Thursday June 30, 2022

Unfolding the FATF

August 08, 2020

Finally, the FATF debate has reached parliament – where it belongs, because the FATF is not a one-time compliance but an evolving hybrid international regulatory process that will impact the financial, legal, anti-corruption and governance structures of Pakistan.

Unlike UN conventions and resolutions, the FATF (Financial Action Task Force) does not have an international convention-based status. It is a non-legally mandated body under international law.

Late last month, parliament under the rationale of national interest legislated FATF-related governments acts in the shortest possible time, and now the government is confident that in the next meeting of the FATF later this year, Pakistan will be off the hook from the threat of being blacklisted.

But the question remains: has parliament internalized the whole process of the FATF?Have lawmakers developed an adequate understanding of the emerging international non-binding yet coercive regulatory regime, so as to ensure that Pakistan does not face a similar situation in any future mutual evaluation exercise?

The legislature can implement and enforce laws and improve policy by employing different parliamentary tools available to them in the shape of parliamentary committees’ review and raising questions.

Pakistan coming out of the grey list will not be the first time. In 2015 also Pakistan came out of the grey list after amending its anti-money laundering law. Pakistan had been placed on the FATF grey list in 2012.

It looks like Pakistan's policymakers have a conventional approach to the FATF, understanding that the UN's primary role has been to develop international law through conventions that member-states ratify or accede to voluntarily. They then become legally bound to implement and comply with these conventions. However, member-states may choose not to sign or ratify these conventions and protocols. This would leave them with no obligation to implement or comply. Even after signing such conventions, member-states can still withdraw their participation by notifying the United Nations of such withdrawal.

But there is a difference. Whereas the UN has been responsible for the development of conventions and protocols, the FATF has sought to articulate these through its recommendations on money laundering and the financing of terrorism (AML/CFT).

A mutual evaluation report (MER) extends the FATF’s coercive tool to implement and enforce its recommendations. The mutual evaluation is a peer review mechanism that enables the FATF to 'assess the overall effectiveness of money laundering and the financing of terrorism (AML/CFT) systems of its members.

A research study, ‘Re-thinking FATF: an experimentalist interpretation of the FATF’, says: "Once an oddity, [the] FATF now seems like a model of global governance in a landscape characterized by contested multilateralism, plurilateralism, regime complexes, and good enough global governance. Ultimately, however, threats of exclusion from major markets raise the cost of non-compliance, which provides an incentive to cooperate”.

The FATF, an inter-governmental body established in 1989 by the G7, is a "policymaking body," which generates the necessary political will to bring about national legislative and regulatory reforms. Pakistan is not a member of the FATF but of the Asia-Pacific Group (APG), a regional affiliate of the FATF, which helps countries enforce the FATF's 40 Recommendations.

In June 2018, Pakistan gave a high-level political commitment to work with the FATF and APG, and agreed to monitor 27 indicators under a 10-point action plan, with specific deadlines. The understanding was that the successful implementation of the action plan, and its physical verification by the APG, would lead the FATF to move Pakistan out of the Grey List. However, Islamabad managed to satisfy the global watchdog over only five of them.

After an extension of the deadline for compliance, on December 6, 2019 Pakistan submitted a report to the FATF containing answers to the remaining 22 questions. In response, the FATF's Joint Group has now sent 150 items to Pakistan, asking for clarifications, updates, and actions taken against the madrassas.

The mutual evaluation process is comprehensive and intensive. In a single round of evaluations, the FATF assesses over 40 jurisdictions. Each assessment takes 14 months for the team to complete. The FATF Plenary discusses and adopts two mutual evaluation reports at each of its three annual plenary meetings. This means that each assessment cycle takes seven to eight years to complete.

The publication of the MER is a starting point for the country, which subsequently reports back to the FATF regularly on the progress it has made. After three years, the general expectation is for states to have addressed most, if not all, of the technical compliance deficiencies. After five years, the FATF conducts a follow-up assessment under a methodology developed in 2004. Mutual evaluations are performed by a team of 'four to six selected experts in the legal, financial, and law enforcement fields from other member governments, with up to two members of the FATF Secretariat' and take approximately ten months to a year to complete.

A considerable number of mutual evaluations are also conducted or led by the World Bank and the IMF, which are also known to be using the outcomes of these evaluations as a criterion of conditionality in their loans and financial assistance. Such countries are therefore being pressured to implement these standards, whether or not they are signatories, as they have now been made part of good governance measures.

A public statement from the FATF on February 27, 2015, which announced the removal of Pakistan from the watch-list, had stated: “The FATF welcomes Pakistan's significant progress in improving its AML/CFT regime and notes that Pakistan has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2010."

"Pakistan is therefore no longer subject to the FATF's monitoring process under its ongoing global AML/CFT compliance process. It will work with [the] APG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report, in particular, fully implementing UNSC (United Nations Security Council) Resolution 1267," the announcement said.

The World Bank had conducted a mutual evaluation of Pakistan in 2009. The 218-page report lists in detail the steps that had already been taken by Pakistan till then in respect of the prevention and criminalization of terrorist financing and money laundering.

The report also provided an overview of Pakistan's national legislative framework and gave recommendations for improvements. The report's assessors highlighted and praised the national authorities for their "strong commitment" to the process of assessment. In 2009, Pakistan was committed to strengthening its Institutional framework to improve the domestic AML/CFT regime.

In October 2019, the Mutual Evaluation Report on Anti-money laundering and counter-terrorist financing measures recorded: “Pakistan completed its first AML/CFT National Risk Assessment (NRA) in 2017 and assigned a national risk-rating of 'medium' for both ML and TF. However, the NRA lacks comprehensive analysis. Competent authorities have varying levels of understanding of the country's ML and TF risks, and the private sector has a mixed understanding of risks. While Pakistan has established a multi-agency approach to implementing its AML/CFT regime, it is not implementing a comprehensive and coordinated risk-based approach to combating ML and TF."

At present, Pakistan is faced with many fiscal and monetary challenges as for the first time ever since its existence it has experienced a negative GDP. To overcome, it needs the massive support of international lending agencies, foreign trading, and investment. This can only be achieved by remaining part of the global financial system.

Therefore, the country’s financial and security managers have to reposition themselves from a formal UN system to the soft yet coercive FATF regulations, and demystify formal and informal international regulations into effective domestic enforcement of the law.


The writer is a freelance