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Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
The four-day long sixth plenary meeting of the Financial Action Task Force (FATF) concluded on March 4, 2022 with adoption of amendment to recommendation 24 and its interpretive note. The purpose of amendment is to prevent the misuse of legal persons for money laundering or terrorist financing and to ensure that countries are maintaining adequate, accurate, and up-to-date information on the beneficial ownership and control of legal persons. This action will further strengthen the global response in dealing with money laundering. However, the most noticeable development was the placement of United Arab Emirates (UAE) among the list of jurisdictions with increased monitoring or “Grey List” along with Pakistan, Turkey and 21 other jurisdictions. UAE has expressed its commitment that the country will meet the list of requirements including increasing prosecutions and identifying the sanctions evasion.
Regarding Pakistan, the global watchdog maintained its stance of keeping it marked as a jurisdiction under increased monitoring (Grey List) and expects that the country will address the remaining action items agreed to under action plans of 2018 and 2021. Currently, Pakistan has completed 26 of the 27 action items of its 2018 action plan whereas 6 of the 7 action items were completed in response to the action plan agreed in June 2021 in order to address additional deficiencies highlighted in Pakistan’s Mutual Evaluation Report of 2019.
As per the FATF’s Press release, Pakistan is now required to demonstrate that Terrorist Financing (TF) investigations and prosecutions, target senior leaders and commanders of UN-designated terrorist groups. The country is further required to enhance the impact of sanctions by nominating individuals and entities for UN designation and restraining and confiscating proceeds of crime in line with Pakistan’s risk profile.
The updated consolidated assessment ranking of Pakistan shows that it is fully compliant on eight recommendations, partially compliant or with moderate shortcomings on three, largely compliant on 27 with minor shortcomings, and non-compliant or with major shortcomings on two recommendations, respectively. However, Pakistan’s effectiveness measures were rated on a scale of high, substantial, medium, and low levels of effectiveness and based on 11 immediate outcomes (IOs). Pakistan’s levels of effectiveness were rated low on 10 and medium for one IO, which relates to international cooperation.
Though Pakistan has improved its technical compliance level, yet the country still needs solid efforts to pitch itself for the whitelist. In upcoming review of June 2022, the FATF will not only assess our level of technical compliance but will also review the effectiveness of the framework. Therefore, we need to revisit the existing Anti-money Laundering/Combating the Financing of Terrorism (AML-CFT) regime and address the anomalies in legislative and enforcement framework in order to bring it at par with global best practices.
Over the last few months, Pakistan has amended its AML-CFT laws, however, these amendments are not aligned with international best practices and are creating conflict of interest at many levels. Similarly, the new framework extends the monitoring and supervisory role to multiple committees such as National Executive Committee, General Committee, and AML-CFT Regulatory Bodies, and these committees are represented by politically exposed persons, namely, the ministers and federal secretaries.
Additionally, the Financial Monitoring Unit (FMU) has an important role to play in combating money laundering and terrorist financing. The FMU should be autonomous and operate without any interference and influence. However, in the current setup, the FMU will perform under the General Committee which has federal secretary, Chairman of National Accountability Bureau (NAB), and other law enforcement agencies’ heads in its formation. Interestingly most of the members of the general committee and executive committee have questionable backgrounds, whereas, most of the members of the executive committee are facing allegations of corruption that compromises transparency of the AML-CFT regime.
In the upcoming review, FATF will consider all aspects of our compliance and measure effectiveness of the framework to ascertain that it can protect the financial system from being misused in the hands of criminals. Apart from the technical compliance and its effectiveness, Pakistan is falling behind in addressing the most pressing concern of the FATF which requires the country to demonstrate that TF investigations and prosecutions, target senior leaders and commanders of UN-designated terrorist groups and enhance the impact of sanctions by nominating individuals and entities for UN designation and restraining and confiscating proceeds of crime in line with Pakistan’s risk profile. However, the role of charitable organizations in terrorist financing activities cannot be ignored.
Even the National Risk Assessment completed in 2017 and signed by the finance minister did not assign risk assessment to this sector. Mutual Evaluation Report highlighted the deficiencies in this sector and urged Pakistan to initiate a comprehensive and targeted outreach programme which will not only mitigate the Terrorist Financing Risk, but will also enlist the mechanism of monitoring and investigations into TF abuse, without restricting the legitimate activities of the non-profit organisations. It is specifically mentioned in the mutual evaluation report that Pakistan’s actions regarding terrorist financing threats are not consistent with its risk profile. The report says that terrorist financing cases are identified by various agencies but not via the financial intelligent unit.
Pakistan has registered 228 terrorist financing cases and convicted 58 individuals. The statistics mentioned in the report highlight that out of 58 convictions 49 were made in the province of Punjab, however, the remaining nine terrorist financing convictions were made in all other provinces which is in contrast to the risk profile of the country. Similarly, the mutual evaluation report highlighted that Pakistan’s law enforcement agencies initiated 2,420 investigations of Money Laundering in the last five years from 2013-to 2018, out of which 354 prosecutions were made but only one got convicted by NAB. However, no conviction was made by the investigation initiated by the Anti-Narcotics Force, Federal Investigation Agency, Customs authorities, etc.
Though the current figure is not known, however, based on the statistics reported by the Asia Pacific Group, it shows that despite the initiation of a high number of money laundering investigations, the ratio of prosecution and conviction is very low, which confirms that Pakistan agencies have a low level of understanding about money laundering and terrorist financing. Another factor is being focused on seeking international cooperation in combating money laundering and terrorist financing. This also demonstrates the seriousness of the government to counter illicit flow of funds including corruption and money laundering, but the Asia Pacific Report states that Pakistan has initiated only one request to seek international cooperation for terrorism, including terrorist financing. Similarly, one request was made to seek corruption-related information as well.
Keeping in view Pakistan’s current ranking on technical and effectiveness of the immediate outcomes, it obtained a low level of compliance on almost 10 immediate outcomes which cannot be considered ideal and provides a base to the review team for keeping Pakistan in the list of jurisdictions under increased monitoring for another term. Moreover, Pakistan’s legal and operational framework does not align with international best practices. Therefore, it is an ideal time for the government to introduce structural changes in its AML-CFT regime which on the one hand improves efficiency of the law enforcement officials and on the other, devises a mechanism to comply with the FATF action plan in its true sense. We have mentioned in our various articles about the importance of creating an autonomous body to deal with all types of financial crimes which should operate without the influence of politically exposed persons. Without incorporating these international best practices in our AML-CFT regime we cannot expect to come out of this challenging situation.
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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