Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan was placed on the list of Jurisdictions under Increased Monitoring in 2018 by the Financial Action Task Force (FATF) due to deficiencies in its anti-money laundering and combating financing of terrorism (AML-CFT) regime. Since then, the country is continuously working with the global money laundering and terrorist financing watchdog and its regional body Asia Pacific Group (APG) to strengthen its AML-CFT framework. Due to continued political commitment and efforts, significant progress has been made to address technical compliance of the two FATF action plans assigned to us in June 2018 and June 2021. The recent press release of FATF acknowledged Pakistan’s efforts regarding terrorism finance-related investigations and prosecutions that targeted senior leaders and commanders of United Nations designated terrorist groups. It further noticed significant rise in the number of money-laundering investigations and prosecutions pursued by Pakistani authorities.
The global watchdog further admired Pakistan’s efforts in addressing its action plan—as evident from the concluding press briefing of June 2022 Plenary meeting by the former president of FATF, Dr. Marcos Plyer. He admitted that Pakistan had largely addressed its 2021 action plan within the prescribed timeline. In the same meeting, the watchdog made an initial determination that after Pakistan substantially completed its two action plans, covering 34 items; the next step would be an on-site visit by an FATF team very soon to verify the implementation of Pakistan’s AML-CFT reforms and the necessary political commitment to sustain implementation and improvements in the future.
In terms of laws and regulations, Pakistan has been steadily moving forward with the implementation of FATF’s 40 Recommendations. However, effectiveness remains a challenge. The updated legal frameworks help in addressing money laundering and terrorist financing challenges. It supports the establishment of financial intelligence units and authorities earmarked for financial investigations coupled with specialists’ units tasked with identifying and confiscating the proceeds of crime. Albeit investigations, and prosecutions of money laundering and terrorist financing, higher success ratio are still to be achieved.
However, due to complications in dealing with cross-border elements, and the absence of technical and qualified staff, Pakistan’s performance in countering criminal proceeds remained low. This fact is highlighted in various international publications including Mutual Evaluation Report 2019 which further highlighted that recovery and convictions for ML and TF offenses are in contrast with risk profiles.
Pakistan’s compliance with FATF mandate is entering the second phase where FATF’s team will ensure effectiveness of our AML-CFT regime and its satisfaction will prove that laws and regulations to counter AML-CFT are effectively implemented. The team will make this assessment on 11 immediate outcomes; the rating scale is divided into four categories:
- High level of effectiveness (HE), where the Immediate Outcome is achieved to a very large extent. Minor improvements are needed;
- Substantial level of effectiveness (SE), where the Immediate Outcome is achieved to a large extent;
- Moderate improvements are needed. Moderate level of effectiveness (ME), where the Immediate Outcome is achieved to some extent. Major improvements are needed; and
- Low level of effectiveness (LE), where the Immediate Outcome is not achieved or achieved to a negligible extent and Fundamental improvements are needed.
Pakistan’s effective rating is quite weak and 10 immediate outcomes are rated as “LE” whereas 01 outcomes are marked as “ME”. To improve its effectiveness rating Pakistan must extend its efforts beyond passing regulations and demonstrate actions that corroborate with its risk profile.
FATF’s Report on the State of Effectiveness and Compliance with the FATF Standards highlights that effectiveness is a global issue. The report states that: Nearly all (97%) of 120 assessed countries have low to moderate effectiveness ratings for preventing money laundering and terrorist financing in the private sector. In particular, the non-financial sector performs poorly in terms of risk awareness and applying preventive measures. In general, private sector entities need a change of culture in applying a truly risk-based approach to conduct customer due diligence, keep records, and file suspicious transaction reports.
In the second phase, the FATF team will assess our performance based on immediate outcomes to make sure that our financial system and the overall economy are protected from the potential threats of money laundering and terrorist as well as proliferation financing. In order to pass this test, Pakistan should focus on improving policy, coordination, and cooperation-related issues as highlighted in the Mutual Evaluation Report 2019 to mitigate the potential risk of AML-CFT. The law enforcement agencies need to reassess control already implemented by the banking and other non-banking financial institutions including Designated Non-Financial Business and Professions (DNFBPs) to make sure that the proceeds of crimes do not penetrate our financial system.
Moreover, Pakistan should work on actively involving the private sector apart from banks. They should be consulted and involved in the process of national risk assessments. Pakistan should work on training the law enforcement agencies’ officials to enhance their understanding of predicate offences, and potential threats of terrorist financing to improve their coordination with each other. Though we have complied with the technical side of the action plan of FATF, yet our current legal framework, which includes laws, as well as regulations, needs further improvements at various levels to conform to global standards.
Pakistan needs to improve its action plan and develop sector-specific policies for identifying the magnitude of risk they are posing to our financial system. This can only be possible when all the sectors implement a comprehensive risk-based approach in the light of FATF recommendations and laws and regulations implemented by the government. The sector-specific guidelines can play an important role in improving the controls to improve the AML-CFT framework. Therefore, the relevant regulations should focus on introducing these guidelines so that the concerned industries should allocate resources, to prioritize the capacity building and training of their relevant staff. It is necessary for successfully implementing the measures to prevent and mitigate potential threats of money laundering and terrorist financing.
Another factor that can be helpful to improve the effectiveness of our AML-CFT regime is seeking international cooperation. As per the Mutual Evaluation Report 2019, Pakistan has initiated Mutual Legal Assistance Treaties on criminal matters for 4 whereas 14 are in progress. Similarly, transfer of offenders is 8 whereas in extradition matters these numbers are 30 out of which 3 are in progress whereas 5 on re-admission.
The same report further highlights that foreign mutual legal assistance requests sent to Pakistan in the last five years from (2013-2017) show that the National Accountability Bureau (NAB) received 18 requests, out of which 14 were responded to whereas 4 are pending, and no request was refused by NAB. Similarly, Federal Board of Revenue’s Customs Wing received two requests, and both were sent back to the relevant jurisdictions.
The Anti-Narcotic Force (ANF) received two requests pertaining to drug-related offenses, that were both attended. Similarly, in extradition cases, Pakistan received a total of 41 requests from treaty and non-treaty countries out of which 28 requests were initiated by the treaty countries whereas 13 by non-treaty countries. Pakistan denied 10 requests but accepted 9 while 22 requests were under process. This is the only immediate outcome rated as moderate. However, we still have weaknesses in our extradition laws which are required to be addressed on priority basis. Pakistan also needs to expand the number of memorandums of understanding with foreign jurisdictions to improve financial intelligence sharing and seeking their cooperation to combat illicit flow of funds. Similarly, our legislature needs to revisit the definition of beneficial ownership in the light of FATF’s new guidelines as well as policies related to legal arrangements and legal persons to effectively attract international cooperation.
Pakistan being the fifth largest populous country with weak financial system can have serious repercussions for the global community. It is thus imperative that our financial institutions and DNFBPs apply preventive measures based on risk profiling and report suspicious transactions to minimize potential threats. It is high time for us to appreciate the importance of this issue. We are dealing with it since 2016 when FATF swiftly warned us to address deficiencies in its AML-CFT regime. It is over four years now that we have been officially placed on the list of Jurisdictions under increased monitoring. Though we have so far substantially addressed the technical compliance-related part of the FATF action plan, yet there is urgency to realise that our addressing of the FATF action plan, on the one hand, can improve our financial sector’s integrity and on the other ensures economic growth. These goals, however, will only be achieved with determination and a skilled workforce otherwise we will continue to face unending embarrassment on a global level.
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