Sword of Damocles: FATF Review & looming repercussions for Pakistan

The Bretton Woods financial order created as a result of Bretton Woods Conference (1944) was meant to focus on the economic development of war ravaged and less developed nations. It also aimed at bolstering world trade by providing short and medium term financial assistance to countries which were experiencing temporary deficits in their balance of payments. An important component of this new financial order was the creation of two global financial institutions i.e. the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) commonly known as the World Bank. Later, another intergovernmental organization by the name of Financial Action Task Force (FATF) was established as a result of G-7 summit in 1989. The stated objective of the FATF was to save the International Financial system from the risks posed by Money Laundering (ML). The mandate of FATF was later expanded to include Counter Terrorism Financing (CTF) in 2001 and Counter Proliferation Financing (CPF) in 2010.

All the major financial organizations of the world like UN, WB, and IMF etc. are the observer members of the FATF. It is pertinent to note that Pakistan is not a direct member of FATF but of Asia/Pacific Group (APG), which is its associate member. FATF communicates through Public statement in which countries are categorized in terms of their co-operation and willingness to comply with enforcement mechanism. The countries which are non-cooperative are commonly termed as Black-listed, whereas the countries which agree to an action plan and are put on an on-going compliance process are commonly termed as Grey-listed. The APG on Money Laundering is an inter-governmental organization, comprising 41 member jurisdictions. It is an FATF style regional body, focused on ensuring that its members effectively implement the international standards against money laundering, terrorist financing and proliferation financing. Pakistan joined the APG in May 2000 . The APG is an associate member in the FATF which permits APG delegates to attend FATF meetings and intervene on policy and other matters. All regional bodies use the FATF’s 40 recommendations as their principal guidelines for the implementation of effective AML/CFT measures.

In June 2010, Pakistan agreed with FATF on an Action Plan to address the strategic deficiencies in Pakistan’s AML/CFT regime. The Action Plan included measures to address strategic deficiencies in legal, operational and enforcement areas. In February 2012, Pakistan was listed in FATF’s Public Statement. In June 2014, after strenuous efforts, implementation of the Action Plan was completed and Pakistan was delisted from FATF’s Public Statement. As such, Pakistan enacted amendments in its Anti-Terrorism Act 1997 to strengthen the provisions pertaining to terrorist financing and asset freezing. The FATF in its February 2015 Plenary acknowledged Pakistan’s progress in improving its AML/CFT regime, delisted Pakistan from its Monitoring/ICRG process and desired to address full range of AML/CFT issues identified in its mutual evaluation report, particularly, implementing of UNSC Resolution 1267. FATF in its June, 2015 plenary upon examining Pakistan’s further report on implementation of UNSCRs referred Pakistan to work with Asia Pacific Group on Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT). In January 2018, US, UK, France and Germany made Pakistan’s nomination for the International Cooperation Review Group (ICRG) process i.e. to place Pakistan in grey list. Pakistan objected to the nomination proposed by US, UK, France and Germany and advocated that it has taken meaningful action on the designated entities in respect of specific recommendations. However the measures taken by Pakistan failed to convince the US-India led alliance and prevent it from being placed in the grey list.

The FATF in 1990 initially prescribed 40 recommendations for combating money laundering and terror financing. In 2001, another eight special recommendations were introduced followed by a ninth one as well. The FATF recommendations require countries and regions to develop policies to counter ML/TF, establish Financial Intelligence Units, criminalize ML/TF, freeze and confiscate terrorist assets, put in place efficient mechanism for international cooperation etc. In compliance with the Financial Action Task Force’s recommendations on anti-money laundering and terror financing, the State Bank of Pakistan in October 2007 set up a Financial Monitoring Unit to ensure and to safeguard the interest of the depositors from risks arising out of Money Laundering (ML) and Terror Financing (TF).

In order to address the deficiencies in the enforcement of the AML/CFT regime in Pakistan, the FATF laid down a ten point agenda to be followed by Pakistan. It includes proper identification and supervision of TF risks, remedial actions on violations of AML/CFT regime, improving cooperation between federal and provincial agencies, checking on illicit movement of cash through cash couriers, implementation of financial sanctions against designated terrorists under UNSC sanctions, effective prosecution in TF cases and enhancing the capacity of prosecutors and judiciary, ensuring that the TF prosecutions target the right persons and entities etc.

Significant measures taken up by Government of Pakistan:
Pakistan though has made concrete efforts in relevant legislation but the country essentially lacks institutional framework for implementation of a sophisticated AML regime. This is mainly due to complex institutional arrangements and political facets to the debate. The country has intermittently been on the radar of FATF because of lack of preventive measures in response to non-compliance status on many frontiers.

Improving Inter-Agency Coordination
The following measures have been taken for enhancing inter-agency cooperation between the federal and provincial governments: The Ministry of Foreign Affairs convenes regular meetings of stakeholders to discuss matters relating to implementation of UNSCRs. In December 2017, the Ministry of Foreign Affairs organized an awareness session to educate all concerned stakeholders on the new obligations arising from the UNSCR 2368 adopted in July 2017. In order to further strengthen the oversight mechanism and to improve coordination between the concerned departments at the Federal and Provincial levels, National Counter Terrorism Authority (NACTA) has established a National Task Force on combating financing of terrorism in July 2017 having representation from all relevant Federal and Provincial authorities involved in combating terrorism financing. This Task Force comprises 27 members which include FIA, FBR, ANF, SBP, FMU, SECP, all the provincial CTD’s, provincial Home Departments, Ministry of Finance and Interior etc. The pace of implementation of FATF action plan has picked up considerably as a result of these meetings.

In addition to above, the General Committee (formed under section 5 of the AML Act, 2010) has convened around dozen meetings since July 2017 to discuss matters relating to AML/CFT and in particular issues relating to FATF. This committee consists of Secretaries Finance, Law, Interior and Foreign Affairs, Chairmen NAB and FBR, Directors General FIA and ANF, Deputy Governor SBP and Commissioner SECP. The DG FMU acts as its secretary. These meetings have resulted into creating a momentum for a concerted drive against combating ML/TF and its impact is getting trickled down to the operational level.

Click here to download: Foreign Affairs Magazine (November & December 2019)

Since August 2017, NACTA issued National Guidelines for regulating hides/charity collection to all civil and law enforcement authorities of the country. As per guidelines, NGOs, NPOs, etc. desiring to collect hides of sacrificial animals would be required to obtain NOC from the office of Deputy Commissioner as well as for publishing any printed material or verbal announcements for hides/funds collection. NACTA in 2018 also signed a MoU with Pakistan Centre for Philanthropy (PCP) to streamline the flow of charity into right hands and to promote safe donations through certified organizations.

Prior to the above, NACTA issued directives to all authorities on 01st May, 2017 regarding fund raising in cash or kind by NGOs/NPOs & Charities during the holy month of Ramadan. The directive mentioned that fundraising by proscribed/listed entities and persons from the public is a serious offence.

Actions taken by State Bank of Pakistan
The State Bank of Pakistan has put in place a comprehensive regime of regulations and guidelines for effective implementation of the UNSCR 1267 sanctions and to ensure that no financial services are provided to illegal entities. The SBP has taken a number of additional actions to reinforce the earlier measures. SBP has directed institutions under its ambit to conduct thorough screening of accounts to ensure that all bank accounts, funds and other financial assets are frozen in line with legal and regulatory requirements. The State Bank of Pakistan is also following the FATF’s instructions of knowing your client/customer policy.

The screening/ assessment process should have particular focus on risky geographical locations based on available information and institution’s own assessment/ judgment in line with risk based approach. In case of entity accounts, it should be ensured that their beneficial owners, directors, members, trustees and authorized signatories are not directly or indirectly linked with any proscribed/ designated persons, whether under the same name or with a different name. Internal audit or compliance function should regularly assess and validate the compliance of Statutory Regulatory Orders (SRO) by way of review and name screening. SBP continues to enforce the compliance of SROs in letter & spirit through a systematic process of on-site inspection and off-site supervision. Inspection departments of SBP keep fully updated version of list of individuals and entities subject to UN sanctions and check the compliance of account freezing instructions during the course of inspection. As a result of these inspections, SBP has imposed penalties on different Banks and Financial Institutions for violations of ML/TF directives.

In 2019 penalties amounting to Rs 247 million have been imposed on 11 financial institutions for weak screening procedures and Rs 31 on different banks for not meeting bio-metric verifications. Moreover, SBP has punished three banks with heavy penalties of Rs. 133.3 million for the violation of its prescribed rules and regulations in September 2019. These banks are Meezan Bank, Askari Bank, and MCB Islamic Bank . Stern action was taken against these banks as part of the steps taken by the government to be removed from the grey list of Financial Action Task Force (FATF). Recently, SBP has initiated a focused risk based thematic inspection of financial institutions to assess the screening processes and compliance of SROs issued by the Government. The SBP and SECP are also following the FATF’s instructions of Know Your Customers (KYC) and Customers Due Diligence (CDD). In spite of the efforts taken by Pakistan that has been discussed above, FATF approved Pakistan’s nomination in International Cooperation Review Group (ICRG) process in its Plenary held in February 2018. This was a sudden move as action plan for Pakistan was not on the agenda. Instead action was taken on the concerns raised in the nomination paper by the countries. This is popularly known to be an India-US led move.

In the first FATF plenary on Pakistan the friendly countries namely Saudi Arabia, Turkey and China opposed the Indian instigated US led move to place Pakistan in the Grey list. However on February 22nd, the US in an unprecedented manner pushed for a second discussion on Pakistan. By then, the US had convinced Saudi Arabia to give up its support for Pakistan and promised a full FATF membership in return. The support of remaining two countries was not sufficient to stall the US move of placing Pakistan on the FATF grey list. Therefore the Chinese informed Pakistan that they have decided to opt out as they did not want to “lose face by supporting a move that is doomed to fail”. Pakistan appreciated the Chinese position and conveyed its gratitude to Turkey for “continuing to support Islamabad against all odds”. This has been termed as a diplomatic failure by some circles but others opine that there is a limit to getting support of a friendly country at International Forums on an issue where our own house needs to be put into order.

Click here to read: Understanding Geoeconomics in International Relations

Institutional and Legal Framework for AML/CFT
Pakistan has made considerable progress in establishing an institutional framework for combating money laundering/terror financing ever since APG conducted its mutual evaluation report. Following is the present institutional set up.

(a) National Executive Committee formed under section 5 of AML 2010 under Chairmanship of Minister of Finance;
(b) General Committee formed under section 5 of AML 2010 under Chairmanship of Secretary Finance.
(c) Financial Monitoring Unit (FMU) in SBP which is operationally and financially independent. This unit is headed by a director and its main function is to analyze and pass on the Suspicious Transaction Reports (STRs) which are reported by banks to the concerned law enforcement agencies. From 2015 to 2018 it has collected 18,000 STRs and after analyzing disseminated 4000 to LEAs.
(d) CTF Directorate in NACTA for a unified response of stakeholders.
(e) CTF Investigation Units in all provincial CTDs formed upon the recommendations of NACTA.
(f) Terrorist Financing Investigation Unit (TFIU) wing in FIA.

An analysis of the existing institutional framework points towards certain weaknesses and gaps which need to be addressed. (a). The FMU is handicapped with regards to its human and technical resource as only 15 financial experts are working there. Further they do not have an international linkage as Pakistan is not a member of the Egmont Group which is an international body of Financial Investigations Units. It provides a forum for exchange of financial intelligence and expertise to check ML/TF. (b) The CTF units in the provincial CTD’s are not fully geared up to fight ML/TF. It is only in Punjab that the CTFU is fully functional and performing well. The efforts of CTD Punjab in combating terrorist financing have been acknowledged during APG Assessors Onsite visit in October 2018 and also in their Mutual Evaluation Report.

Legal Framework: In Pakistan, there is a range of legislation pertaining to Anti-Money Laundering (AML) and countering the Financing of Terrorism (CFT). The primary laws relating to the subject include the following:
a) Anti-Money Laundering Act, 2010 (as amended in 2015)
b) Anti-terrorism Act, 1997 (as amended in 2013)
c) Anti-Money Laundering and Combating the Financing of Terrorism Regulations for Banks & DFIs (2017)
d) Securities and Exchange Commission of Pakistan Regulations, 2018
e) Anti-Money Laundering Regulations, 2015

An assessment of the existing legal framework leads to certain gaps and lacunas which are hampering the ML/CFT efforts.
a) The TF related STRs under AMLA, 2010 are not being disseminated to provincial CTDs, thereby making it difficult for them to seek financial records related to offence of TF from the financial sector. This is because presently CTD is not a notified body under AMLA. However the Prime Minister has recently approved a “Policy on Financial Investigation of Terrorism Cases for LEAs” whereby this gap will be addressed.
b) Section 19 of JITs under ATA, 1997 does not allow members from financial regulators and FMU or experts from private sector to be co-opted as member of JITs on Terrorist Financing.
c) Currently the LEAs i.e. ANF, Customs and NAB are prosecuting and investigating agencies under AMLA, 2010 to the extent of their own offences but specific powers and duties have not been defined in the law to investigate these offences including money laundering, from TF perspective. Resultantly, ML related offences are not being focused or investigated from TF perspective by these organizations. The Customs Operations has in the current financial year i.e. 2018-19 arrested around 30 people for currency smuggling but there has been no headway regarding their TF linkages.
d) Pakistan has no standalone law on Mutual legal Assistance with foreign countries which is leading to problems of making and receiving requests for cooperation in investigation of terrorism cases efficiently in case offence is linked to a foreign jurisdiction.
e) The ATA, 1997 under section 11O provides for freezing and seizure measures against proscribed organization and persons but does not provide any time line for such action. FATF requires seizure and freezing without delay to prevent and mitigate TF risks efficiently and effectively.

Implications for Pakistan.
Pakistan has been on and off the FATF Grey List on account of strategic deficiencies in its AML/CTF regime. Pakistan has committed to a 10 point agenda to improve its listing. The latest review made in February and June 2019 has observed progress especially in counter terror financing efforts. Next review is scheduled in third week of October 2019. The Pakistani delegation, led by Minister for Economic Affairs Division Hammad Azhar, is scheduled to leave for France on October 13th as Pakistan’s case will be taken up on October 14th and 15th. Failure to improve entails risk of black listing and sanctions which will be detrimental to our economy. There will be severe economic implications for Pakistan in the event of its getting black listed. Its credit ratings would be downgraded by multilateral lenders like IMF and World Bank. Further its risk ratings would also get increased by credit rating bodies like Moody’s etc. The risk of international trade sanctions along with a reduced foreign currency inflow in the shape of lesser remittances and FDI would also be looming large. The gravest concern for Pakistan is the possibility of being categorized along with countries like North Korea and Iran as a ‘pariah’ state, with dire political consequences like international isolation. Already it is on the grey list again, along with countries like Yemen, Syria and seven others – some of them known as failed states.

Though, it is opined from the known quarters which keenly follow FATF proceedings that this time, too, Pakistan could avoid being placed on the black list because of help from China, Turkey, and Malaysia. According to the charter of the 39 member FATF, the support of at least three member states is essential to avoid the blacklisting. The main stumbling block in Pakistan not being able to make progress in combating ML/TF as per the expectations of FATF has been a total lack of political commitment. The previous ruling classes at the helm of affairs in Pakistan, especially the regimes which came into power post 2008 have deliberately turned a blind eye towards this issue and not created an effective legal and institutional mechanism to curb it. A case in point is the half hearted approach of Pakistan in getting the membership of the Egmont Group which is an international body of Financial Investigations Units. It provides a forum for exchange of financial intelligence and expertise to check ML/TF.

This is because this ruling junta was itself involved in money laundering. They have been accused of siphoning off their ill-gotten money worth billions of dollars to various off shore destinations. Top political leadership of both the PPP and PML (N) are currently facing serious cases of money laundering. This is a good augury for convincing the world community of the seriousness on the part of Pakistan and the current political regime in fighting ML/TF and is likely to help Pakistan in its efforts to forestall not only getting blacklisted but even getting out of the FATF grey list.

— Written by Saud bin Ahsen. The writer has done MPA from Institute of Administrative Sciences (IAS) Lahore. Published by Daily Times in October 2019.