Financial Action Task Force

Indian Economy glossary

Also called: FATF · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

The Financial Action Task Force (FATF) is an intergovernmental body, set up in 1989, that sets global standards against money laundering, terrorist financing and the financing of weapons of mass destruction. It checks whether countries follow these standards, and it publicly names countries that fall short.

It matters because a country's FATF rating affects how much foreign banks and investors trust its financial system. India's main anti-money-laundering (AML) laws and rules follow FATF standards, including the PMLA 2002, KYC (Know Your Customer) rules and beneficial-ownership checks.

Explanation

What FATF does

  • It sets standards, not laws. FATF issues Recommendations, which are global rules on what countries should do. Each country then turns them into its own laws, such as India's PMLA 2002.
  • Its main targets:
  • Money laundering: making "dirty" money (from crime or corruption) look clean by passing it through banks, firms or assets.
  • Terror financing: moving money, even clean money, to terrorist groups.

  • Proliferation financing: funding the spread of weapons of mass destruction.

  • What it asks countries to build:

  • KYC and customer due diligence: banks must check who their customers are.
  • Suspicious-transaction reporting to a national Financial Intelligence Unit (FIU).
  • Beneficial-ownership transparency: finding the real human being (natural person) who owns or controls a company, trust or fund.
  • Covering new risks such as virtual assets (crypto) and their service providers.

How it checks countries: mutual evaluation

  • Mutual evaluation is a peer review. Experts from other member countries assess two things:
  • Technical compliance: do the country's laws match the standards?

  • Effectiveness: do those laws actually catch and punish money laundering and terror financing?

  • A weak result puts the country under follow-up monitoring.

Grey list and black list

These are informal names. FATF's own terms are:

Popular name FATF term What it means
Grey list Jurisdictions under increased monitoring The country has serious gaps but has agreed to an action plan with deadlines
Black list High-risk jurisdictions subject to a call for action The country has very serious gaps and is not fixing them. Members are asked to apply extra checks, or counter-measures, to it (for example, North Korea and Iran)
  • What grey-listing costs a country:
  • Foreign banks do extra checks on its transactions.
  • Trade payments slow down and borrowing becomes costlier.

  • Foreign investors become more cautious.

  • What gets a country off the list: it completes its action plan and FATF confirms progress, often through an on-site visit.

A worked example: one suspicious payment

  1. A shell company (a company that exists only on paper) receives large deposits from many unrelated accounts.
  2. The bank's KYC checks cannot identify the beneficial owner. It files a suspicious transaction report with FIU-IND.
  3. FIU-IND analyses the report and passes it to investigating agencies under the PMLA.
  4. FATF's mutual evaluation tests whether this chain works in practice, from bank to FIU to prosecution.

In India

  • Law: the PMLA 2002 is India's main AML law and is built on FATF standards. Banks follow the RBI KYC Master Direction 2016.
  • KYC tools that match FATF expectations:
  • CKYC registry, run by CERSAI: one central KYC record that all financial institutions can use.
  • Video-KYC, allowed from 2020.

  • Legal Entity Identifier (LEI): a unique 20-character global code for parties to financial transactions. It is mandatory for large borrowers and market participants.

  • FIU-IND works under the Department of Revenue, Ministry of Finance. It receives reports from banks and other "reporting entities".

  • Crypto (virtual assets):
  • In March 2023, crypto service providers were brought under the AML-CFT framework of the PMLA (AML-CFT means anti-money laundering and countering the financing of terrorism). They must register with FIU-IND as reporting entities.
  • The test is activity, not physical presence, so offshore exchanges that serve Indian users are covered.

  • FIU-IND has issued Section 13 PMLA notices to non-compliant offshore providers.

  • Beneficial ownership:

  • FATF requires that beneficial-owner data be available to authorities.
  • Its 2022 revision only softly encourages countries to consider public access, and countries are not assessed on it.

  • In India, SEBI's 24 August 2023 circular requires certain high-risk foreign portfolio investors (FPIs) to make granular disclosure of their owners to the regulator.

  • Fraud and governance links: the Fugitive Economic Offenders Act 2018 came after the PNB–Nirav Modi case, and RBI's Central Fraud Registry is part of the same push for financial integrity.

  • Foreign policy use: India uses FATF to put pressure on countries that support cross-border terrorism. A grey-listing raises the financial cost for a state that shelters terror funding (for example, Pakistan's past grey-listing).

Don't confuse with

  • FIU-IND: a national agency that receives and analyses suspicious-transaction reports in India. FATF is the global standard-setter that tells countries to create such units.
  • Basel Committee on Banking Supervision (BCBS): set up in 1974 and housed at the BIS. It sets bank capital and liquidity standards (Basel I/II/III). FATF sets AML and terror-financing standards.
  • Financial Stability Board (FSB): set up in 2009. It deals with systemic risk, for example the G-SIB list and, with the IMF, the G20 crypto roadmap. FATF deals with financial crime, not bank solvency.
  • Grey list vs black list: a grey-listed country is cooperating under an action plan. A black-listed country faces a call for action and counter-measures.

Prelims Hooks

  • FATF was set up in 1989. It sets standards against money laundering, terror financing and proliferation financing. Its standards are not legally binding treaties; they work through peer pressure and market reaction.
  • "Grey list" = jurisdictions under increased monitoring. "Black list" = high-risk jurisdictions subject to a call for action.
  • India's AML law is the PMLA 2002. Crypto service providers register with FIU-IND, not SEBI or RBI, and have done so since March 2023.
  • FATF's 2022 beneficial-ownership revision requires data to be available to authorities. Public access is only encouraged and is not assessed.
  • Trap: "FATF sets capital adequacy norms for banks." FALSE. That is BCBS (Basel norms).
  • LEI is a 20-character global code. CKYC is run by CERSAI.

Mains Points

  • Financial integrity and the economy: a good FATF rating lowers the risk premium (the extra return investors demand for risk) on a country's banks and firms. A grey-listing raises trade and borrowing costs. So AML compliance is an economic issue as well as a security issue (GS-III: money laundering and its prevention).
  • Transparency vs privacy and capital flows: strict beneficial-ownership rules help catch round-tripping (Indian money sent abroad and brought back disguised as foreign investment) and terror funding. But very heavy disclosure can scare away foreign portfolio investors. FATF's model requires disclosure to regulators, not to the public. That is a useful middle path for SEBI and the Centre.
  • Diplomacy against state-sponsored terrorism (GS-II/III): FATF lets India turn its stand against cross-border terrorism into financial pressure. India must also keep its own system strong, including crypto oversight by FIU-IND, cooperative-bank governance and fraud reporting, so that its own mutual evaluation stays clean.

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