Pakistan: Dissecting FATF Failure

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

The incompetence and lack of understanding of the incumbent government has once again proven fatal as all their efforts to shift Pakistan from the list of jurisdictions with increased monitoring (grey list) to countries enjoying the status of cooperative jurisdictions were rendered futile. Repeated fiascos of coalition Government of Pakistan Tehreek-i-Insaf (PTI) on Financial Action Task Force (FATF), as well as on the economic front, are now becoming a serious impediment for sustainable growth of the country. Is there any limit to this government’s lies and its efforts to mislead and fool the nation, then taking cover of childish arguments like “India’s diplomatic maneuvering against Pakistan” or “biased behavior of international powers” whereas the actual problem lies within the government which so far has proved itself to be a complete failure?

FATF has been repeatedly raising concerns about Pakistan’s strategic deficiencies while tackling anti-money laundering and combating financing of terrorism (AML-CFT) regime. However, our passive approach to address the concerns of global community has become constant embarrassment for the entire nation.

The press conference of President of FATF, after Second Plenary meeting on June 25, 2021 was unusual for Pakistan because the government, due to its misleading statements already assured the nation that this time Pakistan would come out of the grey list. The Foreign Minister and the spokesperson proudly shared the progress of Pakistan on technical compliance. However, in an intellectually dishonest move, they avoided sharing the rating assigned by the FATF on the effectiveness of technical compliance which was graded as low on 10 immediate outcomes and medium on one immediate outcome as explained in Pakistan: Crucial FATF hearing, Daily Times, June 23, 2021.

The government, while celebrating FATF’s appreciating “our significant progress”, was still hesitant to accept its failure that despite lapse of more than three years. Pakistan is unable to satisfy the global community about our seriousness with reference to combating the financing of terrorism—see documents available at the website of FATF (https://www.fatf-gafi.org/publications/fatfgeneral/documents/outcomes-fatf-plenary-june-2021.html). 

It is an undeniable fact that after lapse of more than three years, FATF in its latest press release  has stressed Pakistan to demonstrate that terrorist financing investigations and prosecutions of targeted senior leaders and commanders of United Nations (UN) designated terrorist groups are taking place.

The FATF in ‘Jurisdictions under Increased Monitoring—June 2021’ has highlighted the following for Pakistan:

“Since June 2018, when Pakistan made a high-level political commitment to work with the FATF and APG to strengthen its AML/CFT regime and to address its strategic counter terrorist financing-related deficiencies, Pakistan’s continued political commitment has led to significant progress across a comprehensive CFT action plan. The FATF recognizes Pakistan’s progress and efforts to address these CFT action plan items and notes that since February 2021, Pakistan has made progress to complete two of the three remaining action items on demonstrating that effective, proportionate and dissuasive sanctions are imposed for TF convictions and that Pakistan’s targeted financial sanctions regime was being used effectively to targeted terrorist assets. Pakistan has now completed 26 of the 27 action items in its 2018 action plan. The FATF encourages Pakistan to continue to make progress to address as soon as possible the one remaining CFT-related item by demonstrating that TF investigations and prosecutions target senior leaders and commanders of UN designated terrorist groups.

In response to additional deficiencies later identified in Pakistan’s 2019 APG Mutual Evaluation Report (MER), Pakistan has made progress to address a number of the recommended actions in the MER and provided further high-level commitment in June 2021 to address these strategic deficiencies pursuant to a new action plan that primarily focuses on combating money laundering. Pakistan should continue to work to address its strategically important AML/CFT deficiencies, namely by: (1) enhancing international cooperation by amending the MLA law; (2) demonstrating that assistance is being sought from foreign countries in implementing UNSCR 1373 designations; (3) demonstrating that supervisors are conducting both on-site and off-site supervision commensurate with specific risks associated with DNFBPs, including applying appropriate sanctions where necessary; (4) demonstrating that proportionate and dissuasive sanctions are applied consistently to all legal persons and legal arrangements for non-compliance with beneficial ownership requirements; (5) demonstrating 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; and (6) demonstrating that DNFBPs are being monitored for compliance with proliferation financing requirements and that sanctions are being imposed for non-compliance”.

The six points mentioned by FATF in the above document vis-à-vis how to meet them are discussed below:

1. enhancing international cooperation by amending the Mutual Legal Assistance (MLA) law.
2. demonstrating that assistance is being sought from foreign countries in implementing UNSCR 1373 (adopted by the Security Council at its 4385th meeting, on 28 September 2001) designations—see further details at: https://www.un.org/securitycouncil/ctc/
3. demonstrating that supervisors are conducting both on-site and off-site supervision commensurate with specific risks associated with Designated Non-Financial Businesses and Professions (DNFBPs), including applying appropriate sanctions where necessary.
4. demonstrating that proportionate and dissuasive sanctions are applied consistently to all legal persons and legal arrangements for non-compliance with beneficial ownership requirements.
5. demonstrating 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; and
6. demonstrating that DNFBPs are being monitored for compliance with proliferation financing requirements and that sanctions are being imposed for non-compliance.

The Federal Board of Revenue (FBR) posted its role to regulate DNFBPs at website but neither updated, nor has shown any progress. Had some tangible cases been reported and progress in enforcing compliance revealed, we could have presented the same during the meeting of FATF from June 21-25, 2021. The failure and details of non-performance of FBR was evaluated in FBR: FATF challenges, Daily Times, March 14, 2021 with facts and figures obtained from the agency officially, but in three months, despite pointing out the shortcoming and how to remove the same, before the next crucial meeting, no heed was given. It is a matter of record and Prime Minister, Imran Khan, should order an investigation. The Standing Committees on Finance and Revenue of Senate and National Assembly must call the Chairman FBR and its team responsible for regulating and this public hearing should be shown live on official channel at PTV Parliament. It is not an issue of ruling government of the PTI but collective responsibility of all poetical parties as pointed out in  FATF & collective failure, Daily Times, June 23, 2021.  

The failure of the PTI Government and that of all political parties having representation in the Senate and National Assembly to design a comprehensive system supported by implementation in true letter and spirit and lack of  parliamentarian oversight has already cost the country heavily. These issues, challenges have been repeatedly highlighted and brought to the attention of everyone in our various articles. We suggested way forward to address these concerns repeatedly, but the PTI Government never showed interested in listening to sane voices. The new FATF action plan shows that our bureaucracy as well as the concerned minster has no interest in reading and learning the practical aspects. In Pakistan: Crucial FATF hearing, Daily Times, June 23, 2021, the issues pertaining to international cooperation and MLA in our existing set-up it was specifically mentioned:

“The regulation 37 and 38 relates to international cooperation and sets out guidance for Mutual legal assistance (MLA) and Mutual legal assistance for freezing and confiscation related matters. Despite the fact that Pakistan has taken multiple steps in enacting the new regulations, the restrictive condition imposed on the provision of MLA through the new requirement to inform the subject of the request, is a significant deficiency noting the risk and context of Pakistan. Procedures have not been developed to support timely handling of requests. There are limitations with respect to non-conviction-based orders. Pakistan’s compliance with R.38 is significantly compromised by the restrictive conditions including the requirement that the subject of any request to restrain or confiscate assets be notified of that request before the action can be taken, which prevents Pakistan from maintaining the confidentiality of requests and undermines its ability to act expeditiously”.

Apart from this article and in various others including the book, Pakistan: Tackling FATF Challenges & Solutions co-authored by us, we gave suggestions for the way forward to address issues pertaining to international cooperation, implementing UNSCR 1373, risks associated with DNFBPs, application of dissuasive sanctions, money laundering investigations and prosecutions including tracing, freezing, and confiscation of assets. The same are now highlighted by the FATF in its new actions plan with mandate to address it before June 2022.

While government was celebrating money laundering related laws back in 2020, it was specifically mentioned in Pakistan: Tackling FATF Challenges & Solutions (published on January 1, 2021), that actions related to anti-Money Laundering (Second Amendment) Act, 2020 do not meet the international standards and at various levels. In fact, it contradicts with the parameters formed to deal with risk-based approach. It has been explained time and again that monitoring of AML-CFT related matters through National Executive Committee (NEC) consisting of politically exposed persons (PEPs) pose greater risks. At a later stage, we raised questions about creation of multiple bodies and committees with overlapping jurisdiction as their scope is confusing and does not meet the global standards. Moreover, regulation of DNFBPs by self-regulatory bodies, goes against the principles of independence and could lead to conflicts of interest. However, neither the Government nor members of political parties present in Senate, national and provincial assemblies read and debated these, what to speak of implementing suggestions after taking input from all stakeholders. The undeniable fact is that no meaningful public debate is initiated and stakeholders have not been taken on board. The result is before us: constant embarrassment which we are facing as a nation since last three years.

Another dilemma of our system is our judicial system. There is no doubt left that the judiciary of Pakistan has a history of controversial and arbitrary decisions coupled with selective application of law and unfortunately this legacy continues till date. These factors have already shaken trust of the common man in this system and now this wrecked system is taking its toll on international level for Pakistan.

Poor understanding of laws, especially in cases with global footprints, is adversely impacting us. It is evident from 2019 report of Asia Pacific Group (APG) related to Pakistan. Para 35 of Asia Pacific Group (APG) Mutual Evaluation Report 2019  has quoted Transparency International Report. It states that two in five Pakistanis believe the judiciary is corrupt. Over two-thirds of Pakistanis, who indicated they had interacted with the courts in the past year, reported paying a bribe. Companies have insufficient trust in the independence of the judiciary and report low trust in the efficiency of the legal framework in settling disputes and challenging regulations. The Supreme Judicial Council (Article 209 & 210 of the Constitution) oversees the accountability of judges, however, the Council does not meet on a regular basis. 

According to the World Justice Project’s Rule of Law Index 2017–18, Pakistan ranks 105 out of 113 jurisdictions placing it well below global standards. The same report further talks about the understanding of the judiciary about AML-CFT related matters and noted that:

“The assessment team is of the view that the collection of insufficient evidence, ineffective use of investigative tools, the delays at the trial stage, and the low levels of awareness as to the elements of ML offence by the judiciary, are the main grounds for the disproportion among the figures of investigation, prosecution and conviction as well as not achieving a reasonable conviction rate.”

These notes from the Mutual Evaluation Report regarding our judiciary are disturbing for every Pakistani. However, no one in the higher judiciary has felt the need to challenge the observations made in the report, nor have they tried to address these deficiencies. It is hoped that the Chief Justice of Pakistan as well as the Chief justices of the High Courts will soon share with the nation as to how many conferences or workshops have been arranged in the last three years to educate judges dealing with the AML-CFT matters so that they could apply judicious mind while deciding cases instead of arbitrary approach to save us from this humiliation.

The most concerning aspect is that no one in the Parliament or media stresses the need for introspection by all institutions. The civil society by and large has not taken the issue of all out reforms, especially in judiciary. The only exception is Women’s Action Forum (WAF) that in 2020 sought under the Right of Information Act, 2017, data regarding assets, salaries and perks of honourable judges of Supreme Court and High Courts as well as of military leadership. However, no one responded, except Justice Qazi Faez Isa, who provided the details.

In the wake of March 16, 2009, the nation was very enthusiastic about dispensation of justice. All were expecting establishment of representative democracy and effective accountability, but instead they witnessed mounting tension amongst different organs of the State. Administration and dispensation of justice in Pakistan till today is a distant dream. In the wake of decisions, Chief Justice of Pakistan Mr. Iftikhar Muhammad Chaudhry v President of Pakistan PLD 2010 SC 61 and Dr. Mobashir Hassan & Others v Federation of Pakistan & Others PLD 2010 SC 1, the hope for rule of law, social justice and economic equality did temporarily emerge but was ruthlessly throttled by the ruling elites.

As a result of flawed policies of successive governments, civil and military alike, weak prosecution, poor enforcement by executive and decisions of judiciary leveraging globally designated terrorists the world has been labelling us as “sympathizers of terrorists”. Since long globally designated terrorist like Hafiz Saeed and Masood Azhar have remained out of shackles and recently last year before FATF meeting they were taken into custody or sent to jail. They have been getting bails from court on charges of murders and terrorism despite being placed among global list of terrorists. Just a few years back Hafiz Saeed was being nurtured as a political force under the name of “Difa-e-Pakistan” council. This council composed of famous politicians (including current interior minister) and former ISI Chief and many other people.

Another important case is of Omar Sheikh who was a prime suspect in Daniel Pearl case. He has been under arrest since early 2000’s and recently Sindh High Court (SHC) ordered his release. The Supreme Court also upheld the SHC decision. No doubt judiciary is independent, but then it is the failure of prosecution that just seems to please some powerful elements. It is quite clear and evident that our executive, judiciary, and establishment are handling crucial challenges on ad-hoc basis to buy more time, rather than going for fundamental structural reforms in institutions to be independent and efficient—mere making of laws, rules and regulations are not sufficient as the real test is their implementation. If we want to be acknowledged as a responsible nation, we must ensure that our actions are based on conviction and resolve to eliminate the menace of terrorism and its financing on war footing. It must be realised that adhoc actions in the nature of eye-wash will not help to avoid unpleasant situation, even in June 2022.

________________________________________________________________

Ms. Huzaima Bukhari, Advocate High Court and Visiting Faculty at Lahore University of Management Sciences (LUMS), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram, a leading law firm of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specializes in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals. She has to her credit over 1500 articles on issues of public importance, printed in various journals, magazines and newspapers at home and abroad.

She has coauthored with Dr. Ikramul Haq many books that include  Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Dr. Ikramul Haq, is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

She regularly writes columns for Pakistani newspapers and has contributed over 1500 articles on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.

_______________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation andVisiting Faculty at Lahore University of Management Sciences (LUMS).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

________________________________________________________

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). Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E – Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer. His notable publications are; Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan, Rauf’s Research on Labour Laws and Income Tax Etc. His articles includes; Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards., Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan,, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates. The recent book, coauthored with Huzaima Bukhari & Dr. Ikramul Haq is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46