The Financial Action Task Force (FATF), the global watchdog for anti-terrorist financing and anti-money laundering activities, set up by the G7 group of advanced economies to protect the global financial system, just concluded its October 2021 plenary session last month with an interesting set of announcements.

While it has retained Pakistan, Morocco, Albania and Yemen on its grey list for not fully complying with FATF’s standards, it has added Turkey, Jordan and Mali to the list this time. When a country is added to the grey list, it faces increased monitoring and intense scrutiny from the FATF till it is able to fully comply with the FATF standards and demonstrate that it has been able to successfully eliminate terrorist financing activities and money laundering activities. The FATF’s black list is for rogue nations that are delinquent and do not show any inclination to progress along FATF’s action plans. Countries find themselves on FATF’s grey list or black list at different degrees depending on how grave their non-compliance is.

Citing improvements in their efforts to prevent money laundering and terrorist financing activities, the FATF has taken Botswana and Mauritius off the grey list.

This article aims to understand the FATF’s position on the newly grey listed countries and explains what non compliance with FATF’s standards, grey listing and black listing means for a country.

Pakistan

The FATF has retained Pakistan on its grey list as it has not fully complied with FATF’s clearly laid out action plans, despite the fact that incremental progress was demonstrated with each plenary session, since 2018. The FATF has now asked Pakistan to investigate and prosecute UN-designated terrorists including Hafiz Saeed and Masood Azhar as a final action point, a difficult and controversial move, for the country.

India has been critical of the support that Pakistan has been giving to terrorist financing activities, especially since the Mumbai terror attacks of 26/11. However, India cannot exert pressure directly at the FATF to blacklist (completely economically isolate) Pakistan, since the scrutiny is evidence based, and each member country has only one vote share. Decisions on blacklisting or grey listing are taken by consensus of the 39 member countries. So, India has been working through its diplomatic channels to gain support of other FATF member countries to vote towards blacklisting Pakistan.

Turkey

The FATF has now added Turkey to its grey list of high-risk jurisdictions. It had put Turkey under scrutiny two years ago and was evaluating the money laundering and terrorist financing risks it faces. Its recent demotion has taken place since the detailed review process did not reveal any serious actions. The FATF, in a press release, has said that although Turkey understood the impending risks, there were “serious shortcomings”, particularly in the understanding of the need to improve measures to freeze assets linked to terrorism and weapons of mass destruction proliferation. This has now been listed as an immediate action item for the country.

According to the FATF, Turkey also needs to address “serious issues of supervision” in its banking and real estate sectors, and with gold and precious stones dealers. It also must show that it is pursuing terrorist financing prosecutions and prioritising cases of U.N.- designated terrorist organisations such as ISIL and al Qaeda.

Since Turkey came under FATF’s scrutiny, foreign investors have fled Turkey, citing other reasons like political interference in monetary policy, high inflation and low currency reserves.

Turkey’s grey listing serves as a double blow to Pakistan, which thus far depended on the support of Turkey, along with Malaysia and China to keep itself off the FATF’s black list since the FATF scrutiny of Pakistan began in 2018.

Jordan and Mali

Jordan has now become the third Arab country after Yemen and Syria to join the FATF’s grey list, while Mali has joined Ghana, Jamaica, Uganda and Zimbabwe from the African subcontinent. Since the announcement of their grey listing, both countries made “high-level political commitments” to work with the FATF to eliminate its serious deficiencies.

After a 2019 evaluation of Jordan by the FATF, mandating the country to implement anti-money laundering and anti-terrorist financing practices, Jordan was found to be “compliant on four and largely compliant on 15 of the FATF 40 Recommendations. It also amended its existing law[2] on anti-terrorism but this move did not meet the June 2021 deadline set by the FATF due to opposition from within the Jordanian government. This move, if it was done in a timely manner, would perhaps have kept Jordan out of the grey list.

Likewise, the FATF found serious deficiencies in Mali’s efforts and it has chalked out an action plan for Mali to comply with as well, failing which it will be placed under rigorous scrutiny and could face economic losses similar to other countries that have been on the list for a while.

What does non-compliance with FATF mean?

Punitive measures for non-compliance with FATF’s standards and continued inaction on withdrawing support towards terrorist financing and money laundering activities means ‘partial or complete economic isolation’ for the country[3]. 

These high risk countries are often denied access to international banking networks and face difficulties in obtaining multilateral development funds from institutions like International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and the European Union, along with bilateral financial assistance as well. The country’s ties, with foreign banks and investors from countries that are members of the FATF, are subsequently restricted (if on the grey list) or severed entirely (if on the black list).

FATF grey listing or blacklisting comes with heavy economic costs to the scrutinised country. For example, for Pakistan, FATF’s grey listing has caused foreign firms to now be far more cautious about investing in it. A paper, ‘Bearing the cost of global politics – the impact of FATF grey-listing on Pakistan’s economy[4]’, published by an Islamabad-based think-tank, Tabadlab, shows that that Pakistan’s grey-listing by the FATF from 2008 to 2019 may have resulted in a cumulative GDP loss of $38 billion.

International Monetary Fund (IMF) research this year found that grey-listing reduces capital inflow[5] by an estimated 7.6% of gross domestic product (GDP), while foreign direct investment (FDI) and portfolio flows are also adversely affected.

North Korea and Iran have been consistent on the black list for years and have been cut off from international financial networks due to their funding for weapons of mass destruction[6]. FATF’s grey list currently includes 23 countries[7], namely Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Haiti, Jamaica, Jordan, Mali, Malta, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, Yemen and Zimbabwe.

Some countries like Sri Lanka in 2019, have in fact gotten off the grey list after fulfilling all the action items listed by the FATF in 2017 when its time bound scrutiny began. The FATF announced this move after an onsite assessment was held to verify that the reforms mandated by the FATF were being implemented and sustained and that there was the necessary political commitment to monitor and sustain the implementation of the reforms in the future. The FATF’s sub-regional grouping, the Asia Pacific Group, (APG) has since been monitoring Sri Lanka’s efforts and have found them satisfactory, eliminating the chance of it being grey listed again.

The FATF next evaluation of the progress that the 23 countries listed above have made on the action plans made by the FATF to eliminate terrorist financing and money laundering activities on their soil will take place in February 2022. It will decide to either retain the partially compliant nations on the grey list and urge them to fully comply; blacklist them for non-compliance or may take them off scrutiny if it is satisfied with the country’s efforts.

Pakistan will be the topic of intense scrutiny and debate at the February 2022 plenary where the FATF will have to make a concrete decision either ways – to take the country off the grey list for its successful efforts or to retain it on the grey list and push it to fully comply. Pakistan’s non-compliance on just one, but a very crucial action item – to identify and prosecute UN designated terrorists like Hafiz Saeed and Masood Azar – will be the focus of the evaluation. It is highly unlikely that Pakistan will be moved to the blacklist, since it has the support of Turkey, China and Malaysia, fulfilling the minimum number of votes it needs to stay off the black list.

The nature of the decision on Pakistan will also gauge the ability and effectiveness of the FATF in enforcing strict standards and taking punitive actions against non-compliant countries.

Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.

 References:

[1]https://www.hindustantimes.com/india-news/fatf-retains-pak-on-its-grey-list-101634841990164.html

[2]https://www.occrp.org/en/daily/15383-jordan-mali-and-turkey-grey-listed-by-global-finance-watchdog

[3]https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/call-for-action-october-2021.html

[4]https://tabadlab.com/bearing-the-cost-of-global-politics/

[5]https://www.imf.org/-/media/Files/Publications/WP/2021/English/wpiea2021153-print-pdf.ashx

[6]https://www.fatf-gafi.org/about/

[7]https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-october-2021.html

Purvaja Modak

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Purvaja Modak is a Research Fellow, International Relations – Geoeconomics at CPPR. Her research focuses on issues of global economic governance, international trade and finance, economic diplomacy and multilateral financial institutions.
Prior to joining CPPR, she was a Researcher for Geoeconomic Studies and the Manager of the Research Office at Gateway House: Indian Council on Global Relations, a Mumbai based foreign policy think tank.. She was a fellow at the 2nd G20 Global Leadership Programme 2019, hosted by the Korean Development Institute (KDI) and the Korean Ministry of Strategy and Finance. Purvaja has also held Research Assistant and Research Associate positions in her academic departments at both Bachelors and Masters levels. She has also interned at Reliable Investments, an exclusive franchisee of Motilal Oswal Securities Ltd.
She holds a Masters degree in Economics (MA) from the University of Mumbai with a focus on international trade, finance and regional monetary arrangements and a Bachelors Degree in Economics (BA) from Jai Hind College, Mumbai.

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