FATF Review & looming repercussions for Pakistan

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

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 FATF Review & looming repercussions for Pakistan

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

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 FATF Review & looming repercussions for Pakistan

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.

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 FATF Review & looming repercussions for Pakistan

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

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 FATF Review & looming repercussions for Pakistan

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.

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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

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 FATF Review & looming repercussions for Pakistan

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

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 FATF Review & looming repercussions for Pakistan

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

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 FATF Review & looming repercussions for Pakistan

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.

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