The likelihood of Pakistan to exit FATF grey list

Financial Action Task Force (FATF) decided to retain Pakistan on the “Grey List” because it not only failed to make progress on last action point of Combatting Financing of Terrorism (CFT) action plan but also still making steady progress in its new action plan on Money Laundering (ML) by complying four out of the seven action items. Marcus Pleyer (FATF President) clarified that the FATF has prepared two concurrent action plans with 34 action points, comprising of FATF and APG (Asia Pacific Group on Money Laundering) recommended actions. Pakistan successfully managed to address 30 of these recommended action points. It has made significant progress in complying with action points, in pursuant to a new action plan that focuses on combating ML related to Strategic deficiencies identified in APG Mutual Evaluation Report.

FATF press release on Progress made by Pakistan on its action points acknowledged Government of Pakistan efforts. The salient of FATF press release are “Since June 2021, Pakistan has taken swift steps towards improving its AML/CFT regime. It enacted legislative amendments to enhance its international cooperation framework; demonstrated Designated Non-Financial Businesses and Professions (DNFBP) monitoring for Proliferation Financing (PF) Targeted Financial Sanctions (TFS) and DNFBP supervision commensurate with the risks; and applied sanctions for non-compliance with beneficial ownership requirements. It should continue to address other strategically important AML/CFT deficiencies by providing evidence that it actively seeks to enhance the impact of sanctions beyond its jurisdiction; by nominating additional individuals and entities for designation at the UN; and by demonstrating an increase in ML investigations and prosecutions and that proceeds of crime continue to be restrained and confiscated in line with Pakistan’s risk profile, including working with foreign counterparts to trace, freeze, and confiscate assets”.

Pakistan tends to complete action points of both ML and TF action plans by next year, 2022, along with strict onsite inspections by APG and FATF. With proper compliance, it is likely that the country will be delisted from the grey list by 2023. If Pakistan fails to qualify the on-site inspection of both action plans, then its Action Plan will be rendered incomplete and it may get prolonged. The challenging areas will be related to DNFBPs, Law Enforcement agencies (LEAs) investigations and prosecutions capacity building. Pakistan failed to revamp the government structure- it has still not inducted experts in the LEAs because it continues to follow the orthodox notion that bureaucrats can handle all professions. This may prove major flaw during the on-site inspection by FATF inspectors who are experts in their fields. Pakistan must establish a new setup of DNFBPs regulators instead of continuing with an ad-hoc setup of nominating different government departments as regulators. These professional regulators must be hired on attractive salary packages for the formulation and implementation of regulations in respective DNFBPs sectors.

As per the Think Tank TABADLAB, working paper, Pakistan has suffered cumulative real GDP losses of approximately USD 38 billion in initial two years after its placement in the FATF grey list. There are few examples of courts awarding punishment on the charges of ML/ TF in Pakistan, and it is one of the reasons why it is still ranking low at Corruption Perception Index (CPI). Corruption amongst LEAs has not been curbed and Pakistan ranked 124th in CPI index. On a scale of 0-100 (0 being ‘Highly Corrupt’ and 100 being ‘Very Clean’), Pakistan’s corruption score stands at 31 — a point lower than last year’s 32 — indicating that corruption in the public sector exacerbated. Hence, it is in the national interest of Pakistan to strictly implement the AML/ CFT/ CPF laws and regulations, to prove to the international community that it is a responsible state, willing to make international financial system safer.

Policy makers in the country must devise a multi-pronged strategy to get delisted from the Grey List as early as possible. Delisting is dependent on the completion of all action points and dedicated diplomatic efforts as Economic Sanctions are an extension of Foreign Policies and FATF was formed by world’s most powerful economies represented by G-8 countries. US influence on FATF should not be underestimated. Thus, FATF action points may become more political in the time to come.  Hence, a senior-level committee comprising of all important stake holders (experts, senior bureaucracy and Diplomats) should be constituted for the preparation & formulation of a comprehensive strategy to get through FATF’s on-site inspection.

FATF currently comprises of 37 member jurisdictions and 2 regional organizations, representing major financial centers across the globe. Although, there is no veto power granted to any member of FATF, Pakistan needs the support of three members to get delisted from Grey List.  USA has pronounced influence on FATF and Pakistan’s failure to complete last action point of CFT action plan may be indirectly linked with Afghanistan’s political situation. Pak-US ties are deeply connected with the current situation in Afghanistan. It is apparent that USA is using FATF grey listing to forcefully get Pakistan’s support in furthering its national interests in Afghanistan.  Thus, Pakistan must devise its Afghan policy carefully as it will also have severe economic consequences.

Pakistan’s continuous failure in garnering the support of FATF members after four years needs re-evaluation of its diplomatic strategy in dealing with the grey listing. Malaysian support after the change of Mahathir Muhammad has become questionable and needs continuous engagement and a comprehensive diplomatic strategy. China has normally supported Pakistan on FATF and likely to support in the future as well. Turkey has always supported Pakistan in FATF forum. However, after Turkey’s Grey listing in FATF and in the fast changing regional political environment, Pakistan shall make an endeavor with dedicated diplomatic efforts to garner support of other members such as Argentina, Brazil, Greece, Portugal, Spain, Denmark, Mexico, Russia and South Africa. It may be noted that these countries are not under the direct influence of USA. Furthermore, Canada, Australia, New Zealand, Japan, Korea, Hong Kong and Singapore are members of both FATF/ APG. Hence, special representatives of the Prime Minister should be given the responsibility to brief and explain the government’s efforts and success in the completion of FATF and APG action plans. Furthermore, these countries should be informed about the steps taken by the government to curb the menace from ML and TF and they should be diplomatically conveyed that the continuation of Pakistan’s Grey listing by FATF will be politically motivated and it will not be on merit.

Pakistan’s Financial Monitoring Unit (FMU) is not working independently as per international practices but instead it is a sub-organization of Finance Ministry. FATF recommends the formation of Financial Intelligence Unit (FIU), whereas Pakistan has formed Financial Monitoring unit (FMU) to limit its complete mandate, as explained in FATF Recommendations. FATF Recommendation 29 declared FIU as a national center to combat ML and TF. During the last four critical years of Grey listing, no improvement has been observed in FMU. Budget constraints by financial 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 temporarily placed in the State Bank of Pakistan because it is without an office space. FATF on-site inspectors will interact and co-ordinate with FMU officials but unfortunately, Pakistan has formed the FATF Secretariat and inducted amateur bureaucrats, instead of hiring experts of the field. FMU needs to induct professional officers experienced in dealing with white collar crimes, investigations and diplomacy.

The remaining action points are related to the professional training and expertise of LEAs and prosecutors on critical subjects of ML and TF. Hence, special emphasis should be placed on the capacity building and training of LEAs. Financial sectors have hired ML experts with international certifications which strengthened their AML/ CFT units. On the contrary, LEAs have not inducted any experts due to which the punishment rate on ML/ TF is very low, even though new stringent AML/ CFT laws have been introduced. Therefore, Pakistan must induct experts in LEAs, especially, FIA and CTD- prime agencies in investigating ML and TF.

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 combatting ML/ TF/ PF. Thus, if Pakistan fails to develop a comprehensive strategy to counter FATF Grey listing status at the national level, then it may get prolonged.  Hence, policy makers should devise a comprehensive strategy to ensure that Pakistan completes both action plans within the given timeframe and that it succeeds through the on-site inspections. Currently, it is facing challenges because large parts of its economy operate behind closed doors, where law enforcers have little or no training in identifying, investigating and prosecuting financial crimes. However, it is in the National interest of the country to work on the ground realities of AML/ CFT/ CPF regimes to strengthen its investigations and prosecutions. The increasing inflow of remittances through legal channels is one of the many economic benefits that Pakistan stands to reap after adopting the global standards on illicit financing. Thus, Pakistan’s successful compliance with the FATF action points will bear fruits for its economy. +92-51-8732000 | +92-51-8730820 18-A, Street 2, Sector E-11/1 Islamabad,Pakistan, 44000