FATF & Economy

Abdul Rauf Shakoori & Dr. Ikramul Haq

After a week of political turmoil, Pakistan’s opposition parties, through a no-confidence resolution, successfully managed to remove Imran Khan from the office of Prime Minister. This is the first time in the history of Pakistan that a sitting prime minister could not maintain the confidence of the National Assembly for the full term of five-years. Consequent to the success of the no-confidence move under Article 95 of the Constitution of the Islamic Republic of Pakistan [“the Constitution”] and the intervention of the Supreme Court, the agreed candidate of the Pakistan Democratic Movement (PDM), Mian Muhammad Shehbaz Sharif, who is also the President of Pakistan Muslim League (Nawaz), was elected as the 23rd Prime Minister of the Islamic Republic of Pakistan on April 3, 2022, and took the oath of his office from Chairman Senate on April 11, 2022.

Shehbaz Sharif enjoys a good reputation as an administrator who delivers projects at “God’s speed”. He is said to be the key force behind overcoming the energy crisis in Pakistan. His ability to ensure governance and execution of developmental projects is known to all. However, his previous experience has been limited to provincial politics and administration, whereas matters of national politics remained the subject of his elder brother, three-times Prime Minister of Pakistan, disqualified for life by the Supreme Court under Article 62(1)(f) of the Constitution—see orders reported as PLD 2017 SC 692 and review petition PLD 2018 SC 1. Challenges faced by the federal government, especially in the current situation, will test his abilities and skill-sets. Pakistan is currently facing a series of challenges on the economic, constitutional, domestic, and international fronts. The people of Pakistan are looking forward to relief in terms of controlling inflation and providing employment opportunities so that they could easily meet their basic needs.

It is a fact that the outgoing government left Pakistan on the verge of default. The reserves of the State Bank of Pakistan (SBP) have been depleting at an alarming pace. Pressure can further mount with global energy prices on the rise. The coalition government of Pakistan Tehreek-i- Insaaf (PTI) left reserves of US$ 17.4 billion and dollar to rupee parity at one dollar equalling PKR 189—the highest in our history.

Pakistan needs immediate financial support from international lenders and friendly countries to keep its reserve at a reasonable level. The most immediate task on the shoulders of Miftah Ismail and his team will be revival of stalled US$6 billion bailout package of the International Monetary Fund (IMF). Our constant non-compliance with agreed terms of IMF has put this program in danger.

The current fiscal year ending on 30 June 2022 will have a historic high current account deficit (CAD) and unsustainable fiscal deficit of over Rs. 4 trillion. The new government thus has no option but to raise taxes on already struggling businesses and the salaried class as well as increase prices of petroleum products and electricity to meet these gaps.

Apart from these internal challenges, the new coalition government will have to deal with the Financial Action Task Force (FATF) in June 2022. Despite giving a high-level political commitment to work with FATF and Asia Pacific Group (APG) to strengthen its Anti-Money Laundering and Combating Financing of Terrorism Regime (AML-CFT) regime, Pakistan has missed out on various deadlines to implement the first action plan. Further, in June 2021, FATF included an additional six-point action plan to be completed by June 2022—it was based on the anomalies highlighted by APG in Mutual Evaluation Report published in 2019 and follow-up reports. However, despite a lapse of almost four years Pakistan is still on the list of jurisdictions under increased monitoring.

Pakistan’s compliance level as per the updated consolidated assessment ranking was last assessed as fully compliant on 08 recommendations, partially compliant, or with moderate shortcomings on 03, largely compliant on 27 with minor shortcomings, and non-compliant or with major shortcomings on 02 recommendations, respectively. Whereas, Pakistan’s effectiveness measures were rated on a scale of high, substantial, medium, and low levels of effectiveness and based on 11 immediate outcomes (IOs). Pakistan’s levels of effectiveness were rated low on 10 and medium for one IO, which relates to international cooperation.

With this level of compliance, Pakistan might not be able to impress the FATF in the upcoming plenary meeting. The FATF review process to identify jurisdictions with strategic deficiencies and places them as jurisdictions under increased monitoring includes countries that achieved poor results on its mutual evaluation. It specifies the criteria as having 20 or more Non-Compliant (NC) or Partially Compliant (PC) ratings for technical compliance; or it is rated NC/PC on 3 or more of the following recommendations: 3, 5, 6, 10, 11, and 20; or it has a low or moderate level of effectiveness for 9 or more of the 11 Immediate Outcomes, with a minimum of two lows; or it has a low level of effectiveness for 6 or more of the 11 Immediate Outcomes.

During these four years, our focus remained on addressing technical compliance, despite the reservation of FATF and other leading international institutions. We hardly bothered to address the anomalies in our basic AML-CFT operational framework. The Financial Monitoring Unit (FMU) was established in 2007, however, in February 2015, it got the status of an autonomous body. This so-called autonomous body, supervised by the general committee consisting of federal cabinet secretaries including the Chairman of the National Accountability Bureau, has a compromised independence. The general committee is further subservient to the national executive committee comprising ministers that are politically exposed persons (PEPs), and their involvement in dealing with AML-CFT-related matters is treated as high risk.

The new law, as drafted, is complicated and confusing. It includes multiple bodies and committees with overlapping jurisdiction and scope. For example, lawyers and accountants, who are considered the most vulnerable to money laundering and terrorist financing, have been given the power to self-regulate themselves. This new law further gives powers to professional bodies to act as appellate authority, which goes against the principles of independence and could lead to conflict of interest.

Now comparing progress with the requirements of the immediate outcomes to assess effectiveness of our system clearly shows that we are not following the international best practices to address FATF concerns.

Though it seems difficult for Pakistan to satisfy FATF’s concerns in the upcoming meeting, yet it depends on the prime minister’s personal interests, the foreign office, and PM’s team handling FATF-related issues. It is high time for the government to revisit laws, rules, and regulations already in place to address the concerns related to risk, policy, and coordination. The government should also focus on addressing the concerns with respect to legal persons, trusts, and other legal arrangements. Since non-profit organizations are more vulnerable to money laundering, the government should initiate a comprehensive risk assessment of all other than their work domain and funding. Pakistan should also take strict actions against banned outfits and investigate their sources of funding assessing risks associated with new technologies.

Similarly, we must work on the improvement of operational regime and minimize the role of politically exposed persons in dealing with AML-CFT-related decisions.  The new government’s major challenge is to satisfy FATF concerns so that we can get respect at the global level. This would only be possible when we are fully aware of our responsibilities and have experts handling such matters. Otherwise, continuing with the same status will further shake the trust of foreign investors and impact our economy.

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Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. Dr. Ikramul Haq, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions, with Huzaima Bukhari.