Prevention of Money Laundering Act, 2002
The Financial Action Task Force (FATF)
No treaty obliges a country to follow the FATF Recommendations, yet almost every country does. The reason is the FATF's method: it sets a single global standard, evaluates each country against it through its peers, and publicly names jurisdictions that fall short, with real consequences for their banks, trade and reputation. For India, FATF standards have shaped almost every amendment to the PMLA since 2009. This note explains what the FATF is, how it works, its lists, and India's place in it.
The FATF's structure, its three functions, its lists, and India's position
1. What the FATF Is
Feature | Detail |
|---|---|
Established | By the G-7 at its summit in Paris in July 1989 |
Nature | An inter-governmental policy-making body; its standards are 'soft law', enforced through peer evaluation and public listing rather than treaty |
Decision-making | The Plenary of members, meeting three times a year, under a President who serves a fixed term |
Secretariat | Housed at the OECD in Paris |
Membership | Around forty members, mostly countries plus regional organisations, with associate members and observers |
Global network | FATF-style regional bodies, such as the Asia/Pacific Group (APG) and the Eurasian Group (EAG), apply the standards to over two hundred jurisdictions |
Mandate | Money laundering from 1989; terrorist financing from 2001; proliferation financing, added in the 2012 revision |
2. What the FATF Does
§ Three functions • It sets standards. The 40 Recommendations, first issued in 1990 and revised in 1996, 2003 and 2012, with Interpretive Notes, are the global standard. After the 11 September 2001 attacks, it issued Special Recommendations on terrorist financing, which the 2012 revision merged into the forty. • It evaluates countries. Each member undergoes a mutual evaluation, a peer review assessing technical compliance with each Recommendation and the effectiveness of the system against eleven Immediate Outcomes. Evaluations are followed by regular or enhanced follow-up. • It identifies high-risk jurisdictions. Through its International Cooperation Review Group process, it publicly identifies jurisdictions with strategic deficiencies and monitors their action plans. |
3. The FATF Lists
List | Meaning | Consequence |
|---|---|---|
High-risk jurisdictions subject to a call for action (the 'black list') | Serious strategic deficiencies and insufficient progress | Members are called on to apply enhanced due diligence and, in the most serious cases, countermeasures |
Jurisdictions under increased monitoring (the 'grey list') | Strategic deficiencies, with a high-level commitment to an agreed action plan and deadlines | Reputational damage, higher compliance costs for the country's banks, and pressure from investors and correspondent banks |
Regular follow-up | A sound system after evaluation | Routine reporting on progress; the best outcome |
§ An illustration from the region Pakistan was placed under increased monitoring in 2018 and removed in 2022 after completing its action plans. The episode shows how grey-listing operates as pressure: the listed country must legislate, prosecute and demonstrate results to be removed. |
4. India and the FATF
Year | Development |
|---|---|
1998 | India joins the Asia/Pacific Group on Money Laundering |
2006 | India becomes an observer at the FATF |
2010 | India becomes a full member of the FATF in June 2010, and joins the Eurasian Group |
2010 | India's first mutual evaluation as a member |
2024 | The FATF adopts India's mutual evaluation report in June 2024, placing India in regular follow-up, while identifying areas for improvement such as the pace of concluding prosecutions and aspects of supervision |
§ Why the FATF matters for the PMLA • Legislative change. The reporting entity framework, designated businesses and professions, beneficial ownership, politically exposed persons, and the extension to virtual digital asset service providers all track FATF standards. • Judicial reasoning. In Vijay Madanlal Choudhary v. Union of India (2022), the Supreme Court relied on India's international commitments, including the FATF standards, in upholding the breadth of Section 3 and other provisions. • Economic stakes. A good evaluation lowers the cost of cross-border finance and signals a sound financial system to investors. |
5. Frequently Asked Questions
What is the FATF?
An inter-governmental body set up by the G-7 in Paris in 1989 that sets global standards against money laundering, terrorist financing and proliferation financing, evaluates countries against them, and identifies high-risk jurisdictions.
Are FATF Recommendations binding?
Not as a treaty. They are enforced through peer evaluation and public listing, which carry real economic and reputational consequences.
What are the grey list and black list?
The grey list is jurisdictions under increased monitoring with strategic deficiencies and an action plan; the black list is high-risk jurisdictions subject to a call for action, with enhanced due diligence or countermeasures.
What is India's status in the FATF?
A full member since June 2010. Its mutual evaluation adopted in June 2024 placed India in regular follow-up, the best outcome.