Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
The first meeting of the Financial Action Task Force (FATF) after Pakistan’s exit from the list of jurisdictions under increased monitoring (commonly known as the Grey List) was held from February 22-24, 2023. It was the second plenary meeting under the Presidency of T. Raja Kumar of Singapore, attended by more than 200 delegates from around the world to discuss various matters at FATF headquarters in Paris.
Important topics covered in these discussions included the Russian invasion of Ukraine, adoption of mutual evaluation reports of Indonesia and Qatar, additions to and removal of countries from the list of jurisdictions under increased monitoring, approval of methodology and procedure for the round of 5th mutual evaluation, ensuring transparency of beneficial ownership, disruption of financial flows from ransomware, and implementation of FATF requirements for virtual assets and virtual assets service providers. The participants also finalized the report highlighting links between money laundering and terrorist financing in the Art and Antiquities Market. The representatives of the meeting selected Jeremy Weil from Canada as their vice president.
The meeting concluded with a statement relating to Russia noting: “The Russian Federation’s continuing and intensifying war of aggression against Ukraine runs counter to FATF’s principles of promoting security, safety and the integrity of the global financial system and the commitment to international cooperation and mutual respect upon which FATF Members have agreed to implement and support the FATF Standards. As a result, the FATF Plenary has today suspended the membership of the Russian Federation. This step will create further problems for the Russians as well as the entire world relating to the initiation of financial transactions. The members of the watchdog consider it important to ensure transparency and beneficial ownership and prevent criminals from hiding illicit activity behind opaque corporate structures”.
Discussing the mutual evaluation reports of Indonesia and Qatar, FATF assessed Indonesia in the respect of its membership request, enjoying an observer status of FATF since 2018. During evaluation, the watchdog appreciated Indonesia’s strong legal, regulatory, and institutional framework, resulting in robust technical compliance in several areas. The watchdog further commended Indonesia’s efforts in curtailing terrorist financing but stressed upon the need to pursue larger-scale money launderers, expand the scope of asset confiscation, while improving risk-based supervision of designated non-financial businesses and professions. It was also asked to use effective and dissuasive sanctions in both the financial and non-financial sectors for non-compliance along with preventive measures. Though the country has yet not been approved for membership, but it will continue to work for FATF membership.
Similarly, according to the outcome of Qatar’s assessment, the country has made improvements on many fronts that include developing a stronger national understanding of money laundering and terrorist financing risks. However, FATF seeks further progress in the response of law enforcement towards money laundering/financing, availability and access to beneficial ownership information and strengthening of target-based financial sanctions for proliferation financing.
The FATF placed South Africa and Nigeria on the list of jurisdictions under increased monitoring. Both countries were given comprehensive action plans, like aligning national Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) strategy with those of national strategies relevant to high-risk predicate offenses, improvement in international cooperation, improving supervision relating to financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs), beneficial ownership obligations, investigations and prosecution of terrorist financing, and risk-based/targeted outreach of Non-profit organizations (NPOs). The FATF insisted that South Africa improve its system regarding Mutual Legal Assistance (MLA) requests and ensure the effective implementation of targeted financial sanctions demonstrating an effective mechanism to identify individuals and entities that meet the criteria for domestic designation.
FATF removed Morocco and Cambodia from the list of jurisdictions under increased monitoring (Grey List) admitting their progress in improving AML-CFT regimes. Efforts of both countries in removing technical deficiencies identified by FATF in February 2019 and 2021, to meet the commitment of its action plan, were highly appreciated.
FATF’s decision having impact on Pakistan is approval of its methodology for 5th round of the mutual evaluation, commencing in 2024 and to continue for six years. During this period, FATF will review seven (7) member jurisdictions every year. Preparations by FATF-Style Regional Bodies (FSRBs) for the next mutual evaluations also came under discussion. Pakistan as a member of FATF-Style Regional Body (FSRB), Asia Pacific Group (APG) should keep in mind the cycle of six years and reduction of time between the mutual evaluations.
Although Pakistan has been recently removed from the list of jurisdictions under increased monitoring; but our compliance with FATF recommendations is not ideal. We still have to address the technical compliance-related concerns of the partially and largely compliant recommendations of FATF. Similarly, the status of the effectiveness of our compliance is poor, and out of eleven (11) Immediate Outcomes (IO), Pakistan’s rating on ten (10) immediate outcomes is poor.
With changing circumstances, orthodox approaches to run businesses and moving funds are being replaced with technology and FATF is incorporating new guidelines to address modern times’ concerns for ensuring transparency to save global financial centers from the proceeds of crime.
The recent strategic initiatives of FATF include its approach in dealing with ransomware attacks as well as implementation of FATF requirements for virtual assets and virtual asset providers including the use of new technology.
Considering the above initiatives, Pakistan AML-CFT framework needs serious improvements to accommodate the new technicalities of financial crimes. Pakistan Anti-Money Laundering Act, 2010 needs amendments to address conflicting provisions while aligning it with international standards to accommodate specific technology-related issues. The law should also be more comprehensive regarding tracking beneficial ownership-related matters, which means modernizing it to synchronize with the requirements of emerging financial markets.
Pakistan must realize that it has two years to improve its AML-CFT-related framework, technical compliance and effectiveness. As soon as the 5th mutual evaluation process starts, it would not be able to convince the FATF about anomalies in its legal and procedural systems. Therefore, it continues to face a potential threat to re-joining the list of jurisdictions under increased monitoring. This is the right time for Pakistan to streamline its affairs to avoid embarrassment on the global index.
Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions.