Moody’s terms Pakistan FATF status as credit negative for banks

KARACHI: Rating agency Moody’s on Thursday termed Pakistan’s status quo in the global financial system watchdog’s list as credit negative for banks in the country as this, it said, alluded to loopholes in the banking compliance to anti-money laundering standards.

“Pakistan’s continued presence on list of jurisdictions under increased monitoring is credit negative for its banks because it raises questions about potential additional restrictions relating to banks’ foreign-currency clearing services, as well as their foreign operations,” Moody’s said in a report.

“Banks’ profitability risks (are) being constrained as a result of increased compliance and operational costs.” The Financial Action Task Force (FATF) last week kept Pakistan on its list of jurisdictions under increased monitoring, along with 17 other countries, after the country failed to complete a June 2018 action plan by the assigned deadlines.

Pakistan, which has been presenting its progress to FATF every four months since the agreement of the action plan in June 2018, will remain on the list until at least June 2020, when the next evaluation will take place.

Paris-based FATF is an inter-governmental body tasked with setting global framework requirements around anti-money-laundering, counterterrorist financing and other related threats to the international financial system.

The FATF warned that it would urge member countries to increase their attention when conducting business transactions with Pakistan if the country's government, regulatory body and other stakeholders of the financial system fail to complete the action plan.

“Should they fail to do so, international financial institutions could curtail their interactions with Pakistani banks and other financial companies, including terminating correspondent banking relationships,” it said. “This in turn would further constrain banks’ ability to generate business and result in higher compliance costs.”

Though Moody’s sees improvement in compliance with global anti-money-laundering and combating terrorist financing standards, both by Pakistani banks and the country’s authorities, “but it is still weak”.

“…banks still risk losing access to foreign-currency clearing services,” it said.

“Access to foreign-currency clearing transactions, typically conducted through international correspondent banking relationships, is crucial for Pakistani banks because it allows them to process cross-border payments for clients.”

Moody’s said clearing in US dollars is particularly important given Pakistan’s high import and export economic activity, as well as the fact that a large proportion of international paymentsare made in this currency.

“That said this risk has so far not crystallised in the jurisdictions that have

been placed on the increased monitoring list,” it added.

Moody’s said a number of domestic banks with foreign operations have been subject to investigations relating to anti-money-laundering/counterterrorist financing issues that have resulted in penalties, higher compliance costs and, in some cases, the removal of overseas licences.

Moody’s, citing an action on a Pakistani bank, said the US authorities in 2017 investigated Habib Bank Limited over deficiencies in its risk management framework and violations of anti-money-laundering regulations.

The bank consented to pay a penalty of $225 million, surrendered its US banking licences and agreed to close its New York branch by the end of March 2020.

Similarly, United Bank Limited wound down its US operations last year, in part as a result of an investigation by the US authorities that identified weak compliance with global anti-money-laundering/counter terrorist financing standards.

The FATF plan contains 27 action points aimed at eliminating strategic anti-money-laundering/counterterrorist financing deficiencies at the financial system level, as well as at the legal, law enforcement, provincial and federal levels.

The final deadline for the completion of the June 2018 action plan has been extended further to June 2020.

As of February 2020, Pakistan has largely increased its compliance with 14 of the 27 identified areas, although the overall anti-money-laundering/ counterterrorist financing framework remains below global standards.

Compliance with the remaining 13 action points has also progressed at varying degrees, according to FATF. Because the list of remaining actions has narrowed, the State Bank of Pakistan has expressed its confidence about Pakistan exiting the grey list in June 2020.