FATF Evaluates India’s Efforts Against Financial Crimes

Context;

Recently, the Financial Action Task Force (FATF) released a Mutual Evaluation Report (MER) on India, approved during their plenary session in Singapore. The report specifically assessed India’s efforts in combating money laundering (ML), terrorist financing (TF), and proliferation financing.

Relevance:

GS II: International Relations

Dimensions of the Article:

1. Highlights of the MER Report on India
2. Significance of the MER Report on the Indian Economy
3. Financial Action Task Force (FATF)

Highlights of the MER Report on India

• Classification by FATF
  • India classified into the ‘regular follow-up’ category along with Russia, France, Italy, and the UK.
  • Required to submit progress report on recommended actions by October 2027.
• FATF Group Categories
  • FATF categorizes member countries into regular follow-up, enhanced follow-up, grey list, and black list.
  • Regular follow-up is the top category; only 5 G20 countries, including India, are in this category post-Mutual Evaluation Report.
• Compliance and Challenges
  • India achieves strong results and high technical compliance.
  • Must address delays in prosecutions related to money laundering and terrorist financing.

Significance of the MER Report on the Indian Economy

• Boost to Financial System
  • Positive FATF evaluation boosts confidence in India’s robust financial system.
  • Strengthens initiatives like Gujarat International Finance Tec-City (GIFT City) in attracting international financial institutions.
• Credit Ratings and Borrowing Costs
  • Improved reputation could lead to better credit ratings, potentially lowering borrowing costs for Indian entities in global markets.
• Foreign Direct Investment (FDI)
  • A trustworthy financial system attracts more FDI, especially in sectors like fintech and e-commerce where financial integrity is crucial.
  • Companies like Amazon and Walmart have made significant investments in India.
• Global Expansion of UPI
  • Endorsement supports global expansion of India’s Unified Payments Interface (UPI).
  • UPI operational in countries like Singapore and UAE, with plans for further international expansion.
• Boost to Fintech Sector
  • Positive evaluation accelerates growth of India’s fintech sector.
  • Companies like Paytm and PhonePe may find it easier to expand internationally, attracting more venture capital and fostering innovation in blockchain and digital currencies.
• Efficient Remittances
  • Improved financial systems make remittances from NRIs more efficient and cost-effective.
  • Increases volume of remittances, significant for India’s foreign exchange reserves.

Financial Action Task Force (FATF)

• The Financial Action Task Force (on Money Laundering) (FATF) is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat money laundering.
• In 2001, its mandate was expanded to include terrorism financing.
• FATF is a “policy-making body” that works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
• FATF monitors progress in implementing its Recommendations through “peer reviews” (“mutual evaluations”) of member countries.
• Since 2000, FATF has maintained the FATF blacklist (formally called the “Call for action”) and the FATF greylist (formally called the “Other monitored jurisdictions”).
• The objectives of FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

FATF Greylists

• FATF greylist is officially referred to as Jurisdictions Under Increased Monitoring.
• FATF grey list represent a much higher risk of money laundering and terrorism financing but have formally committed to working with the FATF to develop action plans that will address their AML/CFT deficiencies.
• The countries on the grey list are subject to increased monitoring by the FATF, which either assesses them directly or uses FATF-style regional bodies (FSRBs) to report on the progress they are making towards their AML/CFT goals.
• While grey-list classification is not as negative as the blacklist, countries on the list may still face economic sanctions from institutions like the IMF and the World Bank and experience adverse effects on trade.
• Unlike the next level “blacklist”, greylisting carries no legal sanctions, but it attracts economic strictures and restricts a country’s access to international loans

FATF Blacklists

• FATF Blacklists is Officially known as High-Risk Jurisdictions subject to a Call for Action.
• FATF blacklist sets out the countries that are considered deficient in their anti-money laundering and counter-financing of terrorism regulatory regimes.
• The list is intended to serve not only as a way of negatively highlighting these countries on the world stage, but as a warning of the high money laundering and terror financing risk that they present.
• It is extremely likely that blacklisted countries will be subject to economic sanctions and other prohibitive measures by FATF member states and other international organizations.

-Source: The Hindu