South Asia

Explainer: FATF, Its 'Grey' List and Pakistan's Lingering Presence in It

Having spent 48 months on the infamous list, Pakistan is now very close to leaving it. But there is still one more step left.

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New Delhi: On the ‘grey list’ of countries with “deficiencies” in the anti-money laundering and counter-terror financing regime since June 2018, Pakistan now has cause for relief.

On June 17, 2022, the Financial Action Task Force announced in Berlin that Pakistan has fully met all 34 action items in its 2018 action plan. But, it has not completely exited the grey list – as there is still one more step left, that of a report by an ‘on-site’ team. 

In its last hybrid plenary, in March 2022, the global money laundering and terrorist financing watchdog had decided against removing Pakistan from the category despite the country meeting 32 out of 34 action points.

However, Pakistan’s progress on its global commitments to fight financial crimes was appreciated at the concluding session of the March plenary, which noted that Pakistan had completed 26 of the 34 action items in its 2018 action plan and the seven action items of the 2021 action plan of the watchdog’s Asia Pacific Group (APG).

Here is a quick overview of the FATF categorisation and Pakistan’s chequered history with the inter-governmental group.

Why was this FATF meeting significant?

Every year, three plenary meetings are held by the inter-governmental body tasked with rooting out money laundering and terror financing by plugging loops holes in the international financial system. In the March meeting, officials of 206 countries were present. 

Like the one before, this plenary is a hybrid one, necessitated by COVID-19 restrictions. A significant number of participants took part in person. The German government has hosted this event in Berlin, and meetings have been taking place since June 10, 2022.

This is the seventh and last plenary under the German Presidency of Dr Marcus Pleyer.

For India, FATF has become an important measure to pressure Pakistan to dismantle the infrastructure supporting cross-border attacks.

A session at the June 2022 FATF plenary in Berlin. Photo: Twitter/@FATFNews

What are the ‘black’ and ‘grey’ lists?

These two terms do not exist in official FATF terminology. The group does identify “jurisdictions with weak measures” through updates on two public lists of countries (or jurisdictions in FATF lingo) issued at the end of the plenary held thrice a year.

The first one, colloquially known as a ‘black list’, is for countries with such “significant strategic deficiencies” that the FATF calls on its members and non-members to apply counter-measures”. This ‘black list’ category has a smaller sub-group group which is less stringent – and only calls on its members to use enhanced due diligence measures proportionate to the risks arising from the deficiencies associated with the country”. 

The second public document is of countries with “strategic deficiencies” in their regime to counter money laundering and terror financing. Once listed as ‘jurisdiction under increased monitoring’ by FATF, they must complete an action plan within a specific period. This one is colloquially referred to as the ‘grey list.’

FATF does not ask its members to take additional “due diligence” measures against the ‘grey list countries” but encourages states “to take into account the information presented below in their risk analysis”.

What’s the procedure to leave the ‘grey list’?

As per the FATF procedure, a country must first address “all or nearly all” of the components of its action plan. Once the multilateral body determines that the terms of the action plan have been met, the FATF will organise an on-site visit. The team for the on-site visit has to determine whether the “implementation of the necessary legal, regulatory, and/or operational reforms is underway and there is the necessary political commitment and institutional capacity to sustain implementation.”

If the on-site visit is positive, the FATF will decide to remove the country from the ‘grey list’ at the next plenary meeting.

Why was Pakistan put on the FATF ‘grey list’?

Pakistan had first figured in a FATF statement after the plenary of February 2008. At that time, FATF had noted Pakistan’s recent progress in adopting anti-money laundering legislation but urged financial institutions to be aware of the “remaining deficiencies” that could constitute a vulnerability in the international financial system.

Pakistan gave a “high level” commitment in June 2010 that it would work with FATF and Asia Pacific Group, the regional FATF-like body, to sort out these differences.

The FATF public statement of February 2012 listed Pakistan among countries that have “Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies”. 

In June 2015, Pakistan was “no longer subject to the FATF’s monitoring process under its on-going global AML/CFT compliance process”.

After three years, Pakistan was back on the ‘grey list’ in June 2018. The FATF press release indicated that the ‘action plan’ should primarily look at plugging the holes in terror financing and activities of UN-designated terrorists.

The action plan submitted by Pakistan has 27 points, including full implementation of the targeted financial sanctions against all UN-designated terrorists.

Was there politics behind Pakistan going back on the ‘grey list’ in June 2018?

The US had spearheaded the move that led to the FATF plenary to first propose that Pakistan be assigned to the ‘grey list’ in three months.

In the run-up to June 2018 plenary, Pakistan did take some steps like amending the anti-terrorism act and clamping down on affiliates of Jamaat-ud-Dawa, an UN-designated terror group.

At the same time, JUD leader Hafiz Saeed, the key mastermind of the 2008 Mumbai terror attacks, was allowed to enter the political mainstream, with his political wing contesting seats in the parliamentary elections.

File photo: Supporters shower Hafiz Saeed with flower petals as he walks to court in Lahore, Pakistan, in November 2017. Photo: Mohsin Raza/Reuters

While foreign ministries insist that the FATF is a technical body, geo-politics does play a role, with countries using the money laundering watchdog as diplomatic leverage.

“Bottom line is that FATF’s grey listing of Pakistan should not be looked at in isolation but placed in the larger picture of US-Pakistan relations that have had many ups and downs,” asserted an article in Pakistani newspaper Dawn.

In the run-up to the February 2008 decision, the US had weaned Saudi Arabia away, leaving only China and Turkey supporting Pakistan. China eventually withdrew its objection. A few days later, India publicly congratulated China for its election as vice president of FATF, lending credence to the suspicion that a deal had been reached behind closed doors.

What has happened since Pakistan was put on the ‘grey list’ in 2018?

Since June 2018, all the FATF plenaries have retained Pakistan on the grey list. However, it was not enough to be brought out of the ‘grey list’. But, it was sufficient that Pakistan could not be bumped up to the FATF public statement, with China, Turkey and Malaysia backing Islamabad.

Pakistan raised the pitch that the FATF had been politicised, with Pakistani Prime Minister Imran Khan stating that India wanted to destroy the Pakistani economy. China has also said that there were “political designs” behind “some countries which want to include Pakistan in the blacklist”.

Ahead of the FATF’s October 2019 plenary, the Asia/Pacific Group on Money Laundering, after considering Pakistan’s Mutual Evaluation Report, found critical gaps in Islamabad’s reforms to curb the flow of funds to proscribed terror groups like Jamaat-ud-Dawa and Lashkar-e-Toiba.

Indian defence minister Rajnath Singh had claimed that the FATF would “blacklist Pakistan anytime” – which was seized on by Pakistan’s foreign minister as an example of the politicisation of the body. Since then, statements by Indian political leaders about FATF have been relatively rare.

In October 2019, Pakistan fully met only five of the 27 action points. But, it managed to avoid the ‘black list’ and was given a reprieve till February 2020.

Pakistan managed to deliver on 14 out of 27 action points by February 2020, which allowed FATF to give it a grace period of four months to fully implement the Action Plan. 

With COVID-19 becoming a full-fledged pandemic, the June 2020 plenary was cancelled, and Pakistan got a reprieve of four months till October. The Pakistan government convened a joint session of parliament and passed over a dozen legislations that would upgrade the country’s legal mechanism to meet FATF standards. At the time of the October 2020 meeting – the first virtual plenary in FATF – Pakistan had complied with 21 of 27 action points. 

After the FATF plenary of February 2021, the watchdog announced that Pakistan has made “significant progress” on the entire action plan, adding three more points from the year before. 

“To date, Pakistan has made progress across all action plan items and has now largely addressed 24 of the 27 action items. As all action plan deadlines have expired, the FATF strongly urges Pakistan to swiftly complete its full action plan before June 2021”.

At a post-plenary virtual media briefing, FATF president Marcus Pleyer stated that while progress has been made by Pakistan, there were still “some serious deficiencies”.

In October 2021, the FATF announced that Pakistan would remain on the ‘grey list’ until it further demonstrated that action was being taken against senior leaders of UN-designated terrorist groups 

“It has now addressed, or largely addressed 30 of the items,” Pleyer said.

At March 2022 plenary, FATF encouraged Pakistan to continue making progress in addressing, as soon as possible on “the one remaining item” by undertaking financing investigations and prosecutions to target senior leaders and commanders of UN-designated terrorist groups.

Did Pakistan ever come close to entering the ‘black list’? Why did it remain on the ‘grey’ list for so long?

It was highly unlikely that Pakistan would ever join North Korea and Iran in the FATF public statement. As evident from the composition of the ‘black list’, the US would have to take the initiative to put Pakistan in the top tier of countries whose financial regimes face isolation from the international system.

Two days before the October 2020 FATF plenary began, then US Principal Assistant Secretary of State for South and Central Asia, Alice G. Wells, had praised Pakistan for convicting Hafiz Saeed and his associate as an important step “in meeting its international commitments to combat terrorist financing”. However, India had termed Saeed’s conviction as an ‘eyewash’.

Despite support from countries like Turkey, Malaysia and China, Pakistan had in the time between 2019-2021, not made enough progress to also exit the grey list, as per various technical evaluations.

It got extensions in several plenary meetings primarily because it showed a steady increase in the number of action plan points it has fully implemented. “As long as we see a country is progressing in action items, and we have seen progress with Pakistan, we give them a chance to repair the outstanding issues,” FATF president Marcus Pleyer had told reporters in 2020.

Note: Earlier versions of this explainer appeared on The Wire in February and October 2020.