Pakistan on Financial Action Task Force ‘Grey List’
Shruti Punia

After a long period of dormancy Pakistan finally enters the Financial Action Task Force’s (FATF) list which comes as no rude awakening to either of its neighbours, India as well as China. The FATF took the imminent decision to place Pakistan on its ‘Grey list’, that is, Compliance Document for Jurisdictions Monitored by International Co-operation Review Group (ICRG) during the FATF-Middle East North Africa Financial Action Task Force (MENAFATF) Joint Plenary held from 27 June to 29 June 2018 in Paris. Other countries on the grey list include Ethiopia, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen. Being put on the grey list means that Pakistan has been formally identified as a country with ‘strategic deficiencies’ in its anti-money laundering and counter-terrorism financing regime, notifying the steps the country must take to address the shortcomings. These deficiencies, identified in Pakistan’s anti-money laundering and counter-terrorism financing regime, include:-

  • Inadequate monitoring and regulatory mechanisms, (5 points)
  • Inadequate terrorism financing investigation and prosecution (8 points)
  • Poor implementation of UNSC resolutions 1267 and 1373 (anti-terrorism, postv9/11) for curbing terror financing (9 points) and
  • Cross-border illicit movement of currency by terrorist groups. (4 points)

The FATF is the global standard-setting body for anti-money laundering and combating the financing of terrorism (AML/CFT). In order to protect the international financial system from money laundering and financing of terrorism (ML/FT) risks and to encourage greater compliance with the AML/CFT standards. The FATF identifies jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system.1 Currently there are 37 members including two regional organisations (the Gulf Cooperation Council or GCC, and the European Commission). While India, Russia and China are members, Pakistan is only an associate member of Asia Pacific Group-FATF.

The decision to put Pakistan on the watch-list was taken in the plenary meeting of the FATF which concluded on 23 February 2018 because of its failure to act in accordance with the standards to curb terrorism financing. Pakistan was given a three month reprieve to conform to the stipulations failing which it would result in Pakistan’s formal inclusion. And so it did.

The time frame of three years, between 2012 and 2015, found our neighbour on the watch-list (due to its incompetence to implement the necessary regulatory framework) of the global illicit financial watchdog. However, it was concerned with money laundering alone. In a distinct manner, Pakistan now stands adjudged both for AML-CFT. In 2015, Pakistan was conditionally removed from the grey list. It was supposed to take action on residual issues concerning implementation of UN Security Council Resolution 1267 and 1373 (sanctions against AQ and Taliban) and the negligence in pursuit of legal frameworks to freeze assets of the proscribed entities of concern viz. Lashkar-e Taiba (LeT), Jamaat-ud Dawa (JuD) and Falah-e Insaaniyat Foundation (FIF). The decision is seen as both fitting and tardy, especially when seen in the context of international isolation it served to Pakistan.

Soundly declared by the international community, Pakistan’s insufficiency was established in its enactment of legislative, institutional and regulatory mechanisms as well as led by poor investigations to combat financing of terrorism and prosecution of malefactors. In February, the efforts by the United States and the formidable squad of UK, France and Germany resulted in FATF’s punitive action against Pakistan. It is pertinent to mention that ‘brothers’ of Pakistan who tend to play influential role in its state of affairs - China and Saudi Arabia - fell in line to support Washington-led proposal, landing it a crushing blow. Turkey remained the only country to not back the move.

The implications of being put on ‘grey list’ are far more complex than what they appear to be. It has no direct legal or financial implications but conveys the impression that a country’s financial system is weak and effective measures are not being taken to halt money laundering or financing terrorist groups:-

  • First, it implies that Pakistan’s businesses and undertakings will be under keen surveillance. It brings extra scrutiny from regulators and financial institutions that can adversely impact trade and investment as also increase transaction costs. This would lead to generation of an unenthusiastic attitude among institutions to enter into financial transactions with Pakistan.
  • Arguably it may also heighten Pakistan’s risk profile and some financial institutions such as the World Bank and International Monetary Fund would be wary of transacting with Pakistani banks and other financial institutions. The banking sector and foreign exchange reserves could get hurt, crippling its already fragile and dwindling economy.
  • It could lead to a demotion in Pakistan’s debt ratings, making it more difficult to tap into international markets

In September 2017, Pakistan’s biggest lender Habib Bank was fined $ 225 million and forced to shut its US operations by the New York Regulator due to compliance failures over money laundering. As also Pakistan’s State Minister for Finance, Rana Afzal has said, “It reduces our credibility in the world.”

Former finance adviser Miftah Ismail had earlier said that the decision to put Pakistan on ‘grey list’ would only cause “embarrassment” for the country at the international level but it would have no effect on the country’s economy.2 These being negligible, none really bothered when Pakistan was in the monitoring jurisdiction (grey list) twice less than a decade ago – in 2008 and then in 2012-15. Pakistan not only launched international bonds but also entered into an International Monetary Fund (IMF) programme and secured funds from other multi-laterals like the World Bank and the Asian Development Bank. Also, it is not as difficult to move out of the jurisdiction as evident from Iraq’s exclusion by the same FATF Plenary on raising the compliance level on AML/CTF.3

Now to burnish its corroded image and fix existing loopholes in the legal-operational system or to address the ‘strategic deficiencies’ Pakistan came up with a 26-point ‘Action Plan’, required to be implemented in coming fifteen months. More importantly, focus is laid on quashing of pecuniary matters of Lashkar-e-Taiba entities and the like. The State Bank of Pakistan and Security Exchange Commission of Pakistan (SECP) have designed the exacting plan to build up the inadequate regulatory regime as well as allay the political concerns. The goals set are tough with ten targets having to be met in January next year, about 13 by May 2019 and the remaining in September 2019. The chances of hitting every target in the time frame is extremely difficult. Blacklist awaits Pakistan if it fails to fulfil the obligations. Time will tell though.

The International Co-operation Review Group’s (ICRG) concern remained over Pakistan not being able to freeze the property of UN-designated groups, the critical element is to choke financing to Daesh, al Qaeda, JuD and its affiliate FIF, LeT, JeM, the Haqqani Network and persons affiliated with the Taliban.

Pakistan promises to share multiple reports with FATF authorities next year:-

  • First report would be on ‘actions’ against four proscribed organisations - Daesh, al-Qaeda, Taliban and Haqqani Network;
  • Second would be on terrorist financing activities/convictions, domestic and international cooperation on cash couriers;
  • The third would be on capacity building of investigators prosecutors judiciary;
  • The fourth report would be on action against illegal money changers, and a report on cross border smuggling of currency would also presented next year.

Enacting laws and regulatory measures are the easy part or low hanging fruit. What is the daunting task is to see if groups and individuals known to have been involved in terrorist activity, and designated by the UN as such, are free to roam, organise, solicit funding and get involved in electoral politics. Prohibited groups like the Jud/LeT are able to circumvent the electoral process to field their candidates and propagate their agenda in the forthcoming elections. Ahmed Ludhavani, head of the banned Ahle Sunnat Wal Jamaat, has been taken off from the Fourth Schedule of the Anti-Terrorism Act and allowed to contest elections on the same day as the FATF verdict.

New Delhi has long been vocal of Pakistan’s intransigence in compliance of global concerns. Moreover, Pakistan’s non-compliance is not an Indian problem alone but concerns the entire world. Now, it is only ‘wait and watch’ until any substantial conclusion can be drawn.

References:

  1. FATF, Public Statement, 29 June 2018.
  2. Tahir Sherani, SECP issues anti-money laundering regulations in compliance with FATF recommendations Dawn Pakistan, 20 June 2018
  3. Khaleeq Kiani, Our obligations beyond the grey list, Dawn Pakistan, 02 July 2018.

Image Source: http://mb.ntdin.tv/wp-content/uploads/2018/03/fatf_g_2-3-2018-700x359.png

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