Why next FATF review is critical for India?

News: The evaluation of India by the Financial Action Task Force (FATF) could start by the September-October year, followed by an on-site visit in February 2023.

What is FATF and what is its objective?

FATF is an inter-governmental body that

• Sets standards, and develops and promotes policies to combat money laundering and terrorist financing.
• Generates the necessary political will to bring about national legislative and regulatory reforms in these areas.
• Works to stop funding for weapons of mass destruction.

FATF currently comprises 37 member jurisdictions (countries) and two regional organizations (European Commission and Gulf Cooperation Council).

What are the FATF recommendations?

These are framework of measures that countries should implement in order to combat money laundering and terrorist financing.

FATF also monitors and conducts peer reviews of each member to ensure they implement its standards fully and effectively.

What is FATF’s grey list?

This means that a jurisdiction is under increased monitoring. The country has to swiftly resolve the identified strategic deficiencies within agreed timeframes. Presently, 23 countries — including Pakistan, Myanmar, Cambodia, Philippines, Morocco — are in the grey list.

FATF also has ‘high risk jurisdictions’ above the grey list. These are countries with serious deficiencies in their anti-money laundering (AML) rules and regulations.

Why should India be concerned this time?

The last review of India was in 2010. In that review, FATF observed that India has made significant progress in addressing the deficiencies.

This round will be crucial due to following reasons:

Money laundering instances: From Yes Bank to IL&FS to Dewan Housing Finance. In all these cases, allegations of money laundering were levelled against the top management and promoters.

Questions over demonetization and crackdown on shell companies will be raised during the assessment.

Recent case of the Paytm Payments Bank – The banking regulator has ordered an external audit of the IT systems of the payments bank. The reason for clampdown is not clear but it could be due to violation of the KYC-AML norms.

Issue of PEP — Politically Exposed Persons: There has been no mention of PEPs in the Prevention of Money Laundering Act, 2002. This could be viewed as a regulatory gap during the FATF assessment.

How are the regulators preparing?

The Indian financial sector regulators have also increased their vigil and scrutiny on regulated entities. The focus on AML has gone up significantly in the last two-three years.

The Reserve Bank of India has, for instance, introduced a dedicated KYC-AML inspection team to exclusively look into compliance of banks and other financial sector entities.

​​Financial sector is only a part of the FATF assessment. The watchdog will also look at other sectors such as narcotics, smuggling, wildlife trafficking, which are known for fund diversion and money laundering.

Source: This post is created based on the article “Why next FATF review is critical for India?” published in Live Mint on 17th March 2022.