Huzaima Bukhari & Abdul Rauf Shakoori
Money laundering severely affects the growth of any country. Criminals involved in money laundering who generate their wealth through illegitimate ways such as corruption, tax evasion, drugs/human trafficking, fraud, kidnapping, extortion etc. are always in search of havens with fewer compliance requirements where they can move their ill-gotten wealth. This illegal flow of funds adversely impacts the capacity of honest and legitimate businesses leading to loss of revenue and economic depravity for the government. Resultantly, such states fail to spend enough to improve key social indicators and the common man stays deprived of basic requirements such as health, education, employment.
The United Nations Office of Drugs and Crimes (UNODC) estimates the share of laundered funds between 2% to 5% of the global GDP or $800 billion or US$ 2 trillion per year. This is a huge amount that belongs to the people of the concerned states and can be utilised to build infrastructure, hospitals, schools, and creating employment opportunities. However, due to weak regulatory framework and strategic deficiencies in the system, criminals misuse their position to move their ill-gotten wealth to offshore shelters.
To curtail the illicit flow of funds, Financial Action Task Force (FATF) is playing an active role. They perform assessment procedures to identify jurisdictions with weakness in their Anti-Money Laundering and Counter Financing of Terrorism (AML-CFT) regime and then work in collaboration with them to implement the plan in line with its 40-recommendations known as global standards designed to protect the global financial system from being misused by the criminals. The process of FATF to list any jurisdiction with AML-CFT strategic deficiencies is initiated when, either a country is not willing to participate in FATF-style regional body (FSRB) or delays the publication of Mutual Evaluation results. Another important reason for listing jurisdiction with a weak AML-CFT framework is when the FSRB finds that a country is exposed to money laundering, terrorist financing, or proliferation financing risks or threats. Apart from these reasons, the FATF review process further states the reasons of listing as AML-CFT strategic deficient jurisdiction in case it has posted 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 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.
To list any jurisdiction as one under increased monitoring (Grey List) or High-Risk Jurisdiction subject to “Call for Action” (Black-list) a comprehensive review process is followed to determine the compliance level of each nation with the 40 recommendations of FATF. Currently, FATF has listed approximately, 23 countries as jurisdiction under increased monitoring while two countries as high-risk jurisdictions subject to call for action.
However, in some instances where FATF has listed some countries, it has been observed that the citizens of the countries subject to such action have perceived it to be a hostile act based on the subjective application of criteria adopted by FATF. Observing the countries listed as jurisdiction under increased monitoring, Pakistan alone was placed on the grey list in 2018 even before the completion of its mutual evaluation report which was due in 2019. This special action was taken by the FATF on the motion of the United States to put Pakistan on the global terrorist-financing watch-list, a motion backed by India. People in Pakistan believe that this was done because of Indian lobbying, otherwise, it would not have been placed on the global watch list, as it was actively working against terrorist groups and organizations. However, this motion was moved right after Pakistan completed the successful operation Zarb-e-Azb against terrorists belonging to various militant groups including Taliban, and restored peace in the country. Pakistan also launched operation Radd-ul-Fasaad to eradicate the threat of terrorism and secure benefits obtained through operation Zarb-e-Azb. This action of FATF not only undermined Pakistan’s efforts in the war against terrorism but transmitted a negative message of refusing to acknowledge sacrifices of Pakistanis in losing their loved ones and bearing huge economic losses.
Simultaneously when a motion was being moved against Pakistan for placement on the global terrorist-financing watchlist, an Indian Commander Kulbhushan Sudhir Jadhav was facing trial in Pakistan on account of terrorism-related charges. During interrogation, he admitted his involvement in various attacks in Pakistan and providing financial support to Baloch separatists. This was a clear case of terrorist financing by India; however, no action was taken by any of the organizations including the global watchdog. Still, Pakistan remains on the list of jurisdictions with increased monitoring despite showing excellent performance in completing the FATF action plan.
Apart from Pakistan, recently media highlighted that United Arab Emirates (UAE) might be placed on the global watchlist due to a weak anti-money laundering framework. The UAE mutual evaluation report was released in April 2020. The report summarizes that the country has made significant improvements in its AML-CFT regime including developing a National Risk assessment. The report further highlighted that the UAE has demonstrated a high-level commitment to better understand and mitigate its money laundering/terrorist financing risk. The report states that UAE authorities initiated various steps to improve its AML-CFT regime which includes the implementation of an ambitious national AML strategy to strengthen the UAE’s overall AML-CFT framework.
The report further admits the role of UAE authorities regarding identification and admission of the role of terrorist financing-related activities. The UAE prosecuted 92 persons for terrorist financing-related charges, whereas 75 have been convicted, which stands at an 82% conviction rate. However, UAE’s compliance regarding FATF recommendation was rated as partially compliant on six, largely compliant on twenty-three, and compliant on eleven recommendations. Whereas, based on eleven immediate outcomes (IOs) their effectiveness measures were rated on a scale of high, substantial, moderate, medium, and low levels of effectiveness and were rated low on four, moderate for six immediate outcomes (IO), and substantial for one immediate outcome which related to investigation and prosecution.
The ratings assigned to UAE’s technical compliance and their effectiveness are way better than the compliance level of various members states of FATF. Though there are some concerns highlighted by the mutual evaluation team, however, UAE’s commitment to addressing those concerns and maintaining integrity of the financial system were acknowledged in the report. FATF aims to highlight deficiencies and work with the concerned jurisdiction to implement the action plan. However, those jurisdictions which are cooperating with the watchdog and are complying with their mandates must be appreciated and given due time and relevant support to improve their systems. Recently, Turkey was placed on the list of jurisdictions under increased monitoring. However, a recently published first follow-up report by the FATF highlighted improvements in their system and the rating assigned to recommendations 6, 7, 18, and 35 in mutual evaluation report was re-rated as largely compliant. Earlier the rating was assessed as partially compliant, however, the rating of recommendation 15 is downgraded to non-compliant. The overall compliance level of Turkey with FATF recommendation was rated as compliant on 11 of the 40 Recommendations and largely compliant on 20 whereas it remained partially compliant on 7 and non-compliant on 2 yet the country will remain on grey list until June 2022.
Comparing Pakistan, UAE, and Turkey with various member states of FATF, it transpires that these countries have established better controls to strengthen the AML-CFT regime. However, various member states of the FATF including founding members have still failed to introduce proper regulation in countering the risk of money laundering and financing of terrorism. The criminal exploits weaknesses of the AML-CFT regime in such countries by investing their dirty money in sectors like real estate, precious metal, gold, and other luxury items and then easily gets away with it. The global watchdog needs to act against those untouchable jurisdictions as well so that the main chunk of the illegal flow of funds can be curtailed.
Huzaima Bukhari, Advocate High Court & Adjunct Faculty at Lahore University of Management Sciences (LUMS), is member Advisory Board and Visiting Senior Fellow 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, with Dr. Ikramul Haq