Is the mutual evaluation report of the Financial Action Task Force extremely narrow?
The FATF approach of mutual evaluation is largely based on the legislative measures initiated by a country to ensure compliance with its recommendations. The FATF, however, does not check the effectiveness of these legislations
The Financial Action Task Force (FATF) conducts peer reviews of each member on an ongoing basis to assess levels of implementation of the FATF recommendations. This
review provides an in-depth description and analysis of each country’s systems for preventing criminal abuse of the financial system. Based on the satisfactory progress made by a country, the FATF decides whether a country should remain part of regular review by it or not. The decision by the FATF to remove a country from the regular follow-up process is based on updated procedures agreed in October 2009.
Many member countries over a period of time have been removed from the list of countries requiring regular review. The latest in the list is India. At the June 2013 plenary meeting, the FATF decided that India had reached a satisfactory level of compliance with all of the core and key recommendations and could be removed from the regular follow-up process. This decision of the FATF has come as a major boost for a country like India, which has generally been classified as a medium risk country as far as measures related to prevention of money laundering and combating of terrorism finance are concerned.
Why was India removed by the FATF from its regular follow-up list?
As per the document issued by the FATF, India has been removed from regular follow up process because of following reasons:
• India rectified nearly all of the technical deficiencies identified with respect to criminalisation of money laundering (ML) and terrorist financing (TF) and the implementation of effective confiscation and provisional measures
• India has substantially addressed over a period of time the technical deficiencies identified in relation to customer due diligence and other preventive measures.
• India has further enhanced its outreach programme to provide guidance to the financial sector on the suspicious transaction reporting obligations and has engaged in extensive compliance monitoring, and
• India has brought several of the Designated Non-Financial Businesses and Professions (DNFBPs) within the scope of its preventive anti-money laundering (AML)/combating the financing of terrorism (CFT) measures.
What did India do for compliance with FATF recommendations?
The FATF’s 44 pages mutual evaluation report on India lauds India’s performance on implementation of anti money laundering and terrorism financing guidelines. India now falls in the same league which has UK and China as the countries which have been removed from regular review process by FATF. So what did India do to deserve this status? Though India has initiated several compliance measures to overcome partial and non-compliance with respect to the FATF recommendations, let us look at one aspect where India was partially complied till recently and that was one of the reasons that India required continuous review as a country. As per the FATF, India was partially complied in implementing the FATF recommendations on Politically Exposed Persons (PEPs). The FATF report highlights the measures initiated by India with respect to PEPs which are listed below:
India was considered as a country which was partly-complied as far as implementation of the FATF recommendations on guidelines with respect to PEPs are considered. The rating PC in the report above shows that. But the FATF believes that India is now largely complied and the FATF document goes on to state, “India has addressed nearly all of the technical deficiencies with regard to Recommendation 6 and its current level of compliance is therefore essentially equivalent to LC ( Largely Compliant).”
If you look at the action taken by India to ensure compliance with FATF guidelines on PEPs front, regulators in India i.e. RBI, SEBI and IRDA have issued circulars for implementation of meaures related to identification and enhanced due diligence for PEPs. Additionally, commodity futures brokers are also now subject to the Prevention of Money Laundering Act (PMLA Act) which means they also have to monitor PEPs now.
Is the scope of the Mutual Evaluation Report too narrow?
The FATF removing a country like India from its mutual evaluation report raises some questions on the scope of the mutual evaluation report currently used by the FATF to assess a country. There is no doubt that the FATF process of mutual evaluation is a lengthy one. It undergoes five steps which are as follows:
• Steps before on-site visit
• On-site visit
• Process post on-site visit
• Plenary week
• Post plenary week
While the checks and controls built in the mutual evaluation process are comprehensive, the issue is with the coverage of mutual evaluation. The FATF approach of mutual evaluation is largely based on the legislative measures initiated by a country to ensure compliance with the FATF recommendations. The FATF does not check the effectiveness of these legislations. Also, whether banks and financial institutions are following compliance measures in a country is not verified by the FATF. Since this is not part of the scope of mutual evaluation as of now, the FATF cannot be blamed for this. However, the fact remains that lack of comprehensiveness in the mutual evaluation process makes the FATF mutual evaluation report weak. For instance, in the case of India, though relevant legislations have been put in place to ensure compliance with respect to compliance of PEPs, banks and financial institutions are ill-equipped to handle money laundering threats posed by PEPs—both in term of technology and process. While the mutual evaluation report of the FATF says India is largely compliant as far as the FATF recommendations are concerned, this compliance is largely on paper and still requires lots to be done as far as practical implementation is concerned.
has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)