Investment in Entities from FATF Non-compliant Jurisdictions

1. The RBI (Reserve Bank of India) has recently issued a notification (14 th June), in
reference to the notification issued on 12 th Feb 2021; the recent notification has
mentioned investments in PSOs (Payment System Operations) from FATF (Financial
Action Task Force) non-compliant jurisdictions shall not be treated at par with that from
compliant jurisdictions.

2. On the 12th Of Feb 2021, The Reserve Bank of India (RBI), via its notification dated
February 12, 2021, stated that new investors from or through non-compliant FATF
jurisdictions would not be allowed to directly or indirectly acquire ‘significant influence’
in Indian Non-Banking Financial Companies (NBFCs). Significant influence in the
notification refers to acquiring more than 20% of the voting power in the NBFCs.

3. FATF is a policy making body which monitors the global money laundering, terrorist
financing and works to stop funding for weapons of mass destruction. Their intent is to
prevent these illegal activities and harm they caused to society. They identify the
jurisdiction with weak measure and combat money laundering terrorist financing; they do
so by following announcement:

 Subject to call for action in high-risk jurisdiction also called as ‘Black list’
 Increased monitoring needed in jurisdiction also called as ‘Grey list’

4. FATF identified two countries which are in high-risk jurisdiction (black list) which are
Iran and Korea and countries who are in increased monitoring (grey list) includes
Albania, Cambodia, Syria, Jamaica and Mauritius.

5. This circular was brought in force immediately from the date of its issue. Here is the
notification https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12027&Mode=0
However, RBI had made some exceptions

 Investors that already held their investments in NBFCs prior to the classifications
of their jurisdiction as FATF non-compliant could continue their holding.

 Fresh investment, from or through the FATF non-compliant jurisdictions made in

either existing NBFCs or in companies seeking certifications of registration,
would not be allowed to directly or indirectly acquire a ‘Significant influence’
i.e., their investments should be less than 20% of the voting power in the investee
NBFCs.
Highlights of 14th June Notification

 Investment made in PSOs from FAFT non-compliant jurisdiction shall not be treated at
par with the ones made from FATF compliant jurisdiction.
 Fresh investments from FATF non-compliant jurisdictions, in either existing PSOs or
PSOs seeking authorization, shall not be permitted to acquire a significant influence i.e.,
their investments should be less than 20 percent of the voting power in the investee PSO.
 Investors with their holding in existing PSOs prior to the classification of their
jurisdiction as FATF non-compliant may continue to hold their investments or bring in
more investments, for the sake of business continuity

Impact of the notification and conclusion

The RBI notification barred the investments from jurisdictions which are non-FAFT compliant
jurisdictions into Payment System Operators (PSOs). However, it’s not a complete ban and they
are not authorised to give significant influence to investors from FATF non compliant
jurisdictions. A threshold of 20% of the voting power or potential voting power has been
established to distinguish significant influence.

Now a questions whether this notification would be applicable on PSOs (Payment System
Operators (PSOs) that has already taken investments from FATF non compliant?

The point 3 of the notification has clearly mentioned that PSOs who already have investments
from FATF non compliant jurisdictions may continue with the said investments and also seek
fresh investments from the same, in order to maintain continuity of business operations.

SOURCES

1. https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=12114&fn=9&Mode=0

2. http://www.businessworld.in/article/Payments-System-Operators-RBI-Imposes-Restrictions-
On-New-Entities-From-Non-FATF-Compliant-Jurisdictions/15-06-2021-393144/

3. https://aajkitaazanews.com/rbi-imposes-restrictions-on-new-entities-from-non-fatf-compliant-
jurisdictions/

4. https://www.newindianexpress.com/business/2021/jun/15/payments-system-operators-rbi-
imposes-restrictions-on-new-entities-from-non-fatf-compliant-jurisdic-2316489.html