Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Recommendation 18 of the Financial Action Task Force (FATF) requires that financial institutions should implement programmes against money laundering and terrorist financing and that financial groups should implement group-wide programmes against money laundering and terrorist financing, including policies and procedures for sharing information within the group for the purpose of anti-money laundering (AML) and combatting the financing of terrorism (CFT). As per the recommendation, financial institutions need to ensure that their foreign branches and majority-owned subsidiaries should apply AML/CFT measures consistent with the home country requirements by implementing the FATF recommendations through financial group programmes against money laundering and terrorist financing.
The financial institution’s programme against money laundering and terrorist financing should include development of internal policies, procedures, and controls, including appropriate compliance management arrangements, and adequate screening procedures to ensure high standards when hiring employees. Another requirement for a comprehensive programme includes the ongoing training of employees with independent audit and testing functions. The interpretive note of the same recommendation says that financial institutions should appoint a compliance officer. These programmes should include policies and procedures for sharing information required for Customer Due Diligence (CDD) and money laundering and terrorist financing risk management. Group-level compliance, audit, and/or AML/CFT functions should be provided with customer, account, and transaction information from branches and subsidiaries when necessary for AML/CFT purposes. Moreover, adequate safeguards on the confidentiality and use of information exchanged should also be in place.
In October 2021, the FATF amended recommendation 23 and the FATF glossary to clarify the requirements of recommendation 18 regarding implementation of the group-wide programme against money laundering and terrorist financing (ML-TF) on Designated Non-Financing Businesses and Professions (DNFBPs). The new explanatory material issued by the FATF for the application of Group-Wide Programs by Non-Financial Businesses and Professions addressed the basic concepts related to DNFBPs. The FATF made casinos, real estate agents, dealers in precious metals, dealers in precious stones, lawyers, notaries, other independent legal professionals, and accountants, as well as trust company service providers, as part of DNFBPs. It also talks about the meaning of “Financial Group” and DNFBP’s Group including maintaining a group-wide program of risk assessment and management across their structure.
The DNFBPs are considered high-risk sectors with especially lawyers and accountants known to be gateways to money laundering. Pakistan tried to address the concerns related to DNFBPs through Anti-Money Laundering (Second Amendment) Act, 2020 but the structure introduced under this legislation has created complexities and raised doubts regarding transparency and its effectiveness.
Schedule IV of the Anti-Money Laundering (Second Amendment) Act, 2020 (AML Act, 2020) gives powers to Federal Board of Revenue (FBR) to act as regulatory authority for various businesses for the designated persons. By exercising powers conferred under section 6 read with clause 1(iii) of Schedule IV to the Act, FBR issued S.R.O. 924(I)/2020, Islamabad, the 29th September 2020 in to regulate DNFBPs. The comprehensive monitoring of DNFBPs requires a highly skilled professional having enough knowledge to comprehend the depth and technicalities of different sectors. Currently, FBR issued generic regulations as a “fit for all” solution, which will not serve the purpose considering the amendment in recommendations 23. These regulations must be carefully crafted, and their requirements should be laid down following the business dynamics of each sector.
Moreover, as per the new rule, the DNFBPs will operate under the same structure as financial groups (i.e., parent/subsidiary, branch). Our regulators need to work proactively to guide the DNFBPs and financial institutions to enhance their knowledge related to the implementation of recommendations 18 and 23.
Regulators in Pakistan should introduce comprehensive guidance highlighting the factors which give rise to common ownership. Similarly, private sector entities need to be educated regarding the implementation of group-wide compliance and control policies. The guidelines should also address the scenario when an entity is obliged to periodically report to another connected individual as well as entities regarding the performance of compliance risk management.
So far, not enough guidelines are available to address the potential threats linked to various types of DNFBPs nor sufficient measures have been taken to safeguard these sectors from potential threats of money laundering and terrorist financing. However, after amendment in recommendation 23 and FATF glossary, the scope of financial group has been extended and now it is applicable to non-core principles of financial institution activities. Similarly, these various sectors should be educated regarding sharing of information within the group where the structure is tantamount to mixed financial institutions such as parent institutions, its branches, and majority-owned subsidiary. Similarly, most law firms and accounting firms operate as a formal network and use a common name, brand, intellectual property, and quality standards. In these situations, these networks should apply the group-wide programme to implement the AML-CFT related policies and procedures to minimise their potential risks.
We are currently struggling to address the strategic deficiencies in our AML-CFT framework. The only way forward to address concerns of the global watchdog is that we should educate our various sectors regarding potential risks linked with their day-to-day activities. We must streamline our existing framework and train our law enforcement agencies so that they can detect potential threats. We must also minimise involvement of politically exposed persons (PEP’s) in matters pertaining to financial crimes as this by itself negates the very concept of transparency. Moreover, the new amendment is focused on group-wide programme so, our industries should be aware of the scope of sharing information without compromising the privacy of customers. Information should only be used for AML-CFT purposes. There is a lot that needs to be improved in our existing framework. Orthodox approaches to deal with financial crimes are losing ground and with the development of new technologies, new risks are emerging. However, our approach in addressing these potential threats needs to be contemporary. The sooner we address and remove these lapses the better, otherwise our struggle to comply with FATF mandate will continue for an indefinite period.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions