FATF/Pakistan: Beyond Grey List

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

Pakistan’s trip on the list of Jurisdictions under increased monitoring maintained by the Financial Action Task Force (FATF) is approaching an end.  The recent consolidated assessment rating by the FATF and its nine FATF-Style Regional Bodies (FRSBS) is the result of peer reviews on an ongoing basis to assess the effectiveness of Anti-Money Laundering and Combating Financing of Terrorism (AML-CFT) measures by the member states. The consolidated risk assessment rating shows that Pakistan ranking concerning technical compliance has significantly improved and so far, we are fully compliant with nine FATF Recommendations, whereas largely compliant with 29 and partially compliant with 2 recommendations.

It appears that Asia Pacific Group (APG) has not yet updated our rating on the effectiveness of our compliance despite completing their onsite visit from August 29, 2022, to September 2, 2022. However, our current effectiveness rating shows that we got a low level of effectiveness on ten immediate outcomes while rated medium on one immediate outcome out of 11 immediate outcomes. However, removal from the list of jurisdictions with increased monitoring is based on the rating of effectiveness which might be assigned in a few days.

Apart from the rating of effectiveness, Pakistan has largely complied with recommendations that are considered important for an effective AML-CFT regime such as recommendations 3, 5, 6,10,11, and 20 that deal with money laundering and terrorist financing offences, targeted financial sanctions related to terrorism and terrorist financing, customer due diligence, record keeping and reporting of suspicious transactions. Pakistan is largely compliant with four recommendations whereas fully compliant with two recommendations out of these six recommendations.

Failure to comply with these six recommendations can land a country in the international cooperation review group process to ensure its prioritization criteria. These six recommendations are among those, the compliance of which shows that the country has an effective AML-CFT framework to counter money laundering and terrorist financing. Though we have excellently complied with these six recommendations as well as the criteria set by the watchdog to select the country for review which specifically state that:

• The country is not rated non or partially compliant for 20 or more recommendations for technical compliance, and,
• The country is rated non or partially compliant on 3 or more of the recommendations which are considered Big Six such as 3, 5, 6, 10, 11, and 20.

Now, if we compare the current technical compliance level of Pakistan with FATF review criteria, it clearly shows that Pakistan has significantly improved its compliance level. Pakistan is compliant and largely compliant with 38 recommendations whereas partially compliant with two recommendations which clearly indicates that our compliance level is well above the FATF requirements.

The most challenging part which might create problems for us is meeting the effectiveness criteria set by FATF to select any country for review. FATF selects any jurisdiction for review on following grounds.

• The country has a low or moderate level of effectiveness for 9 or more of the 11 Immediate Outcomes, with a minimum of two lows: or
• The country has a low level of effectiveness for 6 or more of the 11 Immediate Outcomes

Though our assessment in mutual evaluation report related to effectiveness of our compliance is not satisfactory, however, we have significantly improved our compliance level that is appreciated by the world community in the previous plenary meeting held in June 2022. Therefore, it is expected that Pakistan will successfully achieve the desired rating on effectiveness in upcoming FATF meeting.   

Nonetheless, Pakistan’s biggest challenge after being removed from the grey list will be to maintain the same pace with reference to complying with FATF recommendations. Even if FATF removes us from the list of jurisdictions under increased monitoring, it will not ease up the strict screening requirements imposed by the United States watchdog. Pakistan continues to be considered a high-risk country and all transactions pertaining to Pakistan will continue to be strictly monitored and will pass the strict screening requirements unless we establish control to counter the sources of money laundering and terrorist financing. Corruption is one of the major sources of money laundering. Pakistan’s current ranking on Corruption Perception Index is not satisfactory. In the last four years while under FATF programme due to strategic deficiencies in our AML-CFT regime, Pakistan instead of improving its controls related to corruption, downgraded 23 points from 117 to 140.

With this poor rating, can we expect any relief from the United States’ Financial Crimes Enforcement Network (FinCen) for Pakistan’s financial institutions as well as the transactions directed to us? The U.S banks spend huge money on performing due diligence and enhanced due diligence and applying strict screening procedures to facilitate Pakistan-origin transactions which on one hand create monetary losses to the bank itself and on the other hand it is exhaustive for the foreign investors as well.

Similarly, other jurisdictions such as Europe and England will keep us treating high-risk countries. Pakistan should realize that our casual behavior in dealing with matters of international interest in the long run negatively impacts our economic stability.

The only way forward for Pakistan is to focus on financial inclusion and reduce the volume of undocumented economy. We are in an era of the fourth industrial revolution but believe in running the country in traditional ways. Pakistan still lacks an efficient suspicious transaction reports (STRs) regime. Over and under-invoicing is a common practice and we lack the mechanism to counter this action. Even in the Asia Pacific Report, it was clearly mentioned that “Feedback on STRs in which inquiries have been completed are sent back to the FMU”. The remaining 79 STRs are still under inquiry. The Directorate General (Investigation and Investigations-Customs) initiated six cases relating to trade-based money laundering. However, these cases have been initiated based on the Directorate General’s own information and not based on STRs received from FMU. FMU’s assistance was obtained in these cases only for the identification of bank accounts.

Similarly, the performance of our Financial Monitoring Unit is poor as well. Their lenient attitude towards the banking sector is not only bringing us embarrassment but also creating hurdles for having correspondent banking relationships. Penalties imposed by the New York Department of Financial Services on major banks of Pakistan are evidence that the Financial Monitoring Unit is not playing its role to streamline their basic compliance-related issues.

The current challenge for Pakistan is not just removal from the grey list but to create an atmosphere where foreign investors can easily invest without going through the exhaustive process of screening and monitoring.

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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