Pakistan has been removed from the Financial Action Task Force (FATF) grey list
fter four years, the Financial Action Task Force (FATF) finally removed Pakistan from its ‘grey list’ on October 21. The decision was announced by FATF President T Raja Kumar at the end of a two-day meeting in Paris, France. “Pakistan has addressed technical deficiencies to meet the commitments of its action plans,” he said.
International organisations like the FATF are established to enhance efficiency, transparency and accountability. In the modern world, many a formal organisation has been established, for example, to promote international trade. The General Agreement on Tariffs and Trade (GATT) in 1947 and, now, the World Trade Organisation (WTO) are examples of this. In the wake of the World War II, a number of international organisations were established including the United Nations (UNO) and its various subsidiaries and affiliated bodies like the UNICEF.
Regional organisations are also seen as a means to encourage regional cooperation in various fields. In the Cold War years, numerous regional organisations were established in various parts of the world. For example, the Organisation of American States (OAS) was founded in 1948; the precursor to European Union (EU), namely, the European Economic Community (EEC) was established in 1957. In Asia, the Organisation of the Petroleum Exporting Countries (OPEC) was founded in 1960. Another important regional organisation named the Association of Southeast Asian Nations (ASEAN) was established in 1967. In Africa, the Organisation of African Unity (OAU) was founded in 1963. It was revamped in 2002 and since then is called the African Union (AU).
Context is a very important element in analysing any phenomenon and practice. The above-mentioned international and regional organisations were a product of the Cold War period whereby governments opted to establish such organisations to realise the desired objectives through shared-interests groups. When the Cold War was nearing its end, the G-7 countries decided to establish an inter-governmental organisation to curb the practice of money laundering - which, for years, had affected the international financial system.
In other words, an inter-governmental body was needed to regulate global financial flows in a changed context once the USA versus USSR binary lost its significance as far as the contours of international trade and commerce were concerned in the post-Cold War period. Countries from, for example, East Europe, seemed willing to embrace global capitalism. Thus, at the G-7 session held in Paris in 1989, the FATF was established. Having recognised the threat posed to the banking system and financial institutions, the G-7 leadership along with the president of the European Commission (EC) convened a task force comprising members from the G-7, the EC and eight other countries.
The FATF is tasked to not only examine money laundering techniques and trends, but also to review the current plan(s) of action adopted at national and/ or international level, and propose measures to curb money laundering across nations. In April 1990, the FATF issued a report, which contain what are generally called the Forty Recommendations. The report has served as a detailed document to combat money laundering in the world in the following years. Importantly, till 9/11, the organisational and operational outlook of the FATA centred around money laundering, with the long-term goal of making global banking and financial mechanisms more effective and transparent. However, 9/11 broadened its organisational agenda, expanded its operational outreach and fostered institutional collaboration with governments and non-governmental organisations. Hence, the development of standards in the fight against terrorism financing was incorporated in the mission of the FATF in 2002.
The same year, the FATF issued its Eight Special Recommendations to cope up with terrorist financing. Over the next two years, the FATF revised its standards to curb terrorism-related money laundering comprehensively. Moreover, in October 2004, the organisation published its Ninth Special Recommendations, that improved upon the international standards for combating money laundering and terrorist financing. These nine recommendations were: ratification and implementation of UN instruments; criminalising the financing of terrorism and associated money laundering; freezing and confiscating terrorist assets; reporting suspicious transactions related to terrorism; international cooperation; alternative remittance; wire transfers; non-profit organisations and cash couriers. Generally, these policy measures were described as the 40+9 Recommendations in policy discussions and discourse. However, the FATF completed a comprehensive review of its standards and published the revised FATF Recommendations in 2012. This revision was aimed at strengthening global safeguards and enhancing the integrity of the global financial system by equipping governments with effective tools to plan action against financial crimes i.e., the financing of proliferation of weapons of mass destruction.
Pakistan was placed on the “grey list” for the first time in 2008. Two years later, the country was removed the list. Two years on it was again placed on the list. In 2015, the country demonstrated transparency and exited the list. However, in 2018, it was once added to the grey list citing the same reasons.
In terms of decision-making mechanism, the FATF Plenary is the main organ that makes policies. It meets three times a year. As far as the membership of the FATF is concerned, it expanded its membership from the original 16 to 28 members during 1991-92. In 2000, however, the organisation expanded to 31 members and currently it has 39 members including USA, China, Russia, Saudi Arabia, Turkey and India. Pakistan is not a member of the Finical Action Task Force despite the fact Pakistan has remained in global limelight due to its dealing with the FATF in the recent years. A question arises here: if Pakistan is not a member of the FATF, how come the organization holds it accountable? The answer lies in the revised FATF Recommendations. If someone, for example, studies the Nine Recommendations stated earlier, the reference to the UN instruments is, for instance, a crucial aspect of FATF’s plan to curb money laundering and terrorism financing because the concerned UN conventions obligate every member of the UN system, to comply with the UN standards to fight financial crimes and terrorism.
Since the FATF is organisationally focused on the stated two goals, it has aligned its agenda and plan of action with the UN instruments. Since Pakistan is member of the UN, it is obligated to take measures to the satisfaction of the not only the UN but also the FATF. In addition, since the latter has set standards to, for example, withhold financial transactions, which is seen “suspected” or linked with terrorist financing by the FATF, from an individual or firm to a non-member country such as Pakistan, the latter has no option but to comply since it is dependent on the Bretton Woods financial system with respect to global banking mechanism which is largely controlled by the World Bank and the IMF.
In other words, a country on the so-called “grey list” (technically called “jurisdictions under increased monitoring”) has limited options to financially deal with global stakeholders such as the IMF or any Western multinational corporation (MNC). Nevertheless, “Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring.”
Pakistan has a long history of working with the Financial Action Task Force. It was placed on the “grey list” for the first time in 2008 for failing to meet the international standards relating to money laundering and terror financing. In two years, the country was removed from the grey list after it fulfilled the requirements. Two years later, Pakistan was again placed under ‘increased monitoring’ vis-à-vis money laundering and terror financing. In 2015, it demonstrated the requisite transparency and exited the list. In 2018, it was once again put on the grey list citing the same reasons.
However, this time around, Pakistan struggled to get off the grey list. Previously it had taken two to three years to be declared a “jurisdiction no longer subject to increased monitoring”. In the latest episode, it took a lot longer. Due to several factors, including regional geopolitics, the country remained in the news due to its consistent engagement with the FATF. Nonetheless, Pakistan’s civil-military leadership realised the financial and economic consequences of non-compliance with the FATF and UN standards on money laundering and terror financing and, thus, adopted numerous institutional and legislative measures to objectively fulfil the FATF requirements to exit the ‘increased monitoring’.
To be counted as a core member of the global (financial) community, Pakistan needs to consolidate its anti-money laundering and terrorist financing regime through close cooperation with the Financial Action Task Force. Remember, in the age of accelerated globalisation, the key to success is meaningful engagement and cooperation not isolationism and revisionism.
The writer has a PhD in political science from Heidelberg University and a post-doc from UC-Berkeley. He is a DAAD, FDDI and Fulbright fellow and an associate professor. He can be reached at ejaz.bhattygmail.com