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The FATF tightrope


August 25, 2018

At the end of June this year, Pakistan was added to the ‘grey list’, the list of countries deemed by the FATF as not yet having taken sufficient steps to thwart money laundering and terrorist financing, as defined by international conventions and regulatory requirements.

An action plan was agreed upon with time-bound tasks corresponding to each of the technical weaknesses identified by the FATF. Last week, Pakistan received a six-member delegation of the Asia Pacific Group (APG), the so-called FATF-style regional body responsible for our geographical region, for a follow-up visit. Press reports of the visit highlighted that the APG pointed out that work in key areas remained to be addressed prior to the mutual evaluation scheduled for October.

The FATF is an intergovernmental body established to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system. Pakistan was added to the ‘grey list’, that comprises countries involved in providing monetary assistance to terrorism and related causes, after an FATF meeting held in Paris in June 2018. Terrorist financing involves collection of funds to support acts of terror or terrorist organisations. In financing terrorism, funds may come from legitimate sources, such as donations from an ordinary citizen, but the purpose has to be a crime.

The UN introduced the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) in 1988, the Political Declaration and Action Plan Against Money Laundering in 1998, the United Nations Convention Against Transnational Organized Crime in 2000. These international instruments call on states to outlaw the most common offences, including money laundering and terror financing, and bind states for strict compliance. Further, numerous UN resolutions on terrorism and counter-terrorism give international bodies the mandate to monitor the compliance of member states in countering terrorism.

International requirements to enforce effective regulations for countering terror financing and money laundering often have impacts on grassroots social and economic development and are viewed to limit civil society organisations space and capacity to respond to disasters and emergencies. When such consequences occur, they are often collectively referred to as ‘shrinking operational space’ or ‘shrinking humanitarian space’.

Charities and non-profit organisations perform a vital role in our society, providing relief and support to those in need, and in times of urgent crisis. Unfortunately, charitable fundraising has also been used as a cover for terror financing. The FATF’s eighth recommendation requires that the laws and regulations which govern non-profit organisations be reviewed so that these organisations are not used for financing terrorism.

Pakistan needs to understand the risks of money laundering and terrorist financing. It should take action, including designating an authority or mechanism to coordinate actions taken to assess risks, and apply resources to ensure that the risks are mitigated effectively. There is a need to review our national Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) policies.

Money laundering ought to be criminalised in accordance with the Vienna Convention, and terrorist financing on the basis of the Terrorist Financing Convention. It should be made mandatory for financial institutions to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with the competent authorities’ requests for information. Such records must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved, if any) so as to provide, if necessary, evidence for prosecution against criminal activity.

The Anti-Money Laundering Act, 2010, and its supporting regulations provide a solid foundation to curb money laundering and terrorist financing activities in the country. Under this law, a high-powered National Executive Committee, comprising four ministers, SBP governor and SECP chairman amongst others, are fully empowered to develop an AML/CTF strategy. Furthermore, according to the Financial Monitoring Unit’s website, there are over 20 relevant laws, three sets of regulations and 10 types of reporting formats and guidance notes to control and prevent money laundering and terrorist financing.

It is crucial to understand that an effective AML/CTF regime can curtail money laundering and terrorist financing crimes. But the major weakness lies in the most important area: implementing the rules and regulations on ground by the government itself. This is where information received from financial institutions needs to be analysed and investigated. Those found involved in money laundering and terrorist financing activities then need to be duly prosecuted and subjected to effective sanctions, including confiscation of the proceeds of the crime.

We are quite good in promulgating laws, drafting regulations and notifying guidance notes, but all these efforts lose steam when it comes to enforcing them. The FATF review also highlighted that cross-border smuggling of cash in Pakistan remains one of the major areas where there has been no progress at all. Illicit funds may come from a variety of sources, but they have to change hands at some point. This is where the funds need to be stopped and those involved need to be caught. And this is exactly where we have failed. Effective enforcement requires well-functioning institutions and a capable judicial system, which in turn depends on the overall state of governance and rule of law. Money laundering and related crimes in Pakistan have recently taken centre stage in political debates. Prime Minister Imran Khan in his maiden address to the nation announced that he will personally keep a watch on activities covered under money laundering.

There is an urgent need to consider the FATF’s reservations and take rapid steps to address the problems it has identified. However, the government needs to keep in consideration the possibility of the FATF-APG’s desire to get more specific commitments out of it, including a crackdown on organisations which have been involved in terrorist activities in the past. Apart from establishing a foolproof legal framework to curb terror financing, the group will also want progress on actions against those banned organisations that are still operating under different names. These organisations are, in fact, the FATF’s actual point of concern.

Towards enabling the latter, the National Commission for Human Rights is holding a seminar on August 30, 2018 in Islamabad. Our aim is to set the ball rolling by enabling a cross-sector understanding of the inter-connectedness of international counter terror/anti-money laundering obligations under the FATF and their impact on the operational space for grassroots social and economic development.

It is our hope that the conversation that will begin on August 30 will facilitate all kinds of cross-sector relationships and contributions that are needed to bring about the desired change.

The writer is the chairman of the National Commission on Human Rights.