laundering and combating the financing of terrorism and proliferation (AML/CFT) standards, and the FATF Methodology to assess the effectiveness of AML/CFT systems.

Countries that are seen to be deficient in their readiness or capacity to meet its standards are put under either of two categories: jurisdictions under increased monitoring (countries on the so-called Grey List) and high-risk jurisdictions subject to a call for action (countries on the so-called Black List – right now, only Myanmar qualifies for this honour).

Pakistan and the FATF

Pakistan has found to be wanting and put under obligations to rectify its systems and practices twice: over 2012-15 and 2018-22. If a country fails to comply or ‘mostly comply’ with the measures recommended by the Task Force, it might find it difficult to get external financing, whether from commercial sources or multilateral agencies such as the IMF and the World Bank.

Pakistan was recommended 34 measures to act against money-laundering and terror funding. At the FATF’s latest plenary, the members chose to certify that Pakistan had complied with or mostly complied with all the suggested measures.

The exit and after

India has been concerned about Pakistan-based terror outfits such as the Jaish-e-Mohammed to source easy funding for anti-India attacks and activities. Decisions are taken by consensus and India joined the decision.

After Pakistan was taken off the Grey List, this is what India’s External Affairs Ministry spokesperson Arindam Bagchi said: “As a result of FATF scrutiny, Pakistan has been forced to take some action against well-known terrorists, including those involved in attacks against the entire international community in Mumbai on 26/11.

“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 its control.” India also noted that Pakistan was obliged to continue with the Asia-Pacific Group to further improve its measures against money laundering and funding terror.

It might be worth noting that countries have a motivation for certifying compliance other than Pakistan’s readiness to change. Pakistan has been devastated by floods, which the United Nations estimates caused about $30 billion in economic losses. The country requires massive injections of funding to rebuild. If it continues on the Grey List, funding relief and rehabilitation would fall on a couple of patron states: the US and China.

Conclusion

We should note that all deficiencies on countering money-laundering and terror funding do not come from state sponsorship of terror. Some nations have not foreseen the extent of deviousness that can be brought to bear for achieving nefarious ends. One FATF Report, for example, is on Japan’s progress in strengthening measures to tackle money laundering and terrorist financing.

In the world of crime, innovation tends to stay two steps ahead of law enforcement. Therefore, we can expect the FATF to remain actively employed in the foreseeable future.

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