Ahead Of FATF Review, Centre Takes Multiple Measures To Implement Recommendations

Relevance: GS2 - Important International institutions, agencies and fora- their structure, mandate Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

(Source: The Hindu, 11/06/2023)

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Why in the news?

• Recently, the Union Government has taken steps to implement the recommendations of the Financial Action Task Force, made following the 2010 review.
• India’s onsite assessment by FATF is scheduled for November 2023.

What measures has India taken to implement FATF recommendations?

• In May 2023, the Union Finance Ministry issued a notification designating the three categories of finance professionals as ‘persons carrying on a designated business or profession’ under the Prevention of Money Laundering Act (PMLA).
• Following this, in May the Ministry issued another notification that brought under the same preview, five activities including:
  • Acting as the formation agent of companies and limited liability partnerships (LLP)
  • Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm, or a similar position in relation to other companies and LLPs.
  • Those providing a registered office, business address or accommodation, correspondence or administrative address for a company or an LLP or a trust;
  • Acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust;
  • Acting as (or arranging for another person to act as) a nominee shareholder for another person was also included.
• The respective government departments also issued associated guidelines to be followed by the persons concerned.
• According to the FATF recommendations, lawyers would also be included under the definition of ‘reporting entity’.
  • However, Sections 126 and 129 of the Evidence Act provide them the immunity of privileged communication with clients.
• Non-compliance by a reporting entity will attract monetary penalties between ₹10,000 and ₹1 lakh for each failure.

What does the PMLA say about reporting agencies?

• Under the PMLA, a ‘reporting entity’ means a banking company, financial institution, intermediary, or a person carrying on a designated business or profession.”
• Under the PMLA, reporting entities have to maintain a record of all transactions for five years.
  • They also have to maintain records of the documents which prove the identity of the clients and beneficial owners.
  • They must also store account files and business correspondence with them, which must be furnished as and when sought by the authorities.
• As per Section 12AA of the Act, reporting entities have additional responsibilities.
  • It must verify the identity of its clients and examine the ownership and financial positions and sources of funds of clients.
  • They are also required to record the purpose behind the specified transaction and the intended nature of the relationship between the transacting parties.
• The reporting entity must disallow the specified transaction if the client does not fulfill these conditions.
• In case the transaction is suspicious or likely to involve the proceeds of a crime the entity must increase the monitoring of the business relationship with the crime and the transactions in the future.
• All information gathered while implementing the enhanced diligence measures has to be maintained for a period of five years.

What is the FATF?

• The Financial Action Task Force (FATF) is an intergovernmental organization founded in 1989 at the G7 Summit in Paris.
• Objectives: Set standards and promote the effective implementation of legal, regulatory, and operational measures to combat money laundering, terrorist financing, and other threats to the international financial system's integrity.
• Hierarchy: The FATF Secretariat is based at the OECD headquarters in Paris and supports the functioning of FATF members.
  • The FATF Plenary is the organization's decision-making body which convenes three times a year.
  • The FATF President is a senior official appointed by the FATF Plenary from among its members on a two-year term. He is the principal spokesperson for the FATF and represents the FATF externally.
• Membership: There are currently 39 members of the FATF including 37 countries and 2 regional organizations.
  • Countries: Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Greece, Hong Kong, China, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Türkiye, United Kingdom, and the United States.
  • Organizations: Gulf Cooperation Council and the European Commission
  • The FATF suspended Russia’s membership in the group in February 2023.
  • The FATF has issued recommendations on combating money laundering, terror financing, and the proliferation of weapons of mass destruction since 1990.
  • It also tracks the progress made by member countries in implementing reforms and evaluates their anti-money laundering and anti-terror financing measures.
• Lists under FATF
  • Grey List: The FATF maintains a grey list of countries that are considered safe zones for terrorist financing and money laundering as a warning to the country that it may be added to the blacklist.
  • Black List: It consists of countries known as Non-Cooperative Countries or Territories (NCCTs) which are believed to aid in the financing of terrorism and the laundering of money.
• India Review:
  • The last review of India was conducted in 2010 with the ucpmong review scheduled to be held in November 2023.
  • The FATF review was postponed following the Covid crisis.
  • The results of the review will be discussed at the Plenary session to be held in July 2024.

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FAQs

MCQs

Question: Consider the following statements on the Financial Action Task Force.

1. The greylist countries are known as Non-Cooperative Territories (NCCTs).
2. The FATF updates the blacklist on a regular basis.

Which of the statement(s) given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2