Countries Should be Aware of Degrees of Terrorist Financing: FATF

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What’s in Today’s Article?

  • Why in the News?
  • About Financial Action Task Force (FATF)
  • Objectives of FATF
  • Members of FATF
  • What are FATF 'Grey List' and 'Black List'?
  • Significance of the FATF
  • FATF and India’s Legal and Institutional Frameworks
  • News Summary

Why in the News?

  • At the plenary that concluded recently, delegates from the Financial Action Task Force participated in the discussions on key money laundering, terrorism financing and proliferation financing issues at the FATF headquarters in Paris.

About Financial Action Task Force (FATF)

  • The Financial Action Task Force (FATF)is an intergovernmental organisation founded in 1989.
  • It is an initiative of the G7 countries to develop policies to combat money laundering.
    • In 2001, its mandate was expanded to include terrorism financing.
    • It has also started dealing with virtual currencies.
  • It sets international standards that aim to prevent these illegal activities and the harm they cause to society.
  • It is a “policy-making body” which works to generate the political will to bring about national legislative and regulatory reforms in money laundering.
  • It monitors progress in implementing its recommendations through "peer reviews" ("mutual evaluations") of member countries.
  • The FATF Secretariat is located in Paris.

Objectives of FATF

  • FATF sets standards and promotes effective implementation of:
    • legal, regulatory and operational measures for combating money laundering.
    • The FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.

Members of FATF

  • The FATF currently comprises 38 member jurisdictions and two regional organisations, representing most major financial centres in all parts of the globe.
  • India became an Observer at FATF in 2006. In 2010, India was taken in as the 34th country member of FATF.

What are FATF 'Grey List' and 'Black List'?

  • FATF has 2 types of lists:
    • Black List:
      • 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.
    • 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.
    • Consequences of being in FATF Grey List:
      • Economic sanctions from IMF, World Bank, ADB
      • Problem in getting loans from IMF, World Bank, ADB and other countries
      • Reduction in international trade
      • International boycott

Significance of the FATF

  • The FATF Recommendations provide a comprehensive framework of measures to help countries tackle illicit financial flows.
  • These include a robust framework of laws, regulations and operational measures to ensure national authorities can take effective action to detect and disrupt financial flows that fuel crime and terrorism, and punish those responsible for illegal activity.
  • The cornerstone of the FATF Recommendations is the risk-based approach which emphasizes the need for countries to identify and understand the money laundering and terrorist financing risks they are exposed to.
  • This ensures they can prioritise their resources to mitigate risks in the highest risk areas.
  • The FATF continuously monitors new and evolving threats to the financial system and regularly updates and refines its Recommendations so that countries have up-to-date tools to go after criminals.
  • To help countries implement its Standards, the FATF also creates guidance and best practice papers on range of issues.

FATF and India’s Legal and Institutional Frameworks

  • Money laundering has evolved as a serious concern in India considering the fact that the country is one of the largest growing economies in the world.
  • Illegal activities committed within and outside the country, like drug trafficking; fraud, counterfeiting of Indian currency; transnational organised crime; human trafficking; and corruption are the sources of money laundering in India.
  • As far as the legislative framework in the country is concerned, the first parliamentary law provided for the prevention of certain unlawful activities of individuals and associations and for matters connected therewith.
    • It was known as the Unlawful Activities (Prevention) Act, 1967 (UAPA) which was amended in 2004 to criminalise terrorist financing.
  • The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 was introduced to prevent smuggling.
  • The Smugglers and Foreign Exchange Manipulators Act, 1976 provided for the forfeiture of illegally acquired properties of smugglers and foreign exchange manipulators.
  • The Foreign Contribution (Regulation) Act, 1976 dealt with regulating the acceptance and utilization of foreign contribution and foreign hospitality by persons and associations working in the important areas of national life.
  • The Narcotic Drugs and Psychotropic Substances Act, 1985 made stringent provisions for the control and regulations of operations relating to narcotic drugs and psychotropic substances and
  • The Foreign Exchange Management Act (FEMA), 1999 was enforced to regulate the development and maintenance of foreign exchange market.
  • The Prevention of Money Laundering Act, 2002 (PMLA) which came into force in 2005 and amended in 2009 and 2012 was introduced to counter the trend of money laundering.

News Summary

  • The second Plenary of the FATF under the Presidency of T. Raja Kumar of Singapore concluded today.
  • Delegates from over 200 jurisdictions of the Global Network participated in these discussions at the FATF headquarters in Paris.
  • One of the key highlights of the FATF Plenary is that it has suspended the membership of the Russian Federation.
  • In a major milestone, the FATF agreed on revisions of transparency and beneficial ownership of legal arrangements.
  • Delegates also agreed on new guidance which will help countries and the private sector implement FATF’s strengthened requirements on transparency and beneficial ownership of legal persons.
  • Delegates further agreed on an action plan to drive timely global implementation of FATF standards relating to virtual assets (also termed crypto assets) globally.

Q1) What is Money Laundering?

Money laundering is the process of illegally concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source.

Q2) What is a Tax Haven?

A tax haven is a term, sometimes used negatively and for political reasons, to describe a place with very low tax rates for non-domiciled investors, even if the official rates may be higher. In some older definitions, a tax haven also offers financial secrecy.

Source: Countries should be aware of degrees of terrorist financing: FATF plenary | Global Investigations