In the wake of the deadly terrorist attack in Pahalgam on April 22 that killed 26 civilians, Prime Minister Narendra Modi made a firm declaration: “We shall not spare anyone.” The attack has prompted India to adopt a comprehensive strategy to respond to Pakistan’s alleged role in promoting terrorism.
So far, India has suspended the Indus Waters Treaty, revoked all Pakistani visas, and banned Pakistani aircraft from using Indian airspace. Now, officials are also considering another strong move—recommending Pakistan’s re-entry onto the Financial Action Task Force (FATF) grey list.
FATF grey list push gains political backing
Several leaders have echoed the demand. Hyderabad MP Asaduddin Owaisi, who strongly criticized Pakistan after the Pahalgam incident, urged the government to press for Islamabad’s inclusion in 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.
What is FATF and what does the grey list mean?
Established in 1989 by the G7 to tackle money laundering, the FATF expanded its mandate in 2001 to include combating terror financing. Over time, its responsibilities have grown to cover modern financial threats such as the financing of weapons of mass destruction and misuse of virtual assets.
The FATF consists of 37 member countries and two regional organizations—the European Commission and the Gulf Cooperation Council. India became an observer in 2006 and a full member in 2010. The organization meets three times a year to evaluate countries based on their compliance with anti-money laundering and counter-terrorism financing standards.
A country placed on the grey list has acknowledged deficiencies in its financial monitoring systems. Although it is not a direct punishment, it signals increased international scrutiny and poses a risk of blacklisting if reforms are not undertaken.
The blacklist includes nations that consistently fail to act against terror financing and money laundering. These countries face severe international sanctions and financial isolation.
FATF’s stance: Not punitive, but impactful
Former FATF president T Raja Kumar emphasized the corrective nature of the grey list. He said in an interview with 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.”
How greylisting affects economies
Despite FATF’s collaborative intent, being placed on the grey list has serious economic consequences. Countries under increased monitoring find it harder to attract investments and secure loans from international institutions like the IMF, World Bank, and ADB.
A 2021 IMF study revealed that greylisted nations suffer a 3% drop in foreign direct investment and nearly a 2.9% fall in portfolio investments. Experts also note that greylisting increases compliance costs and risks reputational damage, which can trigger trade restrictions and isolation.
Pakistan’s FATF history
Pakistan has been under FATF scrutiny multiple times. It was first added to the grey list in 2008, removed in 2009, and returned in 2012 before being delisted in 2015. In 2018, it landed back on the grey list after failing a National Risk Assessment in 2017.
FATF issued a 34-point action plan for Pakistan to counter terror financing and money laundering. Though the deadline was initially 2019, it was extended due to the COVID-19 pandemic. In October 2022, Pakistan exited the grey list after complying with most FATF requirements.
Following the delisting, India expressed cautious optimism. Ministry of External Affairs spokesperson Arindam Bagchi had then 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.”
He added, “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.”
Will Pakistan be greylisted again?
India believes that placing Pakistan back on the grey list would not only restrict Islamabad’s financial avenues but also curb illicit fund flows into regions like Jammu and Kashmir. However, securing FATF action requires international consensus.
Despite the procedural hurdles, the Pahalgam attack has drawn global sympathy. At least 23 FATF member nations, including the US, UK, France, Germany, Australia, Saudi Arabia, UAE, and regional blocs like the European Commission and GCC, condemned the attack and expressed solidarity with India.
What’s at stake for Pakistan?
For Pakistan, a return to the grey list could severely damage its already fragile economy. Greylisting would likely restrict access to vital financial assistance from institutions like the IMF. Analysts warn this could worsen Pakistan’s economic instability.
Pakistan has already sought IMF support 24 times since 1958. Most recently, the IMF approved a $7 billion bailout in September 2024. Without access to such lifelines, Pakistan’s economy could face a deep crisis.
