The Financial Action Task Force (FATF) announced that countries should take the necessary steps to identify and mitigate Proliferation Financing (PF) risks by 2024.
FATF Guidance on PF Risk Assessment (RA) and mitigation were finalized and published on June 29, 2021. The Guidance emphasizes the need for supervisors, financial institutions, and Designated Non-Financial Businesses and Professions (DNFBPs) to apply the new obligations proportionately to the risks identified to avoid contributing to de-risking or financial exclusion. After the publication of PF Guidance, it will be binding on all countries to complete their National Risk Assessment (NRA) for PF. In addition, FATF previously revised its Recommendation 1 and interpretive note that requires countries to identify, assess, understand, and mitigate the risks of potential breaches, non-implementation, or evasion of the targeted financial sanctions related to PF.
The guidance explains how both public and private sectors should conduct risk assessments in the context of proliferation financing and how they can mitigate the risks they identify. As part of a phased approach, the FATF will begin assessing jurisdictions for implementation of PF requirements in the next round of mutual evaluations, which will occur in 2024, and jurisdictions will be placed on Grey List or Blacklist on PF context by FATF.
A few jurisdictions, including the USA, have completed and published their PF RA. Due to the sensitive nature of PF risks, FATF has permitted the countries to limit sharing of the outcome of RA to agencies and regulated entities only. However, FATF encourages countries to publish a sanitized version of PF RA to promote understanding of PF risk and compliance with Counter-Proliferation Financing[1] (CPF) requirements.
FATF expects all countries and regions to take concrete steps to ensure the implementation of these new obligations and determine the appropriate sequence and timeframe for implementation at the national level, including guiding the private sector. Moreover, countries are expected to share PF-related information to enhance compliance with the FATF standards and better safeguard the international financial system.
The FATF Recommendations contain specific measures that complement the United Nations Security Council Resolutions (UNSCR) concerning PF:
- The Global approach aims to prevent non-state actors from participating in PF activities (UNSCR 1540 and its successor resolutions).
- The country-specific approach against the DPRK and Iran (UNSCR 1718 and 2231).
FATF recommended the jurisdictions ensure that PF-related assets are frozen and have effective national mechanisms in place to do so. However, understanding their obligations according to UNSCRs, implementing effective measures to tackle the proliferation of weapons of mass destruction, and terminating sanctions evasion is a challenging task.
FATF’s public statement about Pakistan on June 25, 2021, included six additional action points related to the Asia Pacific Group (APG).
“Demonstrating that DNFBPs are being monitored for compliance with proliferation financing requirements and that sanctions are being imposed for non-compliance” entails that FATF expects Pakistan to issue detailed guidelines on PF, even for DNFBP. Moreover, it is an indicator that the evaluation process for Pakistan has already begun.
Assessments
The severity of the issue is that the FATF regime has evolved from money laundering to a terrorist financing regime. In addition, it is moving towards a proliferation financing regime and sanctions. It may be noted that Pakistan was historically put on the FATF’s Grey List for money laundering and terror financing, and it is feared that after terror financing allegations, Pakistan may continue next fall in the category of “Grey Listing” of PF regime and sanctions.
If Pakistan is listed on “Grey Listing” due to the PF regime and sanctions, it may lead to the dismantling of Pakistan’s strategic assets. Thus Pakistan must plan proactively to avoid being Grey Listed on “PF Regime and Sanctions.”
The inclusion of PF in Pakistan’s action points related to APG published by FATF on June 25, 2021, which Pakistan has to show compliance in one year, is a serious concern. Our stakeholders will be questioned on why its exclusion was not negotiated.
After the publication of PF guidance in June 2021, the first step expected by FATF is the preparation of NRA. However, agencies responsible for the preparation and publication of NRA in Pakistan are not aware of the sensitivities and intricacies of PF risk for Pakistan. Therefore, the preparation of NRA without consultation of the Strategic Plans Division (SPD) may harm Pakistan’s strategic assets. On the other hand, if SPD continues its import policies without realizing the major changes in the international financial system, Pakistan may fall into PF’s Grey List.
Financial Monitoring Unit (FMU), State Bank of Pakistan (SBP), and other regulators are unaware of the intricacies involved in PF’s reporting by any financial/ non-financial sector’s regulator of Pakistan. As a result, SBP has initiated PF inspections of different financial institutions without understanding the impact of any such violation being officially reported.
Recommendations
SPD must, immediately and quietly, take the leading role in compliance with action points related to PF by Pakistan, including necessary changes in SPD policies. It must also ensure that no damage is caused to acquire modern technology for strategic assets during the process.
FATF will expect all jurisdictions to prepare NRA related to PF after June 2021’s plenary session. Thus, SPD must play a proactive role in formulating NRA related to PF, and Pakistan shall publish only the sanitized version of NRA.
A national strategy must be formulated to prepare Pakistan for mutual evaluation by the Asia Pacific Group on PF risk by 2024. SPD and real stakeholders must be consulted and prepared accordingly. SPD must inform and prepare its experts on PF as per FATF requirements. Experts must advise SPD on its import policies and payment thereof, and they shall also brief and train regulators and inspectors, including SBP, in writing inspection reports.
Pakistan must avoid Greylisting on PF as it may lead to the dismantling of Pakistan’s strategic assets. Therefore, stakeholders (SPD, MoFA, and ISI) must work hand in gloves with other national institutions to develop a policy and to take all necessary actions to counter impending threats of PF.
International training of SPD experts, regulators, and financial institutions must be made mandatory to identify, assess, manage, and mitigate the risks of potential breaches, non-implementation, or evasion of the targeted financial sanctions related to PF.
[1] Proliferation financing refers to the act of providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling, or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both technologies and dual-use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations.
