FATF & Pakistan

Need for adopting risk-based approach

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

The importance of risk-based approach in curtailing the movement of illicit flows of funds is paramount. The significance of this approach is also stressed in recommendations of Financial Action Task Force (FATF). The FATF highlighted this requirement in its very first recommendation which deals with Assessing Risk and applying risk-based approach. It requires from the countries, competent authorities, and reporting entities to identify, assess, and understand the money laundering and terrorist financing risks they are exposed to. In other words, through this approach they can develop the appropriate measures to mitigate these risks. The global watchdog further requires that based on the assessment, countries should apply a risk-based approach to prevent or mitigate the risk and money laundering and terrorist financing measures commensurate with risks profile.

Pakistan being a member of Asia Pacific Group (APG) is subject to same responsibilities vis-à-vis compliance with the directives of FATF and to fulfill these requirements. Pakistan performed its first Money Laundering (ML) and Terrorist Financing (TF) National Risk Assessment (NRA) in 2017. However, this effort could not satisfy APG and it was criticised in Mutual Evaluation Report of 2019 [MEP 2017]. The report highlighted that NRA lacks a comprehensive analysis, competent authorities have varying level of understanding, and Pakistan’s multi-agency approach to implement its AML/CFT regime is not developing a comprehensive and coordinated risk-based approach to combating ML and TF.

The best response to the APG mutual evaluation was to address the short-comings in our AML-CFT Regime. However, Pakistan could not fully comprehend the seriousness of the matter by showing diminutive concerns to handle the deficiencies in our compliance with FATF. Therefore, even after lapse of a significant time, the concerned authorities have failed to satisfy the concerns highlighted in 2nd Mutual Evaluation Report (2019).

Apart from MEP 2017, the first follow-up report which was published a year after the mutual evaluation, our performance was found below satisfactory level by the global watchdog and concluded with the same concerns as recorded earlier. Pakistan, instead of considering it as an opportunity to work with FATF and its regional organ APG, in addressing their concerns, showed apathy. The government and its law enforcement agencies remained unaware about their tasks. Despite having NRA, we failed to apply the risk-based approach to identify the areas that were and still are vulnerable for money laundering. This resulted in embarrassment for the entire nation. Strangely, rather unfortunately, the focus of the government remains in settling personal political scores rather than objectively addressing the concerns on merit and professionally. It is also important to point out that reputational risk is the main element in AML-CFT risk assessment. However, the government as well as all law enforcement agencies did not bother to assess the damage caused to Pakistan due to weak investigation leading the tarnished image of Pakistan.

The major reputational damage to Pakistan was done by the apex accountability body, National Accountability Bureau (NAB). Though this institution was established by military dictator, General Pervez Musharraf with an objective to “eliminate corruption”, but in practice its entire focus remained to serve the rulers and making political maneuverings and using the unfettered powers to win political loyalty for Musharraf’s King Party. Musharraf introduced the National Accountability Bureau Ordinance (NAB Ordinance) in 1999 but made it effective retrospectively from 1 January 1985 [section 2 of the NAB Ordinance]. It was a clear violation of Article 12 of the Constitution of Pakistan of Islamic Republic [“the Constitution”] which provides for protection against retrospective punishments. It clearly reads as under:

“Protection against retrospective punishment

12. (1) No law shall authorize the punishment of a person—

• for an act or omission that was not punishable by law at the time of the act or omission; or
• for an offence by a penalty greater than, or of a kind different from, the penalty prescribed by law for that offence at the time the offence was committed.

(2) Nothing in clause (1) or in Article 270 shall apply to any law-making acts of abrogation or subversion of a Constitution in force in Pakistan at any time since the twenty-third day of March, one thousand nine hundred and fifty-six, an offence”.

Apart from section 2 of the NAB providing retrospective punishment, most of this law’s provisions are in direct conflict with the Constitution. The NAB Ordinance has resulted in arrests of dissenting voices to protect the power base of rulers or penalising them or is aimed against government servants considered as “loyal” to a particular party. The APG’s Mutual Evaluation Report observed that NAB’s performance resulted in only one person’s conviction for money laundering related cases from 2013-2018. It is alleged and held in many observations by higher courts that NAB’s primary focus has been to arrest people on flimsy grounds, keep them in jail for extended periods, and subject them to mental and physical torture to extract confessions and plea bargain.

The ex-Chief Justice of Pakistan, Jawad S. Khawaja, described this as “institutionalized corruption”. After passing of Constitution (Eighteenth Amendment) Act, 2010, [commonly called 18th Amendment], many jurists question the legality of the NAB Ordinance, claiming that it is not saved under Article 270AA of the Constitution. It is factually incorrect. The fact is that all the political parties have consensus that it is draconian law yet during the Decade of Democracy [2002-18] and since coming into power of Tehreek-i-Insaf (PTI)—literally means Movement for Justice—in August 2018 none repealed it to enact a new law covering all financial crimes and corrupt practices by public office holders and civil and military employees, irrespective of their grade or ranks.  Resultantly, it is still being enforced and courts in Pakistan are hearing NAB’s cases without questioning its legitimacy and constitutional validity. Though it is primarily the duty of Parliament to repeal it and bring new comprehensive accountability law, but Supreme Court even after declaring it a law violative of Article 10A of the Constitution has not declared it ultra vires using suo muto power under Article 184(3) of the Constitution.

Apart from law enforcement agencies, MEP highlighted that Pakistan’s financial sector which includes banks and money service businesses also even lacked basic understanding of terrorist financing risks. Whereas, the State Bank of Pakistan also failed to demonstrate clear understanding of ML-TF risks unique to the banking sector it regulates under the State Bank of Pakistan Act, 1956 and rules made thereunder.

It is really not understandable that even after having knowledge of areas for improvement, our legislators and authorities could not address the concerns highlighted in the mutual evaluation and first follow-up report. We have failed to introduce sector-specific comprehensive laws and regulations with best implementation strategy. It appears that compliance with FATF is not our priority as the newly drafted legislation is divisive—on one hand it does not meet the international standards and on the other negates the principle of risk-based approach listed in the FATF’s first recommendation by assigning powers to those institutions and professional bodies which are considered high risk with regards to AML-CFT.

Due to the above narrated deficiencies and failure, our efforts (sic) have proved to be fruitless. An objective evaluation is required as to why our efforts are not being recognized by the international community. The Minister assigned the task of taking steps to come out of grey list, keeps on claiming that that we have successfully addressed 24 action items out of 27 initially agreed in FATF meeting in June 2018. However, the global community is not satisfied with their level of effectiveness. FATF consolidated assessment rating states that Pakistan’s measures with reference to their effectiveness rated on the scale of high, substantial, medium, and low level of effectiveness based on eleven immediate outcomes (IOs). Pakistan’s level of measures related to their effectiveness is rated low for ten whereas medium for one immediate outcome (IO2) which relates to international co-operation. Unfortunately, Pakistan has failed to secure rating for substantial or high level of effectiveness.

In view of anomalies in our existing AML-CFT regime and poor compliance, FATF always gives the headlines to domestic and international media which adversely damage our repute and perception in the world.  Apart from FATF, the most developed countries in their individual capacities treat us as high and very high-risk country. The United States Financial Crimes Enforcement Network (FinCEN) through its advisory dated November 06, 2020 communicated the list of countries with strategic deficiencies requiring them to meet additional obligations. It also instructed financial institutions to apply risk-based approaches with respect to relevant jurisdictions. Pakistan was one of those jurisdictions.  Similarly, Europe through its directive (EU) 2015/849 has already placed us on the list of high-risk third countries having strategic deficiencies in their regime on anti-money laundering and countering terrorist financing. Earlier as part of EU, the United Kingdom was treating us as a high-risk country. However, recently after the Brexit, the UK Government published the Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021 (SI 2021/392) placing Pakistan on the list of high-risk 21 jurisdictions. Though there is no change in the treatment of dealing with issues related to Pakistan. The full list of high-risk third countries under Schedule 3ZA includes, in order: Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands, Democratic People’s Republic of Korea, Ghana, Iran, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Senegal, Syria, Uganda, Yemen and Zimbabwe.

Through this UK’s action of March 25, 2021 just following the European Union, Pakistan is once again appeared in the headlines on national and international media. Even the spokesperson of Pakistan Foreign Office had to issue a statement that the decision of the UK is not based on facts. It has created further confusion and created further doubts in the minds of people as to why he reacted to the listing that is already there in EU’s directive (EU) 2015/849 and for UK it was just a formality to after the Brexit.

Now it is clear that with this attitude we cannot protect ourselves from further embarrassment. Government of Pakistan needs the right people for the right job. The MEP 2017 as well as First Follow-up report has already highlighted our grey areas. It is almost two years now since the evaluation report was issued. The concerned minister and his team including Director General National FATF Secretariat, and Director General Financial Monitoring Unit should explain to the nation about their progress. The nation has a right to know the answers of concerns raised in the mutual evaluation report such as:

• “What steps they have taken to improve the concerns related to national risk assessment and applying risk-based approach?
• What improvements Financial Monitoring Unit brought in the system to disseminate the information and result of their analysis to the provincial Counter Terrorism Departments (CTDs) designated as Terrorist Financing authorities?
• What measures have been taken by the Law Enforcement Agencies to make sure that their efforts in addressing Money Laundering are consistent with its risks.
• What measures have been taken to improve cross border cash declaration system?
• Will State Bank of Pakistan and Securities and Exchange Commission of Pakistan share the actions exclusively focused on Targeted Financial Sanctions (TFs) and proliferations Financing (PF) were not demonstrated?
• What steps have been taken to train the officials of Law Enforcement Agencies to improve their understanding of Anti-Money Laundering-Countering Financing of Terrorism risks.
• Will State Bank of Pakistan share the steps taken to improve the understanding of Anti-Money Laundering-Countering the Financing of Terrorism risks related to the sectors it supervises?
• What steps national accountability bureau took to address the findings of mutual evaluation report?
• What steps our NAjudiciary has taken to address the concerns raised in the mutual evaluation’.

Our non-professional approach in addressing FATF mandates is not substantiating with international standards which is causing irreparable damage to our global reputation. It is time for our elected representatives to play their role, by inviting all those responsible including relevant ministers, Director General FATF Secretariat, Director General Financial Monitoring Unit (FMU) and seek their explanation regarding the shortcomings in our system and their persistent failure to meet the same. They must be asked to explain to the nation as to why effectiveness of our compliance level is not satisfactory.

Our Parliament needs to check the technical background and credentials of those who are advising the law enforcement agencies (LEAs) or relevant officials in dealing with FATF actions plan and must also consider the suggestion for setting up an independent entity to counter all financial crimes and ML/CFT related issues as presented in FATF: challenges & solutions—I & II, Business Recorder, January 8 & 9, 2021. The blueprint of the entity is listed in a recent book coauthored by us “Pakistan Tackling FATF: Challenges & Solutions”, including ML-TF for collection and consolidation of all reports and issuance of guidelines to each sector. The entity would not only cooperate with the relevant agencies but will also seek international cooperation to combat these crimes which are the source of continuous challenges for the country, domestically as well as internationally.

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Huzaima Bukhari and Dr. Ikramul Haq are lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS). 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.