FATF Compliance: Deficient Jurisdictions and the Relay Chain

India joined the Financial Action Task Force as a full member in 2010, having been an observer since 2006. But the alignment of Indian banking regulation with FATF standards began earlier — in November 2004, when the RBI rewrote its KYC guidelines explicitly around FATF Recommendations. Since then, 197 RBI circulars have carried FATF compliance obligations to every corner of the Indian financial system: from scheduled commercial banks in Mumbai to regional rural banks in Meghalaya, from NBFCs to money changers at international airports.

See also: KYC & Anti-Money Laundering — The Complete Regulatory Timeline

How FATF Compliance Works in the Indian System

The Financial Action Task Force (FATF) does not issue binding regulations. Instead, it publishes Recommendations and periodic Statements identifying jurisdictions with "strategic deficiencies" in their AML/CFT frameworks. India, as a FATF member since 2010 (observer since 2006), implements these through a chain:

FATF issues Statement/Recommendation
    ↓
Government of India incorporates into PML Rules / policy
    ↓
RBI amends Master Direction or issues circular
    ↓
Circular transmitted to each entity type (4-7 parallel versions)

The Foundation: FATF Alignment (2004–2005)

The November 2004 KYC overhaul explicitly framed itself as FATF-aligned:

"These 'Know Your Customer' guidelines have been revisited in the context of the Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). These standards have become the international benchmark for framing Anti Money Laundering and combating financing of terrorism policies by the regulatory authorities." (RBI_2039, November 29, 2004)

All five entity-type KYC root circulars (RBI_2039, RBI/2004-05/302, RBI/2004-05/369, RBI/2004-05/368, RBI_2136) contain this identical FATF alignment language.

The FATF Framework for Authorised Persons (November 2009)

The November 27, 2009 circular RBI/2009-10/235 (20 downstream refs) extended FATF-aligned KYC/AML/CFT obligations to all FEMA-authorised persons:

"In terms of Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009, all Authorized Persons, authorized under Section 10(1) of FEMA, 1999 have been brought under the purview of PMLA, 2002." KYC Norms/AML Standards/Combating Financing of Terrorism/Ob...

This was the base circular from which all subsequent FATF deficient jurisdiction relays for APs would chain.

The Deficient Jurisdictions Relay Pattern

The Template Circular

The April 6, 2011 circular RBI/2010-11/468 exemplifies the relay pattern:

"Financial Action Task Force (FATF) has issued a further Statement on October 22, 2010... It may be observed that the statement divides the strategic AML/CFT deficient jurisdictions into two groups:

(a) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/FT) risks emanating from the jurisdiction: Iran**

(b) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Democratic People's Republic of Korea (DPRK)." KYC Norms/AML Standards/Combating Financing of Terrorism/Obl...

Each relay circular:
1. References the previous FATF statement relay (creating the chain)
2. Reproduces the FATF's categorization of deficient jurisdictions
3. Directs regulated entities to apply enhanced due diligence or countermeasures

The RBI's press release accompanying the February 2019 FATF statement illustrates the relay mechanism, naming jurisdictions subject to enhanced monitoring and countermeasures — see FATF Public Statement dated February 22, 2019 (PR_47099).

FATF-Specific Relay Circulars (Highlights)

The 2016 Master Direction — FATF Integration

The 2016 Master Direction (KYC Master Direction (Master Direction - Know Your Customer (KYC) Direct)) embedded FATF compliance directly into the regulatory framework:

Risk-Based Approach (FATF Recommendation 1):

"REs shall apply a Risk Based Approach (RBA) for mitigation and management of the risks and should have Board approved policies, controls and procedures in this regard." (RBI_11566, Para 5B)

Correspondent Banking (FATF Recommendation 13):

"Banks shall be cautious of correspondent banking relationships with institutions located in jurisdictions which have strategic deficiencies or have not made sufficient progress in implementation of FATF Recommendations." (RBI_11566, Para 63)

Investment Restrictions:
FATF Non-Compliant Jurisdictions Investment Ban RBI/2016-17/216 (2017, 1 ref) prohibited Indian parties from making direct investments in countries identified by FATF as having strategic AML/CFT deficiencies.

NBFC Investment from FATF Non-Compliant Jurisdictions (Investment in NBFCs from FATF non-compliant jurisd) (since withdrawn) (2021, 3 refs) extended this to restrict investment in NBFCs from FATF non-compliant jurisdictions.

The 2023 Amendments — FATF as Part of Multi-Stream Updates

By 2023, FATF compliance had become one of multiple streams folded into each KYC Master Direction amendment:

"(c) update certain instructions in accordance with FATF Recommendations" — one of four reasons for the April 2023 amendment RBI/2023-24/24

"(d) Update certain instructions in accordance with the FATF Recommendations" — one of six reasons for the October 2023 amendment RBI/2023-24/69

The 2025 Entity-Specific KYC Directions — FATF Fully Embedded

All 10 entity-specific KYC Directions issued in November–December 2025 include FATF-aligned provisions as standard features:

Last updated: April 2026