Explainer: FATF and the Significance of Pakistan’s Removal from its ‘Grey List’

New Delhi: After more than four years, Pakistan has been finally removed from the ‘grey list’ of countries who are “under ‘increased monitoring’” after the global watchdog, Financial Action Task Force (FATF), decided that Islamabad had complied with international standards to combat money laundering and terror financing.

At the end of the two-day plenary, FATF announced in Paris on Friday that Pakistan had fully implemented the 34-point action plan. A FATF technical team verified the implementation through a field visit.

Also read: ‘Significant Progress’: Financial Action Task Force Removes Pakistan from its ‘Grey List’

Here is a quick overview of Pakistan’s chequered history with the inter-governmental group – and what its removal means for its relations with the rest of the world.

What is the FATF? 

It is an inter-governmental body, which gained more significance after 9/11 when its mandate was expanded to include both money laundering and terror financing.

Aimed at safeguarding the international financial system, the recommendations of the FATF set standards for combatting money laundering, organised crime and terror financing.

Every year, FATF holds three meetings of its central decision-making body, the plenary, where all the 37 member jurisdictions and two regional organisations (EU and GCC) approve the outcomes through consensus.

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

What are FATF’s ‘black’ and ‘grey’ lists? 

These terms do not exist in official FATF terminology but are colloquial phrases used to describe two lists of countries maintained by the body.

The ‘black list’ is the term used for FATF’s list of “High-Risk Jurisdictions subject to a Call for Action”. Currently, North Korea, Iran and Myanmar are on the ‘black list. These countries are deemed to have “significant strategic deficiencies” in their financial regimes that make them risky to be part of the larger international financial system, with countermeasures applied against them.

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 list 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.’

Also read: Explainer: FATF, Its ‘Grey’ List and Pakistan’s Lingering Presence in It

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 review process, a country must first address “all or nearly all” of the components of its action plan. The June 2022 plenary decided that Pakistan has fully met its 34 action plan points.

Once the multilateral body determines that the terms of the action plan have been implemented, 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 report from the on-site visit is positive, the FATF will decide to remove the country from the ‘grey list’ at the next plenary meeting.

A 15-member FATF delegation visited Pakistan from August 29 to September 2 and submitted a report discussed at the FATF’s October plenary.

History of Pakistan on the ‘grey list’ 

Pakistan 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 monetary system. It exited the list in 2009.

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 with “strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not co