Will Pakistan Finally Escape the Infamous Grey List?

Will Pakistan Finally Escape the Infamous Grey List?

The Financial Action Task Force (FATF) has decided to retain Pakistan on the “Grey List” where it was placed in June 2018. Financial and Money Laundering (ML) experts anticipated this decision because there was a likelihood of Pakistan’s exit from the grey list being linked to APG’s (Asia Pacific Group) Mutual Evaluation Report (MER). However, FATF President, Marcus Pleyer, clarified that the FATF had prepared a parallel action plan comprising of FATF and APG in Pakistan’s case. Pakistan must complete action points of both plans within a year, along with onsite inspections for the Task Force’s members to decide its fate in FATF’s Grey list. Thus, it is clear that the earliest Pakistan will be delisted from the grey list will be in October 2022, though there is a higher probability of delisting it in 2023.

FATF acknowledged Pakistan’s progress and efforts to comply with the action points of the CFT (Combatting the Financing of Terrorism) action plan. Pakistan has currently completed 26 of the 27 action items of the 2018 CFT Action Plan. However, FATF encouraged Pakistan to continue with its progress and complete the remaining CFT action plan item by demonstrating that the TF prosecutions and investigations target commanders and senior leaders of the UN-designated terrorist groups.

Later in the APG Mutual Evaluation Report (2019), strategic deficiencies identified that Pakistan had made significant progress in complying with several recommended actions. In addition, it showed a greater commitment in June 2021 to address the strategic deficiencies pursuant to a new action plan that focuses on combating ML. This plan focuses on international co-operation and Designated Non-Financial Businesses and Professions (DNFBPs) concerning Anti Money Laundering (AML), CFT, and Counter-Proliferation Financing (CPF).

As per the Think Tank TABADLAB working paper, Pakistan has suffered cumulative real GDP losses of approximately USD 38 billion after its placement in FATF. This indicates the negative consequences associated with FATF grey-listing for Pakistan.

Stakeholders in Pakistan must accept that Pakistan will not come out of the Grey list soon and that the country must devise a multi-pronged strategy to get delisted at its earliest. Delisting is not only dependent on the completion of all action points, but dedicated diplomatic efforts are also required as sanctions have become the most favored tool for governments to challenging foreign policies.

Marcus Pleyer said that once Pakistan completes the final action point of CFT, the FATF will conduct an on-site assessment.  Pakistan should start preparing (stakeholders should verify the action points) for this on-site inspection because a strict assessment from FATF is expected. If Pakistan fails to complete the on-site inspection of the 27 action points, then Pakistan’s Action Plan of CFT will be rendered incomplete, and it may get prolonged. The challenging areas will be related to DNFBPs, Law Enforcement agencies (LEAs) investigations, and prosecution’s capacity building. Pakistan has failed to revamp the government structure. It has not inducted experts in former agencies because it follows the same orthodox notion that bureaucrats can handle all professions. This may prove Achilles’ heel during the on-site inspection of FATF inspectors who are experts in their fields.

Inclusion of Proliferation Financing (PF) in Pakistan’s new action plan based on six points related to the combating of ML is a serious point of concern. Therefore, Pakistan’s security establishment must be taken on board, and a comprehensive strategy should be formulated.

In Pakistan’s national interest to strictly implement the AML, CFT, and CPF laws and regulations to prove to the international community that it is a responsible state willing to make the international financial system safer. Pakistan is still ranking low on Corruption Perception Index (124/180 countries). The examples of courts awarding punishment on the charges of ML and TF are very few in Pakistan. Therefore, it will be beneficial for the country to strengthen its Investigations and Prosecution system by inducting experts with attractive salary packages in Law Enforcement Agencies. The increasing inflow of remittances through legal channels is one of Pakistan’s many economic benefits to reap after adopting the global standards on illicit financing.

Since Pakistan’s approach in dealing with technical and specialized subjects like FATF is conventional, its adversaries are taking advantage of the strategic deficiencies in ML, TF, and PF. Thus, if Pakistan fails to develop a comprehensive strategy to counter FATF’s Greylisting status at the national level, it may get prolonged.

Grey areas in Pakistan’s Strategy to Deal with FATF Grey Listing

The FATF currently comprises 37 member jurisdictions and 2 regional organizations representing major financial centers across the globe. There is no veto power granted to any member of FATF and Pakistan needs the support of the former three members to be delisted from the FATF grey list.  Pakistan’s continuous failure in garnering the support of FATF members after four years needs a re-evaluation of its diplomatic strategy to deal with the greylisting.

Pakistan Financial Monitoring Unit (FMU) is not working independently; but instead, it is a sub-organization of the Finance Ministry. It may be noted that FATF recommends the formulation of the Financial Intelligence Unit (FIU). In contrast, Pakistan has formed a Financial Monitoring Unit (FMU) to limit its complete mandate, as explained in FATF Recommendations. FATF Recommendation 29 declared FIU as the national center to combat ML and CFT. During the last four critical years of Greylisting, no improvement has been observed in FMU. Budget constraints by finance ministry officials have adversely impacted the capacity building of FMU. At such a crucial juncture, the seriousness about strengthening the system can be gauged from the fact that FMU is without an office building of its own, and as a result, it is temporarily placed in the State Bank of Pakistan.

FATF on-site inspectors will interact and coordinate with FMU officials. Still, unfortunately, Pakistan has set up the FATF Secretariat and inducted incompetent bureaucrats instead of hiring experts to strengthen FMU. The country is still relying on bureaucracy instead of hiring ML experts. Financial sectors have hired ML experts with international certifications, which have strengthened their AML and CFT units. On the contrary, LEAs have not inducted any experts, due to which the punishment rate on ML and TF is very low despite the introduction of the relevant new and stringent laws.

Pakistan has appointed FBR and other Government departments with the same orthodox approach of bureaucracy as a regulator instead of establishing a new setup to regulate DNFBPs. This seems ad-hoc rather than a sustainable solution.

There is a lack of professional training and expertise of LEAs and prosecutors on crucial TF investigations and prosecutions. The provincial CTD departments have been designated as prime LEA for TF that have limited or no identification, investigation, and prosecution training. Hence, special emphasis should be placed on the capacity building and training of provincial CTDS.

Recommendations

FMU being the focal contact for FATF, needs to be overhauled with the empowerment of FMU financially and administratively. The very name needs to be replaced with the FATF’s recommended name, i.e., Financial Intelligence Unit (FIU). FMU nIn addition needs to get empowered with professionals having a diverse exposure. It is largely dominated by SBP officers and lacks professional officers with multiple exposures and expertise, especially officers having experience in dealing with white-collar crimes, investigations, and diplomacy.

Strategic Plans Division (SPD) must immediately take the leading role in compliance with action points related to PF by Pakistan, including necessary changes in its policies. It must also ensure that no damage is caused in acquiring modern technology for strategic assets during the process.

Pakistan must induct experts in LEAs, especially FIA and CTD that are the prime agencies investigating ML and TF. Moreover, the former must focus on capacity building and training in ML and TF investigations and prosecutions. In addition, the FATF terrorist-financing guidance confidential report had been finalized in February 2021, which must be disseminated amongst the CTD officials.

An upper-level committee comprising of National stakeholders should be constituted for the comprehensive preparation for an on-site inspection of the FATF team. However, experts and senior bureaucracy should be left to deal with the FATF on-site inspection team.

Pakistan must establish a new setup of DNFBPs regulators instead of continuing with an ad-hoc setup of nominating different Government departments as regulators. Furthermore, these professional regulators must be hired on attractive salary packages like SBP that hired professionals with skills to formulate regulations and implement them in respective DNFBPs sectors.

Pakistan must devise a comprehensive diplomatic strategy to garner the support of the maximum number of FATF members by prioritizing and evaluating each member’s support for Pakistan. China and Turkey will most likely provide support, but a few other countries might need special diplomatic ties. Malaysian support, after the change of Mahathir Muhammad, has become questionable. It needs continuous engagement and a comprehensive diplomatic strategy. With the fast-changing regional environment, the support of KSA and GCC is also not guaranteed. Thus, we need to engage and improve diplomatic ties with these countries to garner their support for FATF Plenary sessions.

Argentina, Brazil, Greece, Portugal, Spain, Denmark, Mexico, Russia, and South Africa may support Pakistan’s stance if proper diplomatic efforts improve diplomatic ties. It may be noted that these countries are not under the direct influence of the US. Furthermore, Canada, Australia, New Zealand, Japan, Korea, Hong Kong, and Singapore are members of both FATF and APG. Hence, special representatives of the Prime Minister should be given the responsibility to brief and explain the Pakistani government’s efforts and success in completing FATF and APG action plans. Furthermore, these countries should be briefed about the steps taken by the government to curb the menace of ML and TF in Pakistan and convey diplomatically that the continuation of Pakistan’s Greylisting by FATF will be politically motivated and will not be on merit.

Conclusion

Pakistan’s adversaries are taking advantage of Pakistan’s strategic deficiencies in ML, TF, and PF. Therefore, policymakers should devise a comprehensive strategy to ensure that Pakistan completes both action plans within the given timeframe and succeeds through on-site inspections. In addition, Pakistan is facing challenges because large parts of its economy operate behind closed doors. Law enforcers have little or no training in identifying, investigating, and prosecuting financial crimes.

However, it must be understood at the policy level that it is in the country’s national interest to work on the ground realities of the AML, CFT, and PF regime to strengthen its investigations and prosecutions. Moreover, Pakistan’s successful compliance with the FATF action points will bear fruits for its economy.

 

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