Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
The Financial Action Task Force (FATF) released the Report on the State of Effectiveness and Compliance with the FATF Standards in April 2022. This report contains a comprehensive overview of the state of global efforts to tackle money laundering, terrorist financing, and proliferation financing. This report highlights that the countries have made significant progress in addressing technical compliance of the ‘FATF 40 Recommendations’ by introducing and enacting laws and regulations to handle money-laundering, terrorist and proliferation financing. It further accents that 76% of countries have satisfactorily implemented the FATF 40 Recommendations—a significant improvement as compared to 36% in 2012.
The report mentions that several countries are still facing issues in implementing FATF mandates. The most problematic part is investigating and prosecuting high-profile cross-border cases, preventing anonymous shell companies and trusts—many used for illicit purposes. While highlighting the potential money-laundering risks, faced by the countries, the report states drug trafficking is the major concern for two-thirds of countries. However, other money-laundering threats, identified in the Mutual Evaluations, emphasised that corruption contributes 16%, drug-trafficking, 18%, fraud and tax crimes, 15% respectively, organized crimes 9%, human trafficking 6%, foreign predicates, and counterfeit goods 3% each, whereas financial crimes, environmental crimes, third parties, 2% each respectively. The percentage of illegal mining contributes 1% and share of others is 7% of overall money-laundering threats identified.
Similarly, the report has also under-scored the major factors that play an important role in terrorist financing threats. The analysis of Mutual Evaluations of various countries shows:
- international terrorist groups pose the highest threat of terrorist financing, which contribute 18%
- domestic terrorist groups 13% and foreign terrorist fighters at 11%
- misuse of non- profit organisations (NGOs) at 11%
- financial sector abuse 10%
- self-funding 9%
- cash and informal sector 7%
- lone actors and small cells, and funds from illicit activities 6% each; whereas intermediaries (lawyers, accountant, trust and company service providers (TCSPs) etc.) and others contribute 1% and 7%, respectively
While analysing the status of the country’s money laundering, terrorist, and proliferation of financing risk assessment during Fourth Round of Mutual Evaluations, 59 countries were made part of the analysis. Out of these, 90% have completed their national risk assessments for money laundering, terrorist financing, and proliferation financing risks. The statistics show that 55% of the countries completed their first risk assessment, whereas 30% updated their risk assessment once and 13% updated their risk assessment twice—whereas 2% fall in another category. However, 9% of the countries, even after the Fourth Mutual Evaluation, failed to perform their national risk assessment for money-laundering and terrorist financing.
In February 2022 FATF introduced the Fifth Round Revised Methodology for assessing technical compliance with the FATF Recommendations and the effectiveness of Anti-money Laundering (AML), Combating Financing of Terrorism (CFT) and Counter Proliferation Financing (CPF) systems. The changes for the Fifth Round of the assessment will be undertaken through mutual evaluation reports by reducing the time of the mutual evaluation cycle from ten years to six years so that the jurisdictions should be assessed more frequently.
Fifth Round Revised Methodology also projects major risks and will ensure that they will focus on the areas where the risks are highest. FATF will focus on a result-oriented follow-up assessment process to make sure that concerns related to AML/CFT/CPF are properly addressed. FATF also introduced a mechanism for reviewing the jurisdiction based on the threats, vulnerabilities, or risks arising from the jurisdiction. The conditions for review include denying access to FATF-Style regional body (FSRB) mutual evaluation results, to be published timely—the FATF member or an FSRB nominates the jurisdiction. FATF has established eight FSRBs for disseminating the international standards on combating money laundering, financing of terrorism and proliferation (FATF Recommendations) throughout the world.
The FATF further states that if the jurisdiction obtains poor results on its mutual evaluation concerning compliance with FATF Recommendations, it will be selected for review provided it has 20 or more non-compliant (NC) or Partially Compliant (PC) ratings for technical compliance. The FATF will also select jurisdiction for review if it is rated for NC/PC on 3 or more of the following recommendations: 3, 5, 6, 10, 11, and 20. The jurisdiction will also attract review of FATF in case it achieved a low or moderate level of effectiveness for 9 or more of the 11 immediate outcomes with a minimum of two lows and/or it has a low level of effectiveness for 6 or more of the 11 immediate outcomes.
The above changes will be applied to the Fifth Round of assessment of the jurisdictions. However, while issuing the second enhanced follow-up report highlighting the progress made by Turkey in addressing concerns of FATF, it states that the countries should address most if not all technical compliance deficiencies by the end of the third year from adoption of their Mutual Evaluation Report. The report has further re-rated recommendations 23, 24, and 25. The original recommendations were rated as partially compliant. However, after addressing concerns by the Turkish authorities, recommendation 23 was rated as compliant whereas recommendations 24 and 25 were rated as largely compliant. However, the overall status of Turkish compliance with FATF recommendations is rated as Compliant 12. Largely compliant 22, and partially compliant 4, whereas 2 recommendations were rated as non-compliant with major shortcomings. Despite these improvements, Turkey will remain on the enhanced follow-up until June 2023, when the country will report back to FATF on progress made in addressing the AML/CFT concerns.
Similarly, Pakistan’s third enhanced follow-up report was released in July 2021 to assess the progress made in addressing deficiencies identified in its Mutual Evaluation Report. Though this report was based purely on the assessment of technical compliance, however, it did not analyse its effectiveness. In June 2021 FATF assigned an additional 6 points action plan by giving an extra one year for its compliance until June 2022. However, Pakistan’s progress so far indicates that it is compliant with 8 FATF recommendations, largely compliant with minor shortcomings of 27, partially compliant with moderate shortcomings 3, and non-compliant with 2 FATF recommendations. Similarly, their effectiveness ranking was based on eleven immediate outcomes with the level of a substantial level of effectiveness, moderate level of effectiveness, and low level of effectiveness. Pakistan has failed to get a substantial level of effectiveness, rated moderate level of effectiveness for one immediate outcome whereas ten immediate outcomes achieved a low level of effectiveness.
Pakistan is struggling to address FATF’s concerns since 2016. Further, a motion was moved in FATF against Pakistan by the United States in February 2018 to list it on the global terrorist-financing watchlist. Warning of this severe action was conveyed to then Prime Minister of Pakistan by intelligence and security agencies way back in 2016. The then leadership of military and intelligence agencies did not pay heed to this warning by the three-time-elected prime minister—later surfaced as Dawn Leaks. The prime minister ended up facing an inquiry commission for undermining national security. However, until today no serious effort is made to address what the three-times-elected prime minister (later disqualified by the apex court) conveyed in the high-level meeting, including highlighting very high costs attached for non-compliance.
It is almost six years now since that warning was issued and four years since Pakistan has been placed in the grey list. During this period, Pakistan witnessed three regimes, Pakistan Muslim League (Nawaz)—PMLN—Pakistan Tehreek-e-Insaf (PTI) and now collation government (also called united government) headed by the present President of PMLN. However, concerns of the global watchdog are still there. Though we have made enough progress to address the technical compliance, our compliance level does not meet the criteria to remove itself from the list of jurisdictions under increased monitoring. Pakistan is currently facing various challenges on political, economic, and foreign policy fronts. Non-compliance with FATF action plan is directly linked to economic and foreign relations. Moreover, our foreign direct investment and funding from various institutions are intrinsically attached to compliance with FATF mandates. The delay in addressing these concerns will further deteriorate our economic conditions. Time is right for the incumbent civil and military leaderships to make this issue a priority and address the remaining action items on war footing before June 2022 plenary to save the country from further global embarrassment.
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