FATF Review & looming repercussions for

Pakistan
https://cssexampoint.com/fatf-review-looming-repercussions-for-pakistan/

Sword of Damocles: FATF Review & looming

repercussions for Pakistan
The Bretton Woods financial order created as a result
of Bretton Woods Conference (1944) was meant to focus
on the economic development of war ravaged and less
developed nations. It also aimed at bolstering world
trade by providing short and medium term financial
assistance to countries which were experiencing
temporary deficits in their balance of payments. An
important component of this new financial order was
the creation of two global financial institutions i.e. the
International Monetary Fund (IMF) and the
International Bank for Reconstruction and
Development (IBRD) commonly known as the World
Bank. Later, another intergovernmental organization
by the name of Financial Action Task Force (FATF) was
established as a result of G-7 summit in 1989. The
stated objective of the FATF was to save the
International Financial system from the risks posed by
Money Laundering (ML). The mandate of FATF was
later expanded to include Counter Terrorism
Financing (CTF) in 2001 and Counter Proliferation
Financing (CPF) in 2010.

All the major financial organizations of the world like

UN, WB, and IMF etc. are the observer members of the
FATF. It is pertinent to note that Pakistan is not a direct
member of FATF but of Asia/Pacific Group (APG), which
is its associate member. FATF communicates through
Public statement in which countries are categorized in
terms of their co-operation and willingness to comply
with enforcement mechanism. The countries which are
non-cooperative are commonly termed as Black-listed,
whereas the countries which agree to an action plan
and are put on an on-going compliance process are
commonly termed as Grey-listed. The APG on Money
Laundering is an inter-governmental organization,
comprising 41 member jurisdictions. It is an FATF style
regional body, focused on ensuring that its members
effectively implement the international standards
against money laundering, terrorist financing and
proliferation financing. Pakistan joined the APG in May
2000 . The APG is an associate member in the FATF
which permits APG delegates to attend FATF meetings
and intervene on policy and other matters. All regional
bodies use the FATF’s 40 recommendations as their
principal guidelines for the implementation of
effective AML/CFT measures.

In June 2010, Pakistan agreed with FATF on an Action

Plan to address the strategic deficiencies in Pakistan’s
AML/CFT regime. The Action Plan included measures to
address strategic deficiencies in legal, operational and
enforcement areas. In February 2012, Pakistan was
listed in FATF’s Public Statement. In June 2014, after
strenuous efforts, implementation of the Action Plan
was completed and Pakistan was delisted from FATF’s
Public Statement. As such, Pakistan enacted
amendments in its Anti-Terrorism Act 1997 to
strengthen the provisions pertaining to terrorist
financing and asset freezing. The FATF in its February
2015 Plenary acknowledged Pakistan’s progress in
improving its AML/CFT regime, delisted Pakistan from
its Monitoring/ICRG process and desired to address full
range of AML/CFT issues identified in its mutual
evaluation report, particularly, implementing of UNSC
Resolution 1267. FATF in its June, 2015 plenary upon
examining Pakistan’s further report on
implementation of UNSCRs referred Pakistan to work
with Asia Pacific Group on Anti-Money Laundering
(AML) and Counter Financing of Terrorism (CFT). In
January 2018, US, UK, France and Germany made
Pakistan’s nomination for the International
Cooperation Review Group (ICRG) process i.e. to place
Pakistan in grey list. Pakistan objected to the
nomination proposed by US, UK, France and Germany
and advocated that it has taken meaningful action on
the designated entities in respect of specific
recommendations. However the measures taken by
Pakistan failed to convince the US-India led alliance
and prevent it from being placed in the grey list.

The FATF in 1990 initially prescribed 40

recommendations for combating money laundering
and terror financing. In 2001, another eight special
recommendations were introduced followed by a ninth
one as well. The FATF recommendations require
countries and regions to develop policies to counter
ML/TF, establish Financial Intelligence Units,
criminalize ML/TF, freeze and confiscate terrorist
assets, put in place efficient mechanism for
international cooperation etc. In compliance with the
Financial Action Task Force’s recommendations on
anti-money laundering and terror financing, the State
Bank of Pakistan in October 2007 set up a Financial
Monitoring Unit to ensure and to safeguard the interest
of the depositors from risks arising out of Money
Laundering (ML) and Terror Financing (TF).

In order to address the deficiencies in the enforcement

of the AML/CFT regime in Pakistan, the FATF laid down
a ten point agenda to be followed by Pakistan. It
includes proper identification and supervision of TF
risks, remedial actions on violations of AML/CFT
regime, improving cooperation between federal and
provincial agencies, checking on illicit movement of
cash through cash couriers, implementation of
financial sanctions against designated terrorists under
UNSC sanctions, effective prosecution in TF cases and
enhancing the capacity of prosecutors and judiciary,
ensuring that the TF prosecutions target the right
persons and entities etc.

Significant measures taken up by Government of

Pakistan:
Pakistan though has made concrete efforts in relevant
legislation but the country essentially lacks
institutional framework for implementation of a
sophisticated AML regime. This is mainly due to
complex institutional arrangements and political
facets to the debate. The country has intermittently
been on the radar of FATF because of lack of
preventive measures in response to non-compliance
status on many frontiers.

Improving Inter-Agency Coordination

The following measures have been taken for enhancing
inter-agency cooperation between the federal and
provincial governments: The Ministry of Foreign
Affairs convenes regular meetings of stakeholders to
discuss matters relating to implementation of UNSCRs.
In December 2017, the Ministry of Foreign Affairs
organized an awareness session to educate all
concerned stakeholders on the new obligations arising
from the UNSCR 2368 adopted in July 2017. In order to
further strengthen the oversight mechanism and to
improve coordination between the concerned
departments at the Federal and Provincial levels,
National Counter Terrorism Authority (NACTA) has
established a National Task Force on combating
financing of terrorism in July 2017 having
representation from all relevant Federal and
Provincial authorities involved in combating terrorism
financing. This Task Force comprises 27 members
which include FIA, FBR, ANF, SBP, FMU, SECP, all the
provincial CTD’s, provincial Home Departments,
Ministry of Finance and Interior etc. The pace of
implementation of FATF action plan has picked up
considerably as a result of these meetings.
In addition to above, the General Committee (formed
under section 5 of the AML Act, 2010) has convened
around dozen meetings since July 2017 to discuss
matters relating to AML/CFT and in particular issues
relating to FATF. This committee consists of Secretaries
Finance, Law, Interior and Foreign Affairs, Chairmen
NAB and FBR, Directors General FIA and ANF, Deputy
Governor SBP and Commissioner SECP. The DG FMU
acts as its secretary. These meetings have resulted into
creating a momentum for a concerted drive against
combating ML/TF and its impact is getting trickled
down to the operational level.

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(November & December 2019)

Since August 2017, NACTA issued National Guidelines

for regulating hides/charity collection to all civil and
law enforcement authorities of the country. As per
guidelines, NGOs, NPOs, etc. desiring to collect hides of
sacrificial animals would be required to obtain NOC
from the office of Deputy Commissioner as well as for
publishing any printed material or verbal
announcements for hides/funds collection. NACTA in
2018 also signed a MoU with Pakistan Centre for
Philanthropy (PCP) to streamline the flow of charity
into right hands and to promote safe donations
through certified organizations.
Prior to the above, NACTA issued directives to all
authorities on 01st May, 2017 regarding fund raising in
cash or kind by NGOs/NPOs & Charities during the holy
month of Ramadan. The directive mentioned that
fundraising by proscribed/listed entities and persons
from the public is a serious offence.

Actions taken by State Bank of Pakistan

The State Bank of Pakistan has put in place a
comprehensive regime of regulations and guidelines
for effective implementation of the UNSCR 1267
sanctions and to ensure that no financial services are
provided to illegal entities. The SBP has taken a
number of additional actions to reinforce the earlier
measures. SBP has directed institutions under its ambit
to conduct thorough screening of accounts to ensure
that all bank accounts, funds and other financial assets
are frozen in line with legal and regulatory
requirements. The State Bank of Pakistan is also
following the FATF’s instructions of knowing your
client/customer policy.

The screening/ assessment process should have

particular focus on risky geographical locations based
on available information and institution’s own
assessment/ judgment in line with risk based approach.
In case of entity accounts, it should be ensured that
their beneficial owners, directors, members, trustees
and authorized signatories are not directly or
indirectly linked with any proscribed/ designated
persons, whether under the same name or with a
different name. Internal audit or compliance function
should regularly assess and validate the compliance of
Statutory Regulatory Orders (SRO) by way of review
and name screening. SBP continues to enforce the
compliance of SROs in letter & spirit through a
systematic process of on-site inspection and off-site
supervision. Inspection departments of SBP keep fully
updated version of list of individuals and entities
subject to UN sanctions and check the compliance of
account freezing instructions during the course of
inspection. As a result of these inspections, SBP has
imposed penalties on different Banks and Financial
Institutions for violations of ML/TF directives.

In 2019 penalties amounting to Rs 247 million have

been imposed on 11 financial institutions for weak
screening procedures and Rs 31 on different banks for
not meeting bio-metric verifications. Moreover, SBP
has punished three banks with heavy penalties of Rs.
133.3 million for the violation of its prescribed rules
and regulations in September 2019. These banks are
Meezan Bank, Askari Bank, and MCB Islamic Bank .
Stern action was taken against these banks as part of
the steps taken by the government to be removed from
the grey list of Financial Action Task Force (FATF).
Recently, SBP has initiated a focused risk based
thematic inspection of financial institutions to assess
the screening processes and compliance of SROs issued
by the Government. The SBP and SECP are also
following the FATF’s instructions of Know Your
Customers (KYC) and Customers Due Diligence (CDD).
In spite of the efforts taken by Pakistan that has been
discussed above, FATF approved Pakistan’s nomination
in International Cooperation Review Group (ICRG)
process in its Plenary held in February 2018. This was a
sudden move as action plan for Pakistan was not on the
agenda. Instead action was taken on the concerns
raised in the nomination paper by the countries. This is
popularly known to be an India-US led move.

In the first FATF plenary on Pakistan the friendly

countries namely Saudi Arabia, Turkey and China
opposed the Indian instigated US led move to place
Pakistan in the Grey list. However on February 22nd,
the US in an unprecedented manner pushed for a
second discussion on Pakistan. By then, the US had
convinced Saudi Arabia to give up its support for
Pakistan and promised a full FATF membership in
return. The support of remaining two countries was
not sufficient to stall the US move of placing Pakistan
on the FATF grey list. Therefore the Chinese informed
Pakistan that they have decided to opt out as they did
not want to “lose face by supporting a move that is
doomed to fail”. Pakistan appreciated the Chinese
position and conveyed its gratitude to Turkey for
“continuing to support Islamabad against all odds”.
This has been termed as a diplomatic failure by some
circles but others opine that there is a limit to getting
support of a friendly country at International Forums
on an issue where our own house needs to be put into
order.

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International Relations

Institutional and Legal Framework for AML/CFT

Pakistan has made considerable progress in
establishing an institutional framework for combating
money laundering/terror financing ever since APG
conducted its mutual evaluation report. Following is
the present institutional set up.

(a) National Executive Committee formed under

section 5 of AML 2010 under Chairmanship of Minister
of Finance;
(b) General Committee formed under section 5 of AML
2010 under Chairmanship of Secretary Finance.
(c) Financial Monitoring Unit (FMU) in SBP which is
operationally and financially independent. This unit is
headed by a director and its main function is to
analyze and pass on the Suspicious Transaction
Reports (STRs) which are reported by banks to the
concerned law enforcement agencies. From 2015 to
2018 it has collected 18,000 STRs and after analyzing
disseminated 4000 to LEAs.
(d) CTF Directorate in NACTA for a unified response of
stakeholders.
(e) CTF Investigation Units in all provincial CTDs
formed upon the recommendations of NACTA.
(f) Terrorist Financing Investigation Unit (TFIU) wing
in FIA.

An analysis of the existing institutional framework

points towards certain weaknesses and gaps which
need to be addressed. (a). The FMU is handicapped
with regards to its human and technical resource as
only 15 financial experts are working there. Further
they do not have an international linkage as Pakistan is
not a member of the Egmont Group which is an
international body of Financial Investigations Units. It
provides a forum for exchange of financial intelligence
and expertise to check ML/TF. (b) The CTF units in the
provincial CTD’s are not fully geared up to fight ML/TF.
It is only in Punjab that the CTFU is fully functional and
performing well. The efforts of CTD Punjab in
combating terrorist financing have been acknowledged
during APG Assessors Onsite visit in October 2018 and
also in their Mutual Evaluation Report.

Legal Framework: In Pakistan, there is a range of

legislation pertaining to Anti-Money Laundering (AML)
and countering the Financing of Terrorism (CFT). The
primary laws relating to the subject include the
following:
a) Anti-Money Laundering Act, 2010 (as amended in
2015)
b) Anti-terrorism Act, 1997 (as amended in 2013)
c) Anti-Money Laundering and Combating the
Financing of Terrorism Regulations for Banks & DFIs
(2017)
d) Securities and Exchange Commission of Pakistan
Regulations, 2018
e) Anti-Money Laundering Regulations, 2015

An assessment of the existing legal framework leads to

certain gaps and lacunas which are hampering the
ML/CFT efforts.
a) The TF related STRs under AMLA, 2010 are not being
disseminated to provincial CTDs, thereby making it
difficult for them to seek financial records related to
offence of TF from the financial sector. This is because
presently CTD is not a notified body under AMLA.
However the Prime Minister has recently approved a
“Policy on Financial Investigation of Terrorism Cases
for LEAs” whereby this gap will be addressed.
b) Section 19 of JITs under ATA, 1997 does not allow
members from financial regulators and FMU or
experts from private sector to be co-opted as member
of JITs on Terrorist Financing.
c) Currently the LEAs i.e. ANF, Customs and NAB are
prosecuting and investigating agencies under AMLA,
2010 to the extent of their own offences but specific
powers and duties have not been defined in the law to
investigate these offences including money laundering,
from TF perspective. Resultantly, ML related offences
are not being focused or investigated from TF
perspective by these organizations. The Customs
Operations has in the current financial year i.e. 2018-19
arrested around 30 people for currency smuggling but
there has been no headway regarding their TF
linkages.
d) Pakistan has no standalone law on Mutual legal
Assistance with foreign countries which is leading to
problems of making and receiving requests for
cooperation in investigation of terrorism cases
efficiently in case offence is linked to a foreign
jurisdiction.
e) The ATA, 1997 under section 11O provides for
freezing and seizure measures against proscribed
organization and persons but does not provide any
time line for such action. FATF requires seizure and
freezing without delay to prevent and mitigate TF risks
efficiently and effectively.

Implications for Pakistan.

Pakistan has been on and off the FATF Grey List on
account of strategic deficiencies in its AML/CTF regime.
Pakistan has committed to a 10 point agenda to
improve its listing. The latest review made in February
and June 2019 has observed progress especially in
counter terror financing efforts. Next review is
scheduled in third week of October 2019. The Pakistani
delegation, led by Minister for Economic Affairs
Division Hammad Azhar, is scheduled to leave for
France on October 13th as Pakistan’s case will be taken
up on October 14th and 15th. Failure to improve entails
risk of black listing and sanctions which will be
detrimental to our economy. There will be severe
economic implications for Pakistan in the event of its
getting black listed. Its credit ratings would be
downgraded by multilateral lenders like IMF and
World Bank. Further its risk ratings would also get
increased by credit rating bodies like Moody’s etc. The
risk of international trade sanctions along with a
reduced foreign currency inflow in the shape of lesser
remittances and FDI would also be looming large. The
gravest concern for Pakistan is the possibility of being
categorized along with countries like North Korea and
Iran as a ‘pariah’ state, with dire political
consequences like international isolation. Already it is
on the grey list again, along with countries like Yemen,
Syria and seven others – some of them known as failed
states.

Though, it is opined from the known quarters which

keenly follow FATF proceedings that this time, too,
Pakistan could avoid being placed on the black list
because of help from China, Turkey, and Malaysia.
According to the charter of the 39 member FATF, the
support of at least three member states is essential to
avoid the blacklisting. The main stumbling block in
Pakistan not being able to make progress in combating
ML/TF as per the expectations of FATF has been a total
lack of political commitment. The previous ruling
classes at the helm of affairs in Pakistan, especially the
regimes which came into power post 2008 have
deliberately turned a blind eye towards this issue and
not created an effective legal and institutional
mechanism to curb it. A case in point is the half
hearted approach of Pakistan in getting the
membership of the Egmont Group which is an
international body of Financial Investigations Units. It
provides a forum for exchange of financial intelligence
and expertise to check ML/TF.

This is because this ruling junta was itself involved in

money laundering. They have been accused of
siphoning off their ill-gotten money worth billions of
dollars to various off shore destinations. Top political
leadership of both the PPP and PML (N) are currently
facing serious cases of money laundering. This is a
good augury for convincing the world community of
the seriousness on the part of Pakistan and the current
political regime in fighting ML/TF and is likely to help
Pakistan in its efforts to forestall not only getting
blacklisted but even getting out of the FATF grey list.

— Written by Saud bin Ahsen. The writer has done

MPA from Institute of Administrative Sciences (IAS)
Lahore. Published by Daily Times in October 2019.

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