Why FATF removing Pakistan from 'grey list' has miffed India so much

FATF started out with 16 developed countries as members and added 12 by 1992. It has since expanded to the current list of 39 members

India has reasons to be dismayed at the global Financial Action Task Force (FATF) to lift the pressure off Pakistan.  The global anti-money-laundering forum has only 37 countries as full members and two regional organisations. India is one of them, but Pakistan is not. 

The FATF makes countries sweat a lot to get the prized membership as India discovered in 2010-12. “We literally camped in the North Block, for nights when the FATF supervisors came visiting”, said one of them involved in the exercise. After the global meltdown of 2008 financially and rattled by the Mumbai terror attack, the Indian government found it did not have a global connect to move against terror financing. The rapid approval by the cabinet to pitch for FATF membership was radical for India as it meant acceding to some loss of sovereignty in favour of global scrutiny of domestic financial flows.

External affairs ministry spokesperson, Arindam Bagchi was therefore right last week when he connected the FATF membership with what India gained in tracking terror. “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..," his statement noted.

The membership was read as a) the first step to attracting stable and sizeable global investments into a country. No reputed investment entity was expected to put big money in a place where the FATF looks askance b) get global support to track the dreaded narcotics-led financial route from Af-Pak that was sponsoring terror. 

At both G20 and FATF, this was India’s calling card. “FATF membership is important as it will help India to build the capacity to fight terrorism and trace terror funds and to successfully investigate and prosecute money laundering and terrorist financing offences’, noted then-Finance Minister Pranab Mukherjee.

Yet, a decade later, even as the USA has retained its question marks on Pakistan’s commitment to weed out financial support to terrorism, (for evidence, see the US State Department’s Bilateral Relations Fact Sheet of 15th August 2022), the FATF at the same time has decided to lift Pakistan along with Nicaragua off “increased monitoring” of financial flows, bringing it nearer to full membership of the forum. In the process, it has now possibly added itself to the list of multilateral forums, which are slipping up in their appointed roles, in the third decade of the twenty-first century. 

The positions are seemingly contradictory. There were always question marks about how effective is the policing by the FATF on global financial flows. Those questions are now more out in the open. 

FATF and India

The full member countries, as FATF itself describes, represent most major financial centres in all parts of the globe. These members get their clout as FATF is largely an organisation of Organisation for Economic Co-operation and Development (OECD) countries, with the potential clout of the global financial centres to dry out the flow of international money to any nation, if it so chooses. It is doing the same with Russia and thus comes closest to a description of a plurilateral sanctions body. It was created by the G7 in 1989 to play this role, viz combat money laundering and terrorist operations. 

This offers it the power to craft a multilateral level of sanctions, quite different from the unilateral sanctions that countries led by the USA are now keen to deploy. By rights, the FATF sanctions, ranging from the worst, the “blacklist” to the “increased monitoring regime”, should be enough to make countries fall in line. It has not as its own “Report On The State Of Effectiveness And Compliance With The FATF Standards’ issued in April this year reports: “Looking towards sanctions applied by supervisors to supervised entities, performance is low. Countries’ sanctions are not very effective”, (page 24) notes. FATF is therefore struggling to implement its own strict standards. 

What should then one make of the decision about taking Pakistan and Nicaragua off “increased monitoring”? Neither of them is a full member of the organisation. Pakistan is a member of the Asia Pacific Group of FATF, making it an associate member. As of now, there are nine such Groups, pan-continental springboards for the nations to graduate to become full members. Full members are automatically members of these groups. 

By the way, the Paris-based organisation does not use the term “full” member. It started out with 16 developed countries as members and added 12 by 1992. It has since expanded to the current list of 39 members. Most of them joined after India became full-fledged members in 2010. 

It takes a lot of time and investment for a country to become a full member of FATF as India discovered. India made major efforts to join FATF after the Mumbai terror attack of 2008, revealing how financing had played a key part in the run-up. By 25th June 2010, India became the 34th member. The government press release noted, “FATF membership is important as it will help India to build the capacity to fight terrorism and trace terror funds and to successfully investigate and prosecute money laundering and terrorist financing offences”.

In the run-up to the FATF membership, India discovered its legislation on money laundering lacked teeth. Also, there was no overarching legislation that linked such crimes across various financial sectors like banks, insurance or the stock markets. All these acts for the different sectors had to be amended with clauses to include money laundering as a criminal offence. “There was no way in the middle of national elections that we could change those laws. We had to offer strict compliance schedules—an Action Plan, to do so within the next two years”, said an official. 

The efforts bore fruit. In February 2012, the FATF plenary discussed the fourth follow-up report on India’s progress with reference to the Action Plan that it had committed to in June 2010. “The plenary appreciated the actions taken by India and the commitment of India to the international Anti-Money Laundering/Combating the Financing of Terrorism —AML/CFT standards”. It was akin to entering the UN Security Council as a permanent member—-the member nations saw India also as a potential competitor to drive. Yet “On the basis of the “Statement of Objects and Reasons” for the proposed amendments to these three (Prevention of Money Laundering Act, Unlawful Activities Prevention Act and the Narcotics Drugs and Psychotropic Substances Act) AML/CFT Statutes it can be deduced that India clearly has the intention to address the technical deficiencies identified”, noted a release issued by the FATF and the government. These were like medals of honour for the Indian finance ministry. 

There was one more benefit India expected to draw upon. Indian tax policy had always been touchy about why tax havens were not being penalised. FATF membership was supposed to help New Delhi gain information on black money holders. “India played an active role in finalizing the Declarations which included delivering an effective programme of peer review, capacity building and countermeasures to tackle non-cooperative jurisdictions that fail to meet regulatory standards. As a result, all the tax havens have now agreed to end the bank secrecy’, Mukherjee had said in Parliament.

FATF now

Rather strangely, taking the pressure off the pedal FATF comes even as it has raised monitoring of Myanmar for the same set of issues. Also, the USA has continued to sanction more than one Pakistan-based entity. The Bilateral Relations Fact Sheet issued by the US State Department on August 15 clearly states Pakistan’s “implementation of UN sanctions against (terrorist) entities is uneven. The United States continues to urge Pakistan to take decisive action against these groups…”

So, what gives? In the run-up to the G20, FATF adds its name to the list of the multilateral institution, which is facing tests of credibility. It also makes coming up with fresh international conventions like the minimum threshold for corporate tax less appealing to countries like India.