Financial Action Task Force (FATF) and Pakistan: An Overhaul

1. Introduction:
“The moment the election ended, we approached India. No response. But
then we discovered they were trying to push us in the FAFT blacklist to bankrupt us.
That's when we realized there was an agenda."-Khan stated in his address at the 74th
session of UNGA.
The international watchdog against money laundering and financing of terrorism, the
Financial Action Task Force (FATF), has put Pakistan on a list of “jurisdictions with
strategic deficiencies”, also known as the grey list. FATF’s reasoning is Pakistan’s
“structural deficiencies” in anti-money laundering (AML) and combating financing of
terrorism (CFT). Pakistan was given 15 months to implement an action plan to be able
to negotiate an exit from the grey list.

2. The FATF and its working:

• FATF is an inter-governmental body, including some international organizations that
was set up in 1989 by the Group of Seven (G-7) industrialized countries to combat the
problem of drug and money laundering. After the 9/11 terrorist attacks in the US, its
mandate included Terrorism Financing (TF). In 2012, it was further extended to the
financing of proliferation of weapons of mass destruction.
• Its “task” is to examine international money laundering mechanisms, monitoring
legislative, financial and law enforcement efforts at the national and international
levels, reporting on compliance and issuing recommendations and standards to
combat money laundering.
• Majority of the 39 FATF current members are developed states with only five
belonging to the developing world. Additionally, there are eight associate members
 which include regional groups (such as the Asia-Pacific Group — APG) and Observer
members which are awaiting full membership.
• FATF has formulated a set of 40 recommendations which have become international
standards on AML and CFT.
• FATF evaluates a country’s performance based on its assessment methodology that
covers technical compliance and effectiveness assessment.
• According to the FATF charter comprising 36 countries, the support of at least three
countries is required to not blacklist any country.
3. Task of FATF:
Its “task” is to examine international money laundering mechanisms, monitoring
legislative, financial and law enforcement efforts at the national and international
levels, reporting on compliance and issuing recommendations and standards to
combat money laundering. Using relevant regulations of the OECD, World Bank,
IMF and the UN — such as Security Council resolutions 1267 and 1373 relating to
terrorist groups and terrorism financing — the FATF has evolved 40
recommendations on money laundering and TF (Terror Financing). Briefly, these
involve implementing relevant international conventions, criminalizing money
laundering and confiscation of laundered funds, implementing customer due
diligence, establishing financial intelligence units to monitor and disseminate
suspicious transaction reports and cooperating internationally in investigating and
prosecuting money laundering.
4. Action for non-compliant countries:
Non-compliant countries are first put on a grey list and given specific actions and
policies to implement within a specific timeframe. They could also be subjected to
sanctions and denial of funding from the IMF, World Bank and ADB, reduction in
international trade and access to financial markets and international boycott. If
they still fail to comply, they are placed on the black list with mandatory
sanctions and international isolation. Currently, Iran and North Korea are black-
listed.
5. Membership of FATF:
Majority of the 39 FATF current members are developed states with only five
belonging to the developing world. Additionally, there are eight associate
members which include regional groups (such as the Asia-Pacific Group — APG)
and Observer members which are awaiting full membership. The membership
process is tedious and subjective. The applicant must support FATF policies and
undergo satisfactory Mutual Evaluation. If it meets the criteria, it has to first
become an observer. If not, a Contact Group is sent to advice on further measures
needed to qualify.
6. Pakistan and FATF:
• Within the Asia-Pacific regional group, Pakistan has undergone evaluations in
2005, 2009 and 2018. In 2005 and 2009, the evaluation exposed gaps — absence
of national legislation for money laundering and terrorism financing as well as
absence of a Financial Intelligence Unit. It was blacklisted from 2010-2012 for
non-compliance. In 2012, it was upgraded to the grey list after enacting an Anti-
Money Laundering Bill and setting-up a Financial Monitoring Unit, which
addressed almost all the demands. Consequently, it was taken off the grey list in
2015 but was still required to fully implement UNSC resolution 1267; especially
to sanction all UN-designated “terrorist” groups. While some action was taken,
such as freezing assets and banning fundraising for Lashkar-e-Taiba and its
affiliates, it was not considered sufficient as other UN designated groups were
not covered.
• In 2012, Pakistan was placed on the so-called grey-list of countries considered
uncooperative and tax havens for terror funding. It remained on this list till 2015.
Pakistan was replaced on the gray-list on June 29, 2018, and given 15 months to
implement a 27-point action plan agreed with the FATF.
4. Possible implications of FATF’s grey listing of Pakistan:
1) Adverse impact on Pakistan’s banking channel: Pakistan’s banking channel could
be adversely affected as it is inevitably linked with the international financial
system.
2) Harmful for Pakistan’s faltering economy: The impact on Pakistan’s economy could
be relatively wide, touching imports, exports, remittances and access to
international lending.
3) Effect of Pakistan’s dealings with foreign financial institutions: Foreign financial
institutions may carry out enhanced checking of transactions with Pakistan to avoid
risk of violations pertaining to money laundering and financing of terrorism. Some
such institutions may also avoid dealing with Pakistan’s financial system altogether.
4) Alarming for foreign investor’s sentiments towards Pakistan: Foreign investors will
feel hesitation while investing in Pakistan. That Pakistan has been placed on the
grey list has been covered in international news media and the fact will not go
unnoticed by potential investors. Stock prices at Pakistan Stock Exchange appear to
have already felt this impact.
5) Threat of being pushed to the Black List: Perhaps the biggest threat from being
placed on the grey list is Pakistan could be pushed further down to the black list.
5. What will be the consequences if Pakistan blacklisted under FATF?
1) Pulling out of international financial institutions - Pakistan's economy is primarily
controlled by multinational banks. After the 2017 fiasco with Habib Bank, the investors
have moved to other multinational banks for their surety and payments. After being in
the blacklist, these international financial institutions will pull out from Pakistan. The
cascading effect will on the investors too who are dependent upon these banks. They
may prematurely liquidate their investments to move on for better international
options.
2) Fall in foreign currency transactions and currency remittance - With blacklisting, all
the transactions with Pakistan will involve more and more levels of scrutiny. As a result,
the foreign remittance will decrease and the financial institutions will avoid transacting
in highly transferable currency (USD, Euro, etc.). As a result, foreign remittance will
decrease.
3) Currency devaluation - With a decrease in foreign currency transactions, the entire
economy will be dependent upon Pakistani Rupee which is fighting for its survival
and has depreciated massively in last one year. It is expected that Pakistan Rupee
may go below 200 per USD in the next few months on account of high demand and
less flow of forex in Pakistan's domestic market.
4) Fall in the stock market - As a result of investors pulling out, the Pakistan stock
market will fall drastically which will affect the economy greatly.
5) High rates of inflation, civil unrest -Take the example of Syria who was on the
Blacklist of FATF in 2011. It resulted in high inflation rates which triggered a civil war
in the country which caused great destruction. With Pakistan being a nuclear state
and its Army is predominantly driven by religious sentiments, a major catastrophe
can be on the cards.
6) Economic sanctions from international institutions - Being on the Blacklist will
result in serious economic sanctions from international institutions like IMF, World
Bank, Asian Development Bank, and other similar organizations. This will result in
the following - a. immediate stopping of all the aid from ADB and other financial
institutions. Even humanitarian aids will stop. b. IMF shall review its bailout package
to Pakistan as no country on a Blacklist can be given Bailout by the IMF. c. Even after
this, if any country tries to give money or bailout the blacklisted country, there may
be serious repercussions against that country so, in a nutshell, no country including
China will try to support Pakistan financially. d. International financial institutions
will also stop any kind of line of credit to companies operating from Pakistan now.
This means whatever they buy has to be paid for in advance.
7) International boycotting- When we see the example of North Korea (DPRK) and
Iran, we see that after getting blacklisted in 2016, these two countries have been
totally boycotted by the international community. Even the best friend to North
Korea- China is not able to help it. Pakistan is on the verge of an international
boycott now. This will result in not only economic isolation but also weaken its
position on other international matters.
8) Loss of credibility and goodwill: The international repute, credibility (both financial
as well as diplomatic) and goodwill of Pakistan is now at stake. This will not only
affect the country but also its citizen staying in different parts of the world.
9) Effect on trade - Traditionally, most of the organizations of the world put trade
barriers on the countries blacklisted by FATF. See the example of Iran and North
 Korea again who are not able to export their products in international markets. As
such Pakistan is facing serious trade deficit and its foreign reserve is on the verge of
collapse. At this time such trade barriers will finish the existing export instead of
increasing it.
6. Suggestive measures for Pakistan to normalize its status in FATF:
• terrorism financing risks are properly identified, assessed, and supervised;
• remedial actions and sanctions are applied in cases of money laundering and
financing of terrorism violations;
• competent authorities are coordinating to identify and take enforcement action
against illegal money or value transfer services;
• authorities are identifying cash couriers and enforcing controls on illicit movement
of currency and understanding the risk of cash couriers being used for financing of
terrorism;
• improving inter-agency coordination including between provincial and federal
authorities on combating financing of terrorism risks;
• law enforcement agencies are identifying and investigating financing of terrorism
and prosecuting related designated persons and entities;
• financing of terrorism prosecutions result in applicable sanctions and enhancing the
capacity and support for prosecutors and the judiciary;
• effective implementation of targeted financial sanction against all designated
terrorists;
• enforcement against financing of terrorism violations including administrative and
criminal penalties and authorities cooperating on enforcement cases; and
• facilities and services owned or controlled by designated persons are deprived of
their resources
6. Current status of Pakistan:
• FATF held its meeting in February 2020 and Pakistan escaped the black-list of
FATF. As per the FATF, Pakistan was actively implementing the action plan. It had
found that Pakistan had fully complied 14 out of 27 action plan points, showing
gradual progress to comply with all of its conditions. The FATF announced that it
was retaining Pakistan on the ‘Grey List’ till June, giving it four months to comply
with the goals. So, the fate of the country will be decided in June, 2020.
7. Analysis:
Pakistan’s FATF experience clearly underscores the political dimensions of this
organization. For instance, even when Pakistan was on the black or grey list, there
was little financial pressure on the country. It received several bailouts from the IMF
and generous assistance from the US. This was due to American dependence on
Pakistan for counterterrorism cooperation. It is only after the growing Indo-US
partnership, especially after Trump’s election, that the FATF has been used as a
means of political leverage. And the goal posts keep being pushed back with
demands to do more. While Pakistan needs to take action for its own sake, it also
needs to use its leverage with the US, such as in Afghanistan and counterterrorism,
to ensure that it’s financial and security interests are not jeopardized. Pakistan
should also highlight FATF’s double standards such as ignoring Indian support to TTP
and BLA terrorists against Pakistan, and India’s own money laundering. Such double
standards have also been underscored by international experts. For instance, the
western elite FATF countries cannot explain the money laundering exposed by the
Panama Papers, involving major Western banks. BCCI was penalized for drug money
laundering but not one of its major clients, the CIA, which used the bank in the Iran
Contra Affair. Nor have the links between BCCI and former US presidents George H
W Bush and Bill Clinton been investigated. Meanwhile, drug trafficking remains a
lucrative business in the West, apart from Western-sourced terrorism financing for
ISIS. Consequently, several scholars and legal experts criticize FATF as a “tool that
powerful countries use to force their preferences on others” and to “paint non-
compliant states as rogue and unreliable”.