Mauritius joins Pakistan on FATF's 'grey list'; questions over FPI inflows

Mauritius has joined Pakistan on the “grey list” of the Financial Action Task Force (FATF), an inter-governmental body which sets anti-money laundering standards. The development is a body blow to the country, which has been trying hard to shed its image as a quasi-tax haven in the recent past.

The move also puts a question mark on the existing, as well as new investments flowing into India from the country. Mauritius is the second-largest source of foreign portfolio investor (FPI) flows into India, after the US, and has remained so despite the amendment to the tax treaties between the two countries in 2017.
 

Custodians and tax advisors to FPIs went into a huddle and are reaching out to the Securities and Exchange Board of India (Sebi) with their concerns.

One of the large foreign custodians put a halt on trades from Mauritius on Monday, said a person in the know. The move comes at a time when the markets are already grappling with FPI outflows amid an increase in coronavirus cases.

About 80 per cent of FPIs from Mauritius are already classified as Category-II by Sebi. The grey list tag dashes any hopes of these funds moving to Category-I.

What’s more, the remaining 20 per cent of funds in Category-I may have to be moved to Category-II, as well considering the country’s new status, said experts.

“We are closely observing decisions taken by custodians on the existing, as well as new FPI applicants, many of whom have confirmed denying any fresh FPI registration to Mauritius-based applicants. What happens to the investments made by the existing Mauritius-based FPIs and those FPI applications which are underway remain to be seen,” said Neha Malviya, director, Wilson Financial Services.

“There will be an impact on inflows from Mauritius and funds may want to come from their home jurisdictions or locations, such as Singapore, Malta and Cyprus,” said Viraj Kulkarni, founder, Pivot Management Consulting.

Mauritius has been put on the list of jurisdictions that require increased monitoring. This list is often externally referred to as the “grey list”. “Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring,” said a note put out by the FATF.

According to experts, current regulatory guidelines dictate that FPIs should not come from a jurisdiction that is on the sanctioned list of the United Nations Security Council or from a country which has been reported by the FATF as having strategic anti-money laundering or terror-financing deficiencies to which counter measures apply.

“While the FATF has put Mauritius in an increased monitoring list, it did not prescribe a countermeasure, such as a sanction or financial embargo. To that extent, the immediate regulatory impact could be limited. Still, the grey list would create a huge perception issue, especially among large investors, such as pension, endowment, and sovereign wealth funds, investment charters of which may prohibit investment through such jurisdictions,” said Divaspati Singh, partner, Khaitan & Co.

Mauritius’ financial services regulator Financial Services Commission had met Sebi officials last year, asking it to reconsider its stance of allowing only FATF members to be eligible for the Category-I status as foreign portfolio investors.

EU blacklists Cayman 

The European Union (EU) has added British Overseas Territory Cayman Islands and three countries — Palau, Panama and the Seychelles — to its blacklist of tax havens. The EU said these jurisdictions did not put in place the necessary tax reforms. Over 90 per cent of funds from Cayman Islands are currently classified as Category-II for investments into India.