Next step for Pakistan

Pakistan’s name was placed on the grey list due to weak representation. It will continue to remain there until we fight back

Capital flight through illicit financial flows is a major challenge for our global economy. Money earned through corruption, tax evasion, smuggling endangered species as well as trafficking in humans, drugs and precious gems are the main sources of illicit funds.

The United Nations and multiple watch-dog agencies play a role in eliminating this curse by working together on several platforms, including the United Nations Office on Drug and Crimes, the OECD global forum for taxation, and the Financial Actions Task (FATF). However, the FATF’s role in combating money laundering and terrorist financing is one of the most important.

The FATF is an inter-governmental body that promulgates international standards to combat the profanity of money laundering and terrorist financing. It is directly connected, with every major developing and developed country in the world. The FATF’s regional bodies make sure that each signatory nation is complying with its standards.

If the FATF decides that a signatory nation is non-cooperative in the fight against money laundering and terrorist financing or has weak enforcement measures to combat money laundering and terrorist financing it can declare that a nation is ‘high risk’ and place it on a Grey List for continuous monitoring. Grey-listed nations suffer severe economic consequences such as reduced foreign direct investments, imports and exports, remittances, and limited access to international financial institutions.

Pakistan was grey-listed in June 2018 because of its ties to Islamist militant groups and its weak anti-money laundering and combating the financing of terrorism (AML-CFT) regulations. In my opinion, Pakistan was unfairly grey-listed by the FATF because:

Pakistan’s efforts against terrorism and Islamist militants were being loudly applauded by the world. Being an important ally in the war against terrorism, Pakistan had not only lost innocent citizens but also suffered a substantial financial loss. Despite these costs, Pakistan fought against militant organizations and restored peace in the country.

Pakistan was the only non-NATO ally in the war against terrorism that facilitated the US and its allies by offering its own resources and infrastructure. Pakistan offered its most important supply route for US and ISAF forces in Afghanistan. Pakistan offered its airbase’s and also facilitated the US and its allies in identifying and targeting the Taliban on its own soil through drone attacks.

This cooperation resulted in a high cost to the Pakistani people. A Physicians for Social Responsibility report, states that from 2004-2013, more than 81,000 Pakistani lost their lives in this war against terrorism. The Dead included 48,504 civilians, 45 journalists, and around 951 civilians killed in done attacks, 5,498 law enforcement personnel and 26,862 others.

Moreover, this war badly impacted Pakistan’s economy by drastically affecting exports, physical infrastructure, tax collection, and investment including social fabrics. According to Economic Survey of Pakistan the country lost more than $123 billion in the war against terrorism.

Despite all this suffering, Pakistan’s achievements against terrorism cannot be matched by any other country.

Under the leadership of then prime minister Nawaz Sharif, Pakistan designed a comprehensive National Action Plan to counter terrorism. This plan not only defined direct military actions against terrorists, but also choked off terrorism financing to prevent the re-emergence of targeted organizations. This plan also facilitated coordination between authorities, including federal and provincial governments to get rid of this curse. Moreover, Pakistan moved one step ahead by establishing special trial courts under the supervision of army to ensure speedy terrorist trials.

Military tribunals in Pakistan convicted more than 180 terrorists and had issued verdicts in more than 300 terrorism-related cases by the end of 2015.

The National Counter Terrorism Authority (NACTA) report on terrorism shows that Pakistan has significantly reduced terrorism incidents since 2014. It highlighted that 1,816 terrorist incidents were reported in 2014 and 1,139 in 2015. Reportable terrorist incidents were further reduced to 785, 741 and 548 in 2016, 2017 and 2018 respectively. The report further states that in Islamabad and the Punjab, a reduction of 50 percent in terrorism related incidents occurred, whereas in Baluchistan and Khyber-Pakhtunkhwa, a 92 percent reduction was witnessed. Finally, the report highlights an 80 percent decline in terrorist incidents in 2018 in Sindh. Notably, all victories were achieved through Pakistan’s own initiatives, using its own resources and without external pressure or international dictates.

When it comes to combating money laundering, Pakistan’s progress and performance is better than a majority of FATF member nations. Pakistan successfully implemented anti-money laundering laws in 2007, which were further amended in 2010 in the light of FATF guidance. Pakistan introduced detailed AML-CFT regulations and then issued guidelines on a risk-based approach in 2012. These regulations were further amended in 2015 under the guidance of the Asia Pacific Group, the regional body of the FATF. Below, see a chronological list of Pakistan’s initiatives to combat money laundering and terrorist financing:

The State Bank of Pakistan tightened its policy against unlicensed alternative remittance systems,( which are hundi or hawala). The State Bank of Pakistan made it compulsory for all hawaladars to get registered as authorized foreign exchange dealers and meet minimum capital requirements starting in June 2004

In 2008, the Securities and Exchange Commission of Pakistan issued Anti-Money Laundering Regulations for all entities except financial institutions.

During former finance minster Ishaq Dar’s tenure, Pakistan issued additional lists of predicate offenses and corresponding penalties. Then in 2014, Pakistan issued guidelines for Financial Institutions on Investment Incentive Scheme where it was clearly stated that a ‘scheme’ will not receive any immunity from the application of the AML Act, 2010.

The policy also provides guidelines for addressing and mitigating AML – CFT risks along with filing of suspicious transactions reports. In January 2015, the Ministry of Finance announced minimum threshold limits for currency transaction reports (CTRs).

Subsequently, the same year, through statutory notification, Pakistan announced a Financial Monitoring Unit - an autonomous body that could work without political pressure against the curse of money laundering and terrorist financing.

In April 2015, Pakistan further amended the Sales Tax Act and Federal Excise duties to add predicate offences. The Sales Tax Act was further amended to make insider trading and market manipulation as predicate offences in the light of Section 42 of Money Laundering Act, 2010. Under the same section, the Government of Pakistan amended its Income Tax Ordinance, 2001 and inserted Sections 192 and 192A relating to prosecution for false statements in verification or concealment of income. These provisions were added to deal with tax evasion.

In May 2019, the government notified Provincial Counter Terrorism Departments (CTDs) as investigation and prosecuting agencies and in December 2019, Pakistan established a supervisory authority for Designated Non-Financial Business and Professions (DNFBPs).

Pakistan also issued AML and CFT regulations, together with guidelines on a risk based approach in 2012, which have subsequently been amended, with revised regulations issued in 2015. These guidelines contain clear directions for verification of the identity of a customer and require this verification prior to opening an account. These guidelines further require that financial institutions must obtain a copy of customer’s computerized national identity card (CNIC) from occasional or walk-in customers who are conducting cash transactions above threshold limits; whether carried out in a single transaction or in multiple transactions that appear to be linked for all currency Transaction Reports that in aggregate exceed the threshold.

The Securities and Exchange Commission issued further amended regulations in 2018 based upon recommendations from the Financial Monitoring Unit in consultation with the Policy Board. These regulations contains comprehensive guidelines for risk assessment and applying risk-based approaches to monitor the AML-CFT system, cross-border correspondent relationships, on-going monitoring of business relationships, simplified due-diligence including enhanced due diligence of high-risk customers, politically exposed persons (PEPs), record keeping including reporting of suspicious transactions, and currency transactions.

Despite Pakistan’s sufferings, cooperation and achievements, it was categorized as a ‘non-cooperative’ country and grey-listed by the FATF in 2018. This is ironic since the FATF’s 10 primary objectives were specifically designed to address terrorist-related activities. However, once the FATF realised that militant organizations were already being addressed by the Law Enforcement Agencies (LEAs) of Pakistan, the FATF started coaching Pakistan on its implementation of money laundering laws.

When Pakistan was grey-listed, it felt arbitrary and unfounded, especially as other FATF member nations have faced severe challenges to combat the curse of money laundering. In fact, a review of money laundering vulnerabilities, methodologies and incidents in England, Canada, Italy, Argentina, Belgium, Brazil, India (the list goes on), reveals that each is facing similar issues.

Due to weak controls, criminals still use banks, real estate, financial assets, remittances, shell companies, phantom accounts, illegal gaming, informal financial networks, and the sale of cars, cattle, racehorses, artwork, and other luxury goods to transport their illegitimate earnings. Moreover, large urban centres also facilitate drug trafficking organizations with money laundering techniques which involve foreign bank accounts, shell companies and financial assets.

The INCSR 2019 states that the most common methods used to transport funds in India includes buying gold and real estate, opening multiple accounts, intermingling criminal and legitimate proceeds, purchasing bank checks with cash, routing funds through employee accounts including the creation of complex legal structures. Apart from these methods, the most common way is education programmes, charities and election campaigns. Hawala systems operate on a large scale in India, and facilitates criminals and terrorists and money launderers to transport their funds. All these countries are influential members of the FATF but still struggle to implement AML regulations.

Another important fact highlighted in a report from the UN Office on Drugs and Crime is that drug traffickers may have laundered around $ 1.6 trillion, or 2.7 per cent of global GDP. This report highlights that general criminal proceeds, excluding tax evasion, amounted to $ 2.1 trillion or 3.6 per cent of GDP in 2009. Out of this total, the proceeds of trans-national organized crime - such as drug trafficking, counterfeiting, human trafficking and small arms smuggling - would amount to 1.5 per cent of global GDP and 70 per cent of that amount would likely have been laundered through the financial system.

The report also talks about the cocaine trade, which stood at around $84 billion in 2009. A major portion of this income was generated in North America estimated at approximately $35 billion, followed by west and central Europe at $26 billion. As per this report, most profits from the cocaine trade are laundered in North America and in Europe. Illicit income from other sub-regions is likely laundered in the Caribbean.

These examples include founding as well as other member nations of the FATF. Although these states have not fully implemented laws and regulations to successfully control money laundering, the FATF has never issued warnings nor added their names to the grey list. In contrast, developing countries with weaker economies face similar compliance issues and struggle to fight against these crimes based on their limited resources. Often they are grey-listed by the FATF, which further impedes their revenue base and ability to fight these crimes.

Once a developing country is placed on the FATF grey list, they became victims of advisories and guidance issued by financial regulatory bodies from other countries. This slows and raises the costs of international transactions because of the additional time and resources required to perform enhanced due diligence on each transaction made with a grey-listed nation. These advisories become burdensome even when transferring legitimate funds to support families due to additional requirements and interrogation by the financial institutions or money services businesses acting as transaction intermediaries. For developing countries like Pakistan, it can be a financial disaster. Apart from FATF’s unfair treatment of Pakistan, the current government has done a poor job of defending Pakistan’s national interests, at a time when Pakistan could least afford the punitive actions. They failed to explain that Pakistan was already complying with their ten-point objective by implementing its National Action Plan. They also failed to explain that progress was being achieved, and if FATF member countries forced action against Pakistan, it would further weaken a deteriorating economy in the country. We are witnessing the effects of this lost opportunity. Instead of defending Pakistan’s existing regulations and progress to date, and by agreeing to FATF’s ten-point directive, they have obligated Pakistan to an unrealistic implementation schedule.

Pakistan needs to present its case strongly at the FATF meeting. Pakistan’s compliance levels are growing and our successes compare favorably to other FATF member states. We need to strongly communicate that Pakistan has won its war against terrorism and that we are now at the implementation and fine tuning stage of FATF’s guidance and recommendations.

We have tremendous achievements in hunting down the militants and their organisations. We have improved our laws and regulations and our system is far better than many FATF member states. We are not a facilitator of the drug trade like west and central Europe and Caribbean countries highlighted in UNODC report. Our border security is better than the INSCR has reported about most other FATF member nations. We have successfully overcome issues in alternative remittances system and the INCSR’s report highlighted our efforts.

The bottom line: Pakistan’s name was placed on the grey list due to weak representation and it will continue to remain there until we fight back and ably defend our progress. However, our current leadership may not be up to the task. Recently, their anemic foreign policy resulted in a failure to convince 16 nations to pass a resolution against India for obvious human rights violations in Kashmir. Do we really expect that current Pakistani leadership can convince the FATF to reserve our grey listing?


The writer is a corporate lawyer and expert in AML-CFT and Sanctions Compliance. He has written several books on corporate and taxation law in Pakistan. He can be reached at [email protected]

Next step for Pakistan as FATF puts it on grey list till June 2020