FATF and untouchable jurisdictions

Compared to several other FATF member states, Pakistan, the UAE, and Turkey have established better controls

FATF and untouchable jurisdictions

Criminals involved in money laundering who generate wealth through illegitimate ways, such as tax evasion, drugs/human trafficking, fraud, kidnapping and extortion, etc., are always looking for havens with fewer compliance requirements to which they can move their assets.

This illegal flow of funds adversely impacts the capacity of honest and legitimate businesses, leading to loss of revenue and economic deprivation for the government. Such states fail to spend enough money to improve key social indicators. The common man thus remains deprived of basic needs, such as healthcare, education and employment.

The United Nations Office of Drugs and Crimes (UNODC) estimates the share of laundered funds between 2 and 5 percent of the global GDP or $800 billion or $2 trillion per year. This is a huge amount that belongs to the people of the relevant states and should be utilised to build infrastructure, hospitals and schools and to create employment opportunities. However, weak regulatory frameworks and strategic deficiencies in the systems, allow criminals to move their ill-gotten wealth to offshore shelters.

The Financial Action Task Force (FATF) is playing its role to curtail the illicit flow of funds. They perform assessment procedures to identify jurisdictions with weaknesses in their Anti-Money Laundering and Counter Financing of Terrorism (AML-CFT) regimes and then work in collaboration with them to implement the remedial plans in line with the 40 recommendations known as global standards designed to protect the financial systems from being exploited by the criminals.

The FATF process to list a jurisdiction with AML-CFT strategic deficiencies is initiated when either a country is not willing to participate in the FATF-style regional body (FSRB) or delays the publication of mutual evaluation results. Another important reason for listing a jurisdiction with a weak AML-CFT framework is that the FSRB finds it exposed to money laundering, terrorist financing or proliferation financing risks or threats.

Apart from these, reasons for listing as AML-CFT strategic deficient jurisdiction include posting poor results on its mutual evaluation, specifically,

20 or more non-compliant (NC) or partially compliant (PC) ratings for technical compliance; or

NC/PC rating on three or more of the Recommendations 3, 5, 6, 10, 11, and 20; or

low or moderate level of effectiveness for nine or more of the 11 immediate outcomes, with a minimum of two lows; or

a low level of effectiveness for six or more of the 11 immediate outcomes.

A comprehensive review process is followed to determine the compliance level of each nation with the 40 recommendations of FATF to list a jurisdiction as one under increased monitoring (Grey List) or high-risk jurisdiction subject to a call for action (Black List). Currently, the FATF has listed 23 countries among jurisdictions under increased monitoring and two countries as high-risk jurisdictions subject to call for action.

In some instances, citizens of the countries subject to such action perceive it to be a hostile measure based on subjective application of the FATF criteria.

Pakistan was placed on the Grey List in 2018 even before the completion of its mutual evaluation report that was due in 2019. This action was taken by the FATF on the motion of the United States to put Pakistan on the global terrorist-financing watch-list. The motion was backed by India.

Many people in Pakistan believe that if it were not for Indian lobbying, it would not have been placed on the global watch list as it was actively working against terrorist groups and organisations. The motion was made after Pakistan completed the Operation Zarb-i-Azb against terrorists belonging to several militant groups, including the Tehreek-i-Taliban Pakistan.

Pakistan also launched Operation Radd-ul-Fasaad to eradicate the threat of terrorism and secure the benefits of Operation Zarb-i-Azb. The FATF action not only undermined Pakistan’s efforts in the war against terrorism but also sent a negative message of refusing to acknowledge its sacrifices.

Meanwhile, an Indian soldier, Kulbhushan Sudhir Jadhav, was facing trial in Pakistan on account of terrorism-related charges. During interrogation, he admitted his involvement in various attacks in Pakistan and providing financial support to Baloch militants.

This was a clear case of terrorist financing by India. However, no action was taken in this regard by any of the international organisations, including the FATF. Pakistan remains on the list of jurisdictions with increased monitoring despite showing excellent progress towards completing the FATF action plan.

Recently, the media have highlighted that the United Arab Emirates (UAE) might also be placed on the global watch list on account of having a weak anti-money laundering framework. The UAE mutual evaluation report was released in April 2020. The report says that the country has made significant improvements in its AML-CFT regime, including developing a national risk assessment.

The report further highlights that the UAE has demonstrated a high-level commitment to better understand and mitigate its money laundering/terrorist financing risk. The report states that the UAE authorities have initiated various steps to improve its AML-CFT regime that includes the implementation of an ambitious national AML strategy to strengthen the UAE’s overall AML-CFT framework.

The report acknowledges the role of UAE authorities in identification of terrorist financing-related activities. The UAE has prosecuted 92 persons for terrorist financing-related charges. Out of these 75 have been convicted, showing an 82 percent conviction rate. However, the UAE’s compliance with FATF Recommendation 6 was rated as partial; and on Recommendation 23 largely compliant. It was found compliant on eleven recommendations.

Based on eleven immediate outcomes (IOs) effectiveness was rated on a scale of high, substantial, moderate, medium and low. The UAE got low on four, moderate for six and substantial for one IO. The latter related to investigation and prosecution.

The ratings assigned to UAE’s technical compliance and their effectiveness are way better than the compliance level of several FATF member states. While some concerns have been highlighted by the mutual evaluation team, UAE’s commitment to addressing those concerns and maintaining integrity of the financial system has been acknowledged in the report.

The FATF aims to highlight deficiencies and work with the concerned jurisdiction to implement the action plan. The jurisdictions cooperating with the watchdog and complying with its mandate must be appreciated and given reasonable time and appropriate support to improve their systems.

Recently, Turkey was placed on the list of jurisdictions under increased monitoring. However, a recently published follow-up report by the FATF highlighted improvements in its system and the ratings assigned on Recommendations 6, 7, 18, and 35 in the mutual evaluation report were revised to largely compliant. Earlier the ratings had been partially compliant. Meanwhile, the rating on Recommendation 15 was downgraded to non-compliant.

The overall compliance level of Turkey with FATF recommendation was rated as compliant on 11 of the 40 recommendations and largely compliant on 20. It remained partially compliant on seven and non-compliant on two. The country will remain on the Grey List until June 2022.

Pakistan, the UAE and Turkey have established better controls to strengthen the AML-CFT regime compared to several FATF member states. Some of the member states, including some of the founding members, have still to introduce proper regulation to counter the risk of money laundering and financing of terrorism.

The criminals exploit the weaknesses of the AML-CFT regime in such countries by investing dirty money in real estate, precious metals and luxury items. The global watchdog needs to act against these untouchable jurisdictions as well.

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

Huzaima Bukhari is an advocate of High Court and adjunct faculty at Lahore University of Management Sciences (LUMS)

FATF and untouchable jurisdictions