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fatf grey listing caused ‘$38b losses’: myth or reality

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

As a result of the recently concluded meeting of FATF in February 2021, Pakistan is destined to remain in the list of jurisdictions with increased monitoring (also known as the Grey List). Pakistan is still lagging behind and so far, has complied with 24 out of 27 action items initially agreed with FATF. The remaining three are required to be addressed by June 2021.

It is not the first time that Pakistan is placed on the Grey List, it has remained on this list from 2008-2009, 2012 -2015 and currently struggling to address the action plan of FATF since 2018.

FATF normally identifies countries with strategic deficiencies in their regimes to counter money laundering and combating financing of terrorism (ML-CFT) including proliferation financing and places them on its Grey list. Once the FATF places a jurisdiction under increased monitoring, it indicates that the specific country has pledged to address the identified strategic deficiencies within stipulated timeframes and at the same time it will be subject to enhanced monitoring.

It is important to highlight that grey listing of the jurisdiction does not entail to any monetary sanctions, however, it is an indication to the world financial and banking system about increased risk in the transactions with the specific country in question. Normally it is perceived that being in the grey list can impact foreign aid including development loans, e.g., restrictions on a country’s ability to access international lending instruments and potential negotiation with multilateral donors can also be challenging with correspondent banks and other intermediary financial institutions demanding a higher level of due diligence which could impact cross-border transactions with reference to trade related matters leading to reduced foreign investment. Is it true in case of Pakistan? The answer to this question requires detailed analysis considering the country’s overall outlook on the global index. 

Recently, an Islamabad based organization Tabadlab issued a working paper “Bearing the cost of global politics” highlighting that Pakistan’s grey listing by FATF starting in 2008 and till 2019, have resulted in cumulative real GDP losses of approximately USD 38Billion. The document suggests that investors were reluctant to invest in a grey-listed country as its borrowing capacity decreased. However, before going into the details of the statistic suggested by the working paper, it is necessary to understand the treatment of pre-grey listed Pakistan by global community.

We are struggling to overcome the curse of illicit flow of funds, devising policies and implementing laws to restrict integration of illicit funds in the international financial system. These funds are normally earned through corruption, tax evasion, smuggling endangered species as well as trafficking of humans, drugs, and precious gems etc. Now by looking at the global transparency index, Pakistan’s rating with reference to corruption is considered poor. Since the inception of Transparency International, Pakistan has never been in the list of least corrupt nations.

Pakistan’s corruption ranking from 1995-2020 as follows:

YearPakistan RankingTotal CountriesGap from LowestYearPakistan RankingTotal CountriesGap from Lowest

Apart from corruption, Pakistan is also accused of human trafficking, drug trafficking, smuggling etc, therefore, transactions linked with Pakistan have always been on the radar of the global financial system irrespective of its dealing with FATF and subjecting its name to the white or grey list. Let us take the example of European Union and United States of America. Both these jurisdictions have significant importance when it comes to cross-border transactions. These jurisdictions have their own laws and bodies to examine, review and assess countries as high risk according to their own parameters set by their policy makers. European Union has a two-way method which leads to designate a country as a high risk with reference to financial transactions:

  • Country identified by the FATF.
  • Country assessed solely by the European Union.

The above criteria is in addition to implementation of FATF’s approved plan by the jurisdiction designated for increased monitoring and later placed on whitelist by the FATF. A country will continue to remain in the list of High-Risk jurisdictions maintained by the European Union unless the country meets the delisting criteria of European Union. Same is the case with the United States of America (USA). Being a major player in this field and a leader in the fight against money laundering and terrorist financing, USA introduced strict laws and regulations to restrict the movement of illicit flow of funds. 

The Financial Crimes Enforcement Network (FinCEN) in this regard is a leading agency which devises plans, issues guidance, and requires reporting of suspicious activities from all sectors with reference to money laundering. It not only conveys the decision of FATF to all relevant businesses including financial institutions but also issues advisories to deal with high risk countries. Both USA and European Union have their own policies of treating jurisdictions with strategic deficiencies. Additionally, after implementation of the U.S Patriot Act, 2001, the U.S Treasury has the power to take special measures against jurisdictions with primary money laundering concerns, therefore, the U.S Treasury has utilized its authority under section 311 against three jurisdictions and eight financial institutions and, when applicable, their affiliates, based upon various types of illicit conduct, including facilitation of narcotics trafficking, currency counterfeiting and laundering of funds.

Another factor which is normally highlighted is that correspondent banks and other intermediary financial institutions are prone to demanding a higher level of due diligence that ultimately impacts cross-border transactions. However, by looking at the requirements for establishing correspondent banking relationship with a U.S. bank, foreign banks need to maintain the AML-CFT program, document policies and procedures approved by the board of directors and noted in the board minutes, reaffirmed annually as required by the policy and updated to reflect changes in the law and operations.

Another condition is review of the program to ensure that there is ongoing compliance of system of internal controls, that independent testing is being performed and training is being given to the appropriate personnel. It further requires that the financial institution’s AML policies address the various types of money laundering, compliance with the AML laws and regulations, know-your-customers and high-risk activities including the appointment of AML compliance officer. If the foreign banks meet these requirements along with the information pursuant to sections 5318(j) and 5318(k) of Title 31 of the United States Code, as added by sections 313 and 319(b) of the USA PATRIOT Act of 2001, they can establish correspondent banking relationship with the U.S banks.

These requirements are the same for all the banks in the world including Pakistan except those jurisdictions sanctioned by the OFAC or designated as countries “Call for Action” by the FATF. Being in the grey list does not deprive Pakistan from continuing correspondent relationship with U.S. banks to process their dollar clearance including cross-borders transactions.

Now in the lights of these facts, it appears that claims made by the Tabadlab regarding cumulated real GDP losses of approximately USD 38 billion due to grey listing of Pakistan appears to be exaggerated and misleading and shows that the author is not well versed about the topic and regional developments. The basis provided in the document to support the argument regarding the impact of FATF action on variables such as gross domestic products, final consumption expenditure, exports, and inward foreign direct investment are not properly evaluated. The report further highlights that investors are reluctant to invest in a grey-listed country, because of its decreased borrowing capacity. However, there was no single instance mentioned to substantiate the claim of decline of borrowing capacity or refusal of loan by any monetary institution due to grey listing. By looking at Pakistan’s borrowing profile, it appears that grey listing did not impact Pakistan’s borrowing capacity which can be seen in the below table (Source State Bank of Pakistan Amounts in USD Million):

Further, the document has a concept of Synthetic Pakistan – PK (i.e. Pakistan without FATF implication) and it bases on basket of countries with similar real per-capita GDP (i.e. Bangladesh- BD), Cameroon, India -IN), Niger, Tajikistan, and Nepal). Though the data is in per-capita terms but still this has prima-facie the following shortcomings

  1. All these countries mentioned along with with Pakistan are also high-risk and their financial transactions (U.S dollar clearing and other cross border transactions) are treated the same way as Pakistan. Moreover, even for Nigeria, U.S financial institutions use special procedure to perform due diligence on cross-border transactions. Another factor which is quite significant is that none of these countries is considered least corrupt as per Transparency International rating which shows that they are the highest risk countries with reference to flow of funds and their transactions require enhanced monitoring.
  • Other factors which are missed by the author are the security, political and economic situations that have changed entirely in the last two decades especially IN, BD vs PK. Post 1996-2007 IN & BD have surpassed PK based on their iconic performance and policies rather than any advantage vis-à-vis FATF.

The performance of India has been acknowledged at international levels also, International Monetary Fund (IMF) in one of its India’s Strong Economy Continues to Lead Global Growth applauded India on multiple factors like the following

  • Reducing trade documentation requirements and procedures.
  • Lowering tariffs;
  • Continuing to improve the business climate; and
  • Improving governance

Same is the case with Bangladesh. In an article Bangladesh: Building a Strong and Inclusive Economy IMF it was stated as follows:

 “Growth in Bangladesh has averaged more than 6 percent over the last decade, significantly lifting per capita income. Poverty has declined steadily and other social indicators, like gender disparity in education and maternal mortality, have also improved. Throughout this process, the country has diversified away from an agrarian to a more manufacturing-based economy with rapid growth in the ready-made garment industry.” 

  • Urban and Rural demographics, skilled and non-skilled labor.
  • Business opportunities and technological landscape of each country.

Similarly, by looking at the investment numbers and impact on the GDP during the period of grey listing, this claim appears to be incorrect as well.

YearForeign Investment  Million USDGDP Growth %YearForeign Investment  Million USDGDP Growth %

Source : State Bank of Pakistan & Pakistan Bureau of Statistics

Moving further, the article mentions that the positivity (high GDP growth and investment etc.) in 2017 to 2018 was due to Pakistan’s better performance at FATF. This might be one factor, however, the following also played a key role

  1. Landmark CPEC agreement between China and Pakistan.

“China-Pakistan Economic Corridor” (CPEC), which was only officially launched in April 2015 while China’s president Xi Jinping visited Pakistan. Emphasis shifted towards power generation in Pakistan, and estimated costs ballooned to 46 billion USD. The two governments then drew up a “Long Term Plan,” starting in 2017 and drastically expanding the projected timeline for implementation up to 2030. Projected costs moved up to 62 billion USD, and Pakistani officials have since mentioned even higher numbers.” 

  • Investments to the tune of billions in Energy Sector and infrastructure projects.

Pakistan managed to overcome its energy crisis during 2013-18, this was due to government’s support and foreign investments in this sector. A report by World bank in 2017 also corroborates this fact

“Surprisingly, Pakistan was the largest recipient of PPI investments in both conventional and renewable energy, leaving the heavyweight in the region (India) behind. Investments in renewable energy projects in Pakistan were twice the size of conventional-energy projects (US$3.9 billion vs. US$1.9 billion)”

  • Investments to the tune of billions in Energy Sector and infrastructure projects.

During 2015, the policy rate was reduced to 6%, which was termed as lowest in decades,

“The policy rate stood at its lowest point in the last 42 years when the SBP brought it down to 6.5% in May (before reducing it further by 0.5% in Sep-15). The SBP spokesman did not have the interest rate history readily available when he was asked on Saturday if the current policy rate is the lowest in Pakistan’s history.”

  • Curtailment of terrorism,

Pakistan remained a victim of terrorism since 2001 and lost more than 80,000 civilian and law enforcement personnel suffering huge financial losses which are estimated to be above $118 billion in monetary terms. Pakistan’s government funded three major military operations i.e.  Operation Rah-e-Rast in Swat in 2009 (the impact of this is evident in financial results of 2010) this was followed by Operation Zarb-e-Azb in 2014 to ensure peace and tranquility in Pakistan, resultantly investors’ trust was revived and economic activities were restored which was even recognized by the PricewaterhouseCooper (PWC) in its report “How will the global economic order change by 2050?” expected Pakistan to overtake Canada by 2050.  It stated:

“By 2050, emerging economies such as Indonesia, Brazil and Mexico are likely to be larger than the UK and France, while Pakistan and Egypt could overtake Italy and Canada (on a PPP basis). In terms of growth, Vietnam, India and Bangladesh could be the fastest growing economies over the period to 2050, averaging growth of around 5% a year.”

Looking at the Pakistan’s global outlook including its unique political and economic conditions, attributing of $38 billion losses solely to grey listing by the FATF appears to be incorrect. Apparently, the cause of these losses seems to be due to bad-governance and mismanagement by the rulers. Though a military dictator ruled this county with the slogan “Pakistan First” but during his tenure, Pakistan’s security and economic conditions were compromised. Pakistan started experiencing energy crisis, A report by The National Bureau of Asian Research in 2013, estimated the losses associated with energy crisis to be around 4% of the GDP, it states:

“Pakistan is mired in an acute energy crisis—one with immense implications for both the nation’s floundering economy and its volatile security situation. According to some estimates, energy shortages have cost the country up to 4% of GDP over the past few years”.

Another factor was judicial activism, restoration of the judiciary gave us a new wave of hope that this time Pakistanis could build the best judicial system, However, the then Chief Justice Iftikhar Chaudhry followed in the footsteps of his predecessor and instead of introducing reforms, his focus remained on settling old scores with those who had different opinions regarding his restoration as chief justice. He frequently exercised and misused the suo moto powers which promoted the worst form of judicial activism and created chaos in the country. Eventually, the Government became dysfunctional and every matter was being taken up by the Supreme Court. Foreign investors lost confidence in dealing with Pakistan and started adding international arbitration clauses to their agreements to bypass litigation in Pakistan. Due to his poor and arbitrary judgments lacking any legal substance, Pakistan witnessed international embarrassment and suffered huge financial losses. In the Reko Diq case, Pakistan was slapped with a $6 billion penalty, whereas in Karadeniz Elektrik Uretim A.S case, the ICSID tribunal disagreed with the Supreme Court’s findings and concluded that there was no specific corruption.

Moreover, out of the calculation of USD 38Billion, the biggest chunk is from 2019 i.e., USD 10.31Billion. It is pertinent to mention that the decline and deterioration in economic conditions in 2019 was mainly due to so called “Economic Stabilization” by incumbent government. During 2019, inflation rose to highest levels as compared to preceding 5 years, this cannot be directly attributed to FATF as it was observed that the devaluation of the local currency was the main reason behind this inflation. It is pertinent to mention  here that Pakistan’s exports are based on import based inputs and in recent years (2018 onwards) with an objective to reduce Current Account Deficit, the government has increased duties and taxes that ultimately led to less output; This fact is also discussed in ABD’s working paper: Why Pakistan’s Economic Growth Continues to be Balance-Of-Payments Constrained it states as following

Pakistan’s episodes of high economic growth were usually marked by disproportionally higher import growth). This was due to several factors. First, energy imports largely contributed to a surge in overall imports. Pakistan had insufficient energy supplies and an energy mix that relied on imported furnace oil and natural gas. Imported furnace oil was often used to run smaller generators during blackouts and brownouts in urban areas and by manufacturers in times of high economic growth to keep up with demand. Second, since Pakistan did not produce machinery that was crucial for manufacturing and infrastructure development, it continued its reliance on imports. Third, past investments did not improve the productive capabilities of the country to enable it to substitute some of imports and shift its pattern of specialization towards more sophisticated products”.

Keeping in view the global practice with reference to enhanced monitoring and treatment of the jurisdictions vulnerable to pollute the financial system of the world, theory presented in the Islamabad based organization seem far beyond the reality. Pakistan’s entire suffering is more due to misgovernance, political instability, undue intervention by the military and judiciary in administrative matters. Grey Listing is nothing different than monitoring of our progress by the watchdog regarding implementation of its action plan.


Ms. Huzaima Bukhari, Advocate High Court and Visiting Faculty at Lahore University of Management Sciences (LUMS), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram, a leading law firm of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specializes in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals. She has to her credit over 1500 articles on issues of public importance, printed in various journals, magazines and newspapers at home and abroad.

She has coauthored with Dr. Ikramul Haq many books that include  Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Dr. Ikramul Haq, is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

She regularly writes columns for Pakistani newspapers and has contributed over 1500 articles on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.


Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation andVisiting Faculty at Lahore University of Management Sciences (LUMS).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.


Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities),, government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC). Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E – Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer. His notable publications are; Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan, Rauf’s Research on Labour Laws and Income Tax Etc. His articles includes; Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards., Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan,, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates. The recent book, coauthored with Huzaima Bukhari & Dr. Ikramul Haq is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

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