The Financial Action Task Force (FATF)

Why in News?. India has been advocating for Pakistan’s re-inclusion on the FATF’s “grey list” due to its alleged support for terrorism, including the Pahalgam attack, which Indian authorities attribute to Pakistan-trained terrorists. India is preparing a dossier for the Asia Pacific Group (APG) meeting on August 25, 2025, and the FATF plenary on October 20, 2025, to argue for increased scrutiny of Pakistan.

Relevance : UPSC Pre &  Mains

Prelims : FATF

Mains :   GS 3/ Economy

About FATF:

• The Financial Action Task Force (FATF) is an intergovernmental organization established in 1989 by the G7 Summit in Paris to combat money laundering and terrorist financing.
• Over time, its mandate has expanded to address other threats to the international financial system, such as proliferation financing.

Headquarters: Paris, France.

Purpose:

• To set international standards and promote the effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats.
• To safeguard the integrity of the global financial system.

Membership:

1. • 39 Members: Includes 37 member jurisdictions and 2 regional organizations (European Commission and Gulf Cooperation Council).
   • Observers: Various international and regional organizations like the IMF, World Bank, and UN.
   • India became an FATF member in 2010.

FATF Black List:

The Black List, officially “High-Risk Jurisdictions Subject to a Call for Action,” flags countries with severe AML/CFT deficiencies and little commitment to improvement. These pose significant risks, prompting calls for enhanced due diligence and potential countermeasures like sanctions.

Current Countries (as of June 2025)

• Democratic People’s Republic of Korea (DPRK)
• Iran
• Myanmar

Implications

• Economic Sanctions: Restrictions like asset freezes or trade embargoes deter investment.
• Reputational Damage: Signals non-cooperation, harming global trade.
• Countermeasures: FATF urges members to apply protective measures against money laundering, terrorist financing, and proliferation financing risks.

Compliance Requirements

Financial institutions must implement enhanced due diligence (EDD), including rigorous customer screening and transaction monitoring, for blacklisted countries.

FATF Grey List:

The Grey List, or “Jurisdictions Under Increased Monitoring,” includes countries with AML/CFT deficiencies but committed to addressing them within set timelines. They undergo active FATF monitoring.

Current Countries (as of February 2025):

Algeria • Angola • Bulgaria • Burkina Faso • Cameroon • Côte d’Ivoire • Democratic Republic of Congo • Haiti • Kenya • Lao PDR • Lebanon • Mali • Monaco • Mozambique • Namibia • Nigeria • South Africa • South Sudan • Syria • Tanzania • Venezuela • Vietnam • Yemen

Recent Changes:

• Removed: Philippines, Mali, Tanzania, Croatia (after resolving deficiencies).
• Added: Nepal, Lao PDR (due to identified AML/CFT gaps).

Implications:

• Economic Impact: Reduced investment, higher transaction costs, and challenges accessing international loans.
• Increased Monitoring: Regular progress reports and assessments required.
• Reputational Risk: Signals elevated risk, prompting financial institutions to apply EDD.

Compliance Requirements:

Businesses use a risk-based approach (RBA) for grey-listed countries, often applying EDD as required by regional regulations. Robust customer due diligence (CDD) and transaction monitoring are essential.

FATF White List (Unofficial):

The informal White List includes countries compliant with FATF standards, identified through mutual evaluations. These jurisdictions have effective AML/CFT systems and are not on the Black or Grey Lists.

Examples of Countries:

United States • Canada • United Kingdom • Australia • Japan • Germany

Other Lists and Context:

• OECD Tax Haven List: Focuses on tax transparency, separate from FATF but related. No countries are currently listed as uncooperative tax havens.
• EU and UK High-Risk Lists: Often align with the Grey List, requiring EDD for listed jurisdictions.
• FATF Monitoring: Mutual Evaluation Reports (MERs) assess compliance, influencing list placements based on adherence to standards like customer due diligence and suspicious transaction reporting.