Decoded: Why the next FATF review is critical for India

Put off twice in the last two years due to Covid-19 pandemic, the evaluation of India by the Financial Action Task Force (FATF) could start by the end of the year. There are reasons the assessment this time round will be of significance.

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. FATF’s international standards aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
 

FATF currently comprises 37 member jurisdictions (countries) and two regional organisations (European ommission and Gulf Cooperation Council), representing most major financial centres in all parts of the globe.

What are the FATF recommendations?
 

The FATF recommendations set out a comprehensive and consistent framework of measures that countries should implement in order to combat money laundering and terrorist financing. FATF also works to stop funding for weapons of mass destruction.

The recommendations are updated regularly.
 

FATF monitors countries to ensure they implement its standards fully and effectively, and holds to account those that do not comply. It conducts peer reviews of each member on an ongoing basis to assess the levels of implementation of its recommendations. A complete mutual evaluation takes up to 18 months.

What is FATF’s grey list?
 

When FATF places a jurisdiction under increased monitoring, it means the country has committed to swiftly resolve the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the “grey list”. At present, 23 countries — including Pakistan, Myanmar, Cambodia, Philippines, Morocco — are in the grey list. Above the grey list is what FATF refers to as a “high risk jurisdiction”, for countries with serious, strategic deficiencies in their anti-money laundering (AML) rules and regulations.

When is India’s FATF review?
 

Media reports suggested that the technical review for India will likely start in September-October this year, followed by an on-site visit in February 2023. The report of the assessment will be published after 10 months of the on-site visit.

The last review of India was in 2010. In that review, FATF observed that India has made significant progress in addressing the deficiencies observed in the mutual evaluation report and removed the country from regular follow-ups.

Why should India be concerned this time?
 

The next round of review for India will be crucial since there have been several instances of major money laundering events in the last few years. At the same time, Indian financial sector regulators have increased their vigil and scrutiny on regulated entities. The focus on AML has gone up significantly from the regulator’s perspective in the last two-three years, as has the scrutiny of AML compliance of the regulated entities.
 

As part of its preparation for the FATF assessment, 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.

Since the last FATF India review, several instances of high-profile financial fraud cases have been reported — 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. These cases are currently being examined by the Enforcement Directorate for violation of anti-money laundering norms.
 

In addition, questions over the demonetisation exercise of 2016 and the crackdown on shell companies will be raised during the assessment.
 

And then there is the recent case of the Paytm Payments Bank, now barred by the RBI from onboarding new customers. The banking regulator has ordered an external audit of the IT systems of the payments bank, the report of which will be taken into account before the ban is lifted. While the RBI has not spelt out the reason for clamping down on the entity, which is mainly into payments and remittances, sources indicate violation of the KYC-AML norms would be one.
 

More importantly, the FATF looks at how many cases of violation of money laundering norms were lodged, cases where the chargesheet was filed, and the percentage of accused acquitted or punished.
 

Another issue for India would be the PEP — Politically Exposed Persons — from the FATF point of view. 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.
 

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.