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What Mauritius exiting FATF grey list means for India

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The Financial Action Task Force (FATF), an intergovernmental organization meant to combat money laundering and financing of terrorism, has moved Mauritius out of its grey list in the October 2021 plenary held last week. Mint explores the implications for India.

The Financial Action Task Force (FATF), an intergovernmental organization meant to combat money laundering and financing of terrorism, has moved Mauritius out of its grey list in the October 2021 plenary held last week. Mint explores the implications for India.

What did FATF decide in its October plenary?

FATF was known to be actively considering a re-rating of Mauritius and moving it out of the grey list on the basis of the legislative and regulatory changes implemented in the past 20 months by the Mauritius government. FATF had in the June 2021 plenary agreed that Mauritius had completed putting into force an action plan designed to combat and strengthen the effectiveness of its activities to combat money laundering and financing of terrorism. The delisting of Mauritius from the FATF grey list has been brought into effect at its latest plenary held in Paris last week.

What is FATF and what does it do?

FATF was established during the Paris G7 summit in 1989. It sets standards or develops recommendations aimed at the prevention of illegal activities. The task force also generates political will to bring about legislative and regulatory reforms. More than 200 countries and jurisdictions take part in the implementation of these reformative measures. The effort is to continuously review money laundering, terrorist funding techniques, and threats to the global financial system and toughen the standards for addressing new risks. It monitors and holds to account countries that do not comply with set standards.

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What is FATF’s grey list and how does it work?

Countries are placed in the grey list for increased monitoring to counter money laundering and funding of terrorist activities and to address strategic gaps in their systems. As many as 23 countries, including Pakistan and Cayman Islands, are in the list. While Mauritius and Botswana have been removed from the list this month, Jordan, Mali and Turkey have been added.

What  were authorities in India worried about?

Mauritius was placed in FATF’s grey list in February 2020, and as foreign portfolio investments (FPIs) were largely routed into India via the tax haven country—the second highest source of FPI after the US as of January 2020—authorities were wary. Concerned about round-tripping of black money in the guise of FPI (through “participatory notes") and terror funding getting routed via Mauritius, the Reserve Bank of India and the Securities and Exchange Board of India subsequently levied investment curbs on foreign direct investments and FPI from Mauritius.

How should Indian authorities respond?

RBI and government should not be tempted by an opportunity of attracting more FPI and FDI, which is the likely consequence of the FATF de-listing Mauritius from the grey list. Prior to making a hasty move with immediate economic interests in mind, the government must look at long-term prospects of the economy and internal security. Lesser scrutiny on ultimate beneficial ownership in investments originating from the tax haven should be contemplated with caution.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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