Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Once again, our efforts towards the fulfillment of the agenda of Finical Action Task Force (FATF) have fallen short to come out of the grey list. President of FATF, in his Press conference, pointed out that out of 34 items agreed in two action plans assigned to Pakistan, it has so far complied with 30 action items. The outstanding areas still needed to be addressed, date back to 2016 when the initial warning was given by FATF.
The FATF requires action against terrorist financing and execution of persons engaged in cross-border terrorist activities. The same demands are still part of the FATF concerning Pakistan. These were highlighted in the FATF press briefing issued on October 21, 2021 requiring Pakistan:
- to continue to address its strategically important Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT) deficiencies, like 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
- to demonstrate 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.
The above mandate was initially assigned to us in 2016 and despite a lapse of nearly five years, we have failed to address these concerns. Though we have improved compliance standards and the FATF’s President appreciated us as well, yet the initiatives, which can improve our image about terrorist financings, still require to be addressed. Our lenient approach in addressing international issues is a serious threat to our national security as well. With every passing day, FATF is introducing new guidelines, rules, and best practices to curtail the illicit flow of funds. Our current AML-CFT regime cannot cope with new inventions in this area. We have highlighted in many articles that our legislative framework needs to be updated. It contradicts global practices at many levels. Moreover, the recent focus on digitalization of this sector is another challenge for countries like Pakistan.
Egmont Group of the financial intelligence unit has recently published a paper on Digital Transformation of AML-CFT for Operational Agencies highlighting the approach of detecting suspicious activities and analysis of financial intelligence. The same document refers to a process of converting analogue data from a paper or text/image-based into a digital form that can be easily read, processed, reproduced, and transmitted by computers. In financial intelligence, digitalization can refer to turning suspicious transaction reports (STRs), suspicious activity reports (SARs), cash threshold/transaction reports (CTRs), and other images and information into a digital format. It can also involve automation, which helps streamline repetitive workflows and minimizes processing time. One example is automated submissions of STRs.
However, our government institutions are not efficient in proactively detecting threats and mitigating potential risks related to cyberattacks. In 2018, severe attacks were made on Pakistan’s financial institutions and exposed the efficiency and sufficiency of controls in the financial sector. Our sole apex revenue agency Federal Board of Revenue (FBR) faced cyberattacks on several occasions in the recent past. These attacks on FBR’s systems have compromised the privacy of information. In the latest cyberattack on FBR, taxpayers’ information was accessed, which was initially denied by FBR but later it was confirmed when NADRA intervened, and Chairman NADRA took credit for helping to control the damage.
The then Finance Minister and now Adviser to Prime Minister ordered an investigation of the security breach—unfortunately to date nobody has been made responsible for this criminal negligence. Apart from FBR, now National Bank of Pakistan (NBP) is under attack. Though it is being claimed that the attack did not compromise customers’ financial data, yet it proves that our systems are not well protected and need evaluation from independent experts. Keeping in view the approach of our institutions dealing with technical issues, whether it is FBR or financial institutions, it has become inevitable that we implement FATF recommendations in their true sense.
The risk-based approach is considered as the foundation for AML-CFT systems and essential for managing potential risks. It is high time that we introduce a proper regulatory environment, otherwise, we will not be able to address the concerns of FATF regarding financial inclusions, de-risking, data localization, risk aversion, data privacy and protection, Suspicious Transactions reporting Tipping Off and addressing complex technologies.
Our policymakers need to realise that world priorities are changing and our orthodox approach in dealing with international issues will not serve any purpose. Playing the victim card that Pakistan is on the grey list due to some ulterior political motives might work as eyewash at the local level, but it will certainly not get us any benefit at an international forum. Being a member of the United Nations as well as other governmental and non-governmental bodies, we must respect their rules and comply with them in letter and spirit so that the global community can repose confidence in us as a responsible nation.
Recently, FATF listed Cayman Island as the jurisdiction with increased monitoring. The country enjoys good repute complying with AML-CFT standards. However, it has failed to satisfy FATF and was finally placed on the grey list. Another example is that of Turkey which, after being assigned as a non-cooperative jurisdiction, agreed to work with FATF to address strategic deficiencies in their AML-CFT regime. However, most of the analysts in Pakistan who have very limited understanding of the technicalities involved, termed this act of FATF as arm-twisting. They believe that FATF works under the influence of a few states who have some hostile agenda towards Muslim countries. They tend to ignore the fact that Turkey’s Mutual Evaluation Report of 2019 highlighted serious deficiencies in its AML/CFT regime. Turkey was given due time to address these concerns. However, on failure to do so, the FATF decided to work with Turkey to streamline its AML-CFT regime. Currently, there are 23 countries listed as jurisdictions under increased monitoring and eight of them are Muslim countries, even though a few enjoy good relationship with FATF member states, known as influential states. This corroborates that FATF has its procedures to evaluate the progress of any jurisdiction and then member states decide about the strategic deficiencies.
The task in hand now for Pakistani authorities should be about complying with the remaining action items as well as improving their efficiency level. The current level of our compliance did not meet the standards set by the global watchdog. Therefore, we are rated low on 10 immediate outcomes and one as moderate. It is feared that the current pace and approach can further complicate things for us, especially when FATF will diligently pursue sector-specific compliance for those areas where we have no check and balance currently, such as dealing with virtual currencies, though we have completely banned it, people are actively engaged by involving usage of different avenues.
The incumbent government has no clue and data about virtual currency and with future implementation of travel rules that relate to cross-border domestic bank transfers and directions that Virtual Asset Service Providers should obtain, hold, and exchange information about the originators and beneficiaries of virtual asset transfers can be another challenge for us. Similarly, the proposed revisions in recommendation 24 on the transparency and beneficial ownership intends to strengthen the international standards on beneficial ownership of legal persons to ensure greater transparency about the ultimate ownership and control of legal persons, providing competent authorities timely access to adequate, accurate, and up-to-date beneficial ownership information as well as to take more effective action to mitigate the risks of misuse will be an additional requirement.
The regulatory changes and updates should be monitored and addressed in time otherwise it might turn out to be a new challenge for Pakistan and despite all the efforts and actions taken we might end up on the same list on jurisdictions subject or increased monitoring on account of a new set of requirements.
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.