FATF: Pakistan’s arduous journey

Dr. Ikramul Haq & Abdul Rauf Shakoori

The journey of Pakistan to reclaim its space back as a cooperative nation with strong anti-money laundering and combating the financing of terrorism controls on the global index has entered the final phase. The last Plenary of the Financial Action Task Force (FATF), under the German Presidency Dr. Marcus Player, admitted that Pakistan’s continued political commitment to combating both terrorist financing and money laundering had led to significant progress. The members of the global watchdog also acknowledged that Pakistan had satisfactorily demonstrated its commitment towards terrorist financing investigations and prosecutions and to target senior leaders and commanders of UN-designated terrorist groups. It further noted that that there was a positive upwards trend in the number of money laundering investigations and prosecutions, pursued in line with Pakistan’s risk profile. The members also found that Pakistan largely addressed its 2021 action plan ahead of the deadline.

In the recent Plenary, the FATF made the initial determination that Pakistan has substantially completed its two action plans covering 34 items, and thus warrants an on-site visit to verify that the implementation of Pakistan’s Anti-Money Laundering and Counter Financing of Terrorism [AML/CFT] reforms have begun and that these could be sustained. For which the necessary political commitment remains in place to sustain implementation and improvement in the future. Despite admitting improvement in Pakistan’s AML-CFT framework, the global watchdog did not remove Pakistan’s name from the list of jurisdictions under increased monitoring and made it conditional to the onsite evaluation of our so far compliance with FATF standards. Though, the exact date of the FATF team’s visit to Pakistan is yet to be finalized, it will continue to monitor the COVID-19 situation and conduct an on-site visit at the earliest possible date.

The Minister of State for Foreign Affairs, Hina Rabbani Khar, in her press briefing explained that Pakistan on its 2018 action plan submitted the eleventh report to FATF which was unanimously acknowledged by the member states as largely compliant with no pendency of action left on the part of Pakistan. However, Pakistan submitted three reports in compliance with the 2021 action plan related to money laundering compliance. The State Minister congratulated the nation for completing the action plan year ahead of the prescribed timeline. She added that this swift pace and progress were indicative of the comprehensive reforms and actions that had been carried out by Pakistan in the AML/CFT domain and the sustained momentum of our efforts. Pakistan’s positive and speedy progress was greatly appreciated and welcomed by FATF members, she added.

Pakistan is in the grey list since June 2018. During these four years, Pakistan was slapped with two FATF action plans with 27 and 7 action items to address. In these four years, Pakistan’s pace towards addressing the FATF’s concerns viz a viz highlighting this issue at international forums and seeking their cooperation to address Pakistan’s concerns was very poor. We have constantly raised this issue in various articles and highlighted the problems with our compliance and foreign office’s role. However, no attention was paid to our suggestions. Pakistan has not yet fully complied with the FATF action plan but the outcome of recent assessment ranked us at substantially complied. But despite that convincing FATF to admit our progress and move on to the next step for evaluating the effectiveness level of our technical compliance is an achievement, especially our foreign office team, people engaged to deal with FATF compliance, Pakistan armed forces, and intelligence agencies.  

Pakistan is entering a new phase of compliance with the FATF action plan. Our foreign office as well as the entire nation is hoping after the next plenary Pakistan will be out of the grey list. However, the question arises whether the new phase of onsite evaluation would be merely a symbolic trip or after that FATF should officially remove us from the grey list. However, it is not that simple. FATF measures the compliance level of any country by using two different methodologies i.e. technical compliance and their effectiveness. The FATF assesses those ratings which reflect the extent to which a country has implemented the technical requirements of the FATF Recommendations. The watchdog also assesses while evaluating the country on technical compliance that it has a proper framework of laws and enforceable means and the existence, powers, and procedures of competent authorities.

Pakistan, in the last few years amended Anti-Money Laundering Act, 2010, and introduced regulations for different sectors that fall under the domain of the State Bank of Pakistan (SBP) as well as Securities and Exchange Commission of Pakistan (SECP). Pakistan also introduced a new role for Statutory Regulatory Bodies. It also assigned powers to the Federal Board of Revenue (FBR) for monitoring Designated Non-Financial Businesses and Professions (DNFBP). However, this assessment does not include the requirements for measuring the effectiveness of the AML-CFT framework in any jurisdiction. The FATF uses separate parameters to assess the effectiveness of the framework which includes a component of the Methodology.

In the next phase of evaluation of the effectiveness of our system, FATF will assess that Pakistan’s current AML-CFT framework is achieving the required objectives and can be termed as an effective framework that can stop criminals from generating or hiding the proceeds of crime and to prevent the financing of terrorism. The watchdog will also figure out if there is any weakness in the framework concerning its laws, regulations, policies, and procedures. 

As per the Report on the State of Effectiveness and Compliance with the FATF Standards, while evaluating the effectiveness of the AML-CFT framework, the assessment team looks at 11 Immediate Outcomes to determine the level of effectiveness of a country’s efforts. Countries deemed to be sufficiently effective receive a “substantial” or “high” rating of effectiveness (SE/HE) (as opposed to moderate to low effectiveness ratings – ME/LE). Similarly, the FATF Methodology, for assessing technical compliance with the FATF Recommendations and the effectiveness of AML/CFT systems guidelines  states that measuring effectiveness could be about the intended result of a given (a) policy, law, or enforceable means; (b) program of law enforcement, supervision, or intelligence activity; or (c) implementation of a specific set of measures to mitigate the money laundering and financing of terrorism risks, and combat the financing of proliferation.

In this entire scenario, if we look at the effectiveness level of Pakistan’s compliance with FATF 40 recommendations, our level of effectiveness was ranked low on 10 immediate outcomes, while medium on one immediate outcome which pertains to international cooperation. Pakistan failed to obtain a substantial or high level of effectiveness for any of the immediate outcomes.  Now if we compare this with FATF parameters for placing the countries in the list of jurisdictions with increased monitoring and analyzing it with Pakistan’s current compliance level, Pakistan still needs to work hard for the satisfaction of the FATF action plan.

As per FATF standards that jurisdiction will be reviewed when:

• It does not participate in a FATF-style regional body (FSRB) or does not allow mutual evaluation results to be published promptly; or
• It is nominated by a FATF member or an FSRB. The nomination is based on specific money laundering, terrorist financing, or proliferation financing risks or threats coming to the attention of delegations; or
• It has achieved poor results on its mutual evaluation, specifically:
• It has 20 or more non-Compliant (NC) or Partially Compliance (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 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.

Though Pakistan has addressed issues about mutual evaluations and technical compliance, yet the performance of our compliance related to effectiveness measures does not qualify us to be placed back on the white list. Our current laws and regulations do not meet international standards. Pakistan Financial Monitoring Unit’s independence seems to be compromised. Former Finance Minister, Muhammad Ishaq Dar made it an autonomous body through a notification. It is now works under the supervision of the General Committee comprising government cabinet secretaries that limits its independence. Further, the previous coalition government of Pakistan Tehreek-i-Insaf (PTI) tried to regulate it through different committees such as the National Executive Committee (NEC) having ministers qualifying as politically exposed people and considered high risk. The majority of them are facing corruption charges. The General Committee (Cabinet Secretaries), and the Financial Monitoring Unit (FMU), work under the influence of GC to receive suspicious transactions. Secondly, the role of various statutory Regulatory Bodies might come under question as well as it tantamount to conflict of interests.

Similarly, regulations related to Designated Non-Financial Businesses and Professions (DNFBP) are not aligned with international standards. The FATF team might show its concerns and ask for their revision as well. Moreover, FATF has not given us a clean chit regarding the compliance of terrorist financing investigations and prosecutions, targeting senior leaders and commanders of UN-designated terrorist groups but called it a positive upwards trend in the number of money laundering investigations and prosecutions being pursued in Pakistan, in line with country’s risk profile.

Pakistan needs to work on dismantling the financial support of these individuals and organizations by introducing strict procedures for raising any type of donations/funding. Pakistan also needs to improve its risk profile, the policy concerning the AML-CFT framework, and coordination among the intelligence institutions to counter the creation, movement, and penetration of those illicit funds in our financial system.

We need to improve international cooperation so that the support to follow the illicit money and criminals can be sought bypassing the true information that can be shared; financial intelligence can be exchanged to facilitate action against the criminal and their assets. We also need to improve supervisory regime in the light of concerns highlighted in the mutual evaluation report 2019 for financial institutions and DNFBPs. The supervisor should make sure that both sectors are applying the preventive measures according to their risk profile and reporting suspicious transactions without any delay.

Pakistan should also improve its financial intelligence, operation of legal persons and arrangements, money laundering investigation, and prosecutions. The Asia Pacific Group (APG) Mutual Evaluation showed concerns about our investigation and prosecution regime and also raised concerns about the capability of our judiciary regarding understanding AML-CFT matters. All these actions require sincere efforts and continuous monitoring by the skilled workforce.

Pakistan can only achieve the required objectives if its AML-CFT framework is operating according to global standards of the FATF. The evaluation will be a tough call for Pakistan, as the presidency of the FATF will be transferred to Singapore.

Moreover, this evaluation will be based on the personal judgment of the FATF team members (most probably APG will form a team to evaluate the effectiveness of our compliance). It will enhance the role of Foreign Office to improve our relations with the member countries and keep them updated about our progress and efforts about countering the illicit flow of funds. Coordinated efforts by all the stakeholders (Foreign Office, Interior Ministry, FMU, FATF Secretariat, armed forces, Director General Military Operation [DGMO], all intelligence agencies, SBP, SECP, FBR and others) will bring us good news in October 2022.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He isVisiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

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).

The recent publication, coauthored by these writes with Huzaima Bukhari, is:

Pakistan Tackling FATF: Challenges & Solutions

https://www.amazon.com/dp/B08RXH8W46  and  https://aacp.com.pk/