Another FATF assessment

Pakistan needs to improve its mechanism of detecting potential threats related to terrorist financing

Another FATF assessment

Speaking at the Fourth G20 Finance Ministers and Central Bank Governors’ Meeting on October 13, president of the Financial Action Task Force (FATF) touched on three issues. He apprised the participants of the FATF roadmap on cross-border payments in various ways concerning anti-money laundering (AML) aspects, shared FATF’s work on virtual currency assets, including implementation of the so-called travel rule, which ensures that data is shared on who sends and receives a virtual asset. He also said that a failure to implement the rules has real consequences, giving criminals and terrorists the green light to use virtual assets to launder illegal profits, knowing that they will get away with it.

He urged the G20 countries to implement the FATF standards, including travel rule requirements, as soon as possible. Effective AML rules are crucial to ensuring proper oversight of globally stable currencies. In addition, the FATF president raised the matter of Pandora Papers and how they accentuated the need for action.

The FATF is doing amazing work in countering the illicit flow of funds. It has stressed the implementation of Recommendation 16 that aims at helping to resolve the issues that pertain to cross-border payments. This will not only help in tracing the transactions but also minimise the risk of financing terrorism. The collection of personal data to fulfill the requirements of the know your customer (KYC) standards will help locate transactions from origin to end destination. Moreover, the implementation of the ultimate beneficial ownership rule will further strengthen the standards of transparency and discourage money laundering.

In the wake of these measures, Pakistan’s handling of these important issues needs to match global best practices. At the time of writing this article, the hybrid plenary meeting of the FATF was in session. The member states reviewed our progress concerning the original as well as the new action plan agreed upon in June 2021. Pakistan has made significant progress regarding deficiencies highlighted in the Mutual Evaluation Report, 2019.

Despite that, Pakistan was handed a new six-point action plan in June 2021 which requires enhancing international cooperation, implementation of the UNSC resolution 1373, addressing risks related to designated non-financial businesses and professions (DNFBP) and implementation of sanctions, applying sanctions to all legal persons, and legal arrangements for non-compliance with beneficial ownership requirements, increase in money-laundering investigations and prosecution as well as freezing and confiscating of assets; and monitoring of DNFBPs with regard to proliferation of terrorist financing. Pakistan was asked to implement the new action plan by June 2022.

Following the first warning from the FATF in June 2016 about the consequences of not addressing strategic deficiencies related to money laundering, especiallycombating the financing of terrorism (CFT), the then prime minister Nawaz Sharif had directed the security agencies to take stern action against rogue elements. This assignment of the task allegedly resulted in a discord between the government and the military leadership. After this, the political landscape changed rapidly.

Our celebrations to welcome the Taliban appeared to prove the points the United States and other countries had made in a motion in FATF to list Pakistan as a financier of terrorism.

The tension between the political leadership and the military establishment had a heavy cost for Pakistan; in June 2018 the FATF placed it on its Grey List. Since then, it has failed to address the FATF concerns and get off the list. Following the listing, the FATF issued a detailed mutual evaluation report on Pakistan in 2019. Subsequently, follow-up reports were published on the progress made by Pakistan. Our progress on technical compliance and its effectiveness did not meet the standards set by the global watchdog.

According to the most recent consolidated rating assigned to Pakistan based on the third follow-up report, Pakistan was fully compliant on eight recommendations, partially compliant on three with moderate shortcomings, largely compliant on 27 with minor shortcomings, and non-compliant on two recommendations with major shortcomings.

The effectiveness measures were rated on a scale of high, substantial, medium and low levels of effectiveness based on 11 immediate outcomes (IOs). Pakistan’s levels of effectiveness were rated as low on ten and medium for one immediate outcome (IOs) related to international cooperation.

Why was Pakistan unable to address the strategic deficiencies and remains in the jurisdiction with increased monitoring? Apparently, it needs to change its priorities. It must streamline its internal as well as external arrangements. The internal issues, related to AML–CFT, cannot be addressed without incorporating the fundamental principles of countering illicit flow of funds in legislation. While Pakistan has amended its Anti-Money Laundering Act, 2010, several times, most of its provisions do not meet international standards. Similarly, the regulations issued by the State Bank, the Securities and Exchange Commission of Pakistan and the Federal Board of Revenue do not address all issues. No comprehensive sector-specific guidelines are available to educate the professionals in the relevant industries.

Pakistan needs to improve its legal system as well as equip its law enforcement agencies with advanced training, techniques and tools to detect, arrest and prosecute criminals.

Pakistan also needs to reconsider its foreign policy. Following the recent developments in Afghanistan, it failed to claim its fair share in facilitating the US-Taliban peace deal. An unsolicited visit by Pakistan’s premier intelligence agency chief to Kabul at a time when the US was under severe criticism, provided the Biden administration an opportunity to blame Pakistan.

Celebrations in Pakistan to welcome the Taliban takeover appeared to support the points the United States and other countries made in a motion in the FATF to list Pakistan as a financier of terrorism. Despite knowing that the new FATF action plan asked it to implement the UNSC Resolution 1373 (2001) which requires countries to freeze, without delay, the funds, or other assets of, and to ensure that no funds or other assets are made available, directly, or indirectly, to or for the benefit of, any person or entity designated a terrorist by the UNSC. There seemed to be no realisation of the consequences of the unconditional support for those who are the reason for introducing this resolution. This can have a severe impact.

Pakistan needs to improve its mechanism of detecting potential threats related to terrorist financing through cross-border transactions and implement the guidelines on monitoring the main drivers of cross-border terrorist financing risks posed by an alternative remittance system. Our financial institutions need to ensure that their Suspicious Transaction Reports and Cash Transaction Reports are aligned with their risk profiles and address concerns raised in the recent Mutual Evaluation Report.

The observation that highly technical matters like ML and CFT have been left to the Federal Investigation Agency and the National Accountability Bureau, seen as politically motivated and showing below-par performance, is highly unfortunate.

Pakistan has been asked by the FATF to implement the new action plan by June 2022. It is time for it to invest adequate resources in training and forming a separate institution to deal with all types of financial crimes, including timely detection of illicit flow of funds, raising red flags against suspicious activities, issuance of sector-specific guidelines, seeking mutual legal assistance, coordinating with the law enforcement agencies, aiding the courts as well as dealing with technical issues. The objective should not limited to getting of the FATF Grey List, at the same time, we must strive to upscale our financial and corporate system.

Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in white collar crimes.

Dr Ikramul Haq, Advocate Supreme Court, is adjunct faculty at the Lahore University of Management Sciences, a member of the Advisory Board and a visiting senior fellow of Pakistan Institute of Development Economics

Another FATF assessment