 "After Pahalgam, India is pushing to add Pakistan on FATF’s grey list. How will it hurt Islamabad?")
“We shall not spare anyone,” Prime Minister Narendra Modi had said in the aftermath of the Pahalgam attack on April 22, which claimed the lives of 26 civilians. In response to the attack, India has taken a multi-pronged approach to curtail Pakistan and its constant support to terrorism, which includes suspending the Indus Waters Treaty, cancelling visas of all Pakistanis to the country and even banning its airspace for use.
But, it appears, that’s not it. As part of its measures to choke Pakistan’s support to terrorism , New Delhi is also considering to push for Pakistan’s return to the ‘grey list’ of the Financial Action Task Force (FATF), the global money laundering and terror financing watchdog.
In fact, earlier, Hyderabad MP Asaduddin Owaisi, who has been very vocally critical of Pakistan since the attack, urged the Modi government to push for the country’s re-entry onto the FATF grey list. “My demand is that it is important to put Pakistan on the FATF’s ‘Grey’ list again… Pakistan’s deep state and establishment want that there should be a Hindu-Muslim divide in India, and this is the reason they did this (Pahalgam attack),” said Owaisi in Maharashtra.
But how will this hurt Pakistan? What would a return to the FATF’s grey list mean for the cash-strapped nation?
What is the FATF?
Set up in 1989 out of a G-7 meeting of developed nations, the FATF’s initial aim was “to examine and develop measures to combat money laundering”. In 2001, the body’s mandate expanded to cover terrorist financing, following the 9/11 attacks in the United States and eventually it was mandated to cover areas, including advances in money laundering techniques, the financing of weapons of mass destruction, asset recovery, beneficial ownership disclosure, and activity relating to virtual assets.
Today, the FATF comprises 37 countries and two regional organisations: the European Commission, the European Union’s executive body, and the Gulf Cooperation Council. India joined with ‘observer’ status in 2006 and became a full member of FATF in 2010.
The decision-making body of the FATF or Plenary meets thrice a year, in February, June and October, to take stock of “Mutual Evaluation Reports” (MERs) of the countries they review. Based on their performance, countries are then placed on the grey list or the black list.
What is FATF’s grey list and black list?
When a country is placed on FATF’s grey list, it means that it has been identified as having deficiencies in their anti-money laundering and countering the financing of terrorism regimes. The inclusion of a country in this list serves as a warning that it may enter the black list.
Meanwhile, the black list is when countries are deemed as ‘Non-Cooperative Countries or Territories’. The FATF notes that these black-listed countries support terror funding and money laundering activities and additionally is not making any noticeable effort to improve towards meeting the benchmarks set by the FATF.
According to former FATF president, T Raja Kumar, inclusion on the list is not a punitive measure, but rather a means of helping countries work through glaring deficiencies. He told The Banker, “The process helps countries identify where the key gaps are, and we work together on a plan of action. “If they successfully implement those action items, they can be moved off the grey list, and can then benefit from greater confidence in their financial system.”
What is the impact of being grey-listed?
While FATF’s former president notes that being grey-listed isn’t a punitive measure it does have tangible consequences for a country’s economy and financial system. Countries on FATF’s grey list are subjected to increasing levels of financial scrutiny and makes it difficult to procure loans from financial organisations like the International Monetary Fund (IMF)/World Bank, ADB etc, as well as to invite investment from private companies and other countries.
A 2021 study by the IMF found countries on the grey list witness an average decline of three per cent in foreign direct investment inflows and an average 2.9 per cent decline in portfolio inflows.
Other experts also note that the country faces a high level of diligence, which could, in turn, result in international trade and an international boycott.
What about Pakistan and the FATF?
Notably, Pakistan has a history with the FATF’s grey list. Islamabad was first put on the list in 2008, removed in 2009 and then again remained under increased monitoring from 2012 to 2015.
In 2018, Pakistan was put in the ‘grey list’ by the watchdog as its National Risk Assessment conducted in 2017 was found to be deficient. The country was said to be lacking a comprehensive and coordinated risk-based approach in combating money laundering and terror financing. At the time, the FATF urged Islamabad to implement a 34-point action plan to curb money laundering and terror financing by the end of 2019. This deadline was extended due to the coronavirus pandemic.
In October 2022, Pakistan was ultimately removed from the FATF list after the agency found that it had taken enough steps to curb terror financing. In response to the move, India had then stated that Islamabad should continue to take credible action against terrorism. Then Ministry of External Affairs (MEA) spokesperson Arindam Bagchi said, “As a result of FATF scrutiny, Pakistan has been forced to take some action against well-known terrorists, including those involved in attacks against the entire international community in Mumbai on 26/11.”
“It is in global interest that the world remains clear that Pakistan must continue to take credible, verifiable, irreversible and sustained action against terrorism and terrorist financing emanating from territories under its control.”
After Pahalgam, can India add Pakistan to grey list?
Following the Pahalgam attack, India is mulling to push back Pakistan on the grey list, effectively hurting its economy. They note that it will also help curtail illicit fund flows from Pakistan into India, especially into Jammu and Kashmir.
However, getting Pakistan on the FATF’s grey list is no easy task. To initiate a nomination, New Delhi would need the support of other FATF member countries. Experts note that the Pahalgam attack has swayed support in favour of New Delhi — 23 FATF countries including the UK, US, France, Germany, Australia, European Commission, and Gulf Cooperation Council heavyweights such as Saudi Arabia and the UAE, have condoled for the loss of lives.
By getting Pakistan back on the FATF’s grey list, India is hoping to restrict Islamabad’s access to international financial institutions such as the IMF. Without the support of the IMF, experts note that Pakistan’s economy would crumble. The country has already been bailed out by the IMF on numerous occasions — 24 times since 1958 with the last loan being sanctioned in September 2024 worth $7 billion.
With inputs from agencies
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