Huzaima Bukhari & Abdul Rauf Shakoori
The Financial Action Task Force (FATF) has been striving to create an enabling environment that facilitates both government and the private sector to gear up against money laundering and terror financing challenges. Technological advancements, the development of tax havens, and complex corporate structures continue to enable criminals to hide their identity and their illicit activities such as drug trade, human trafficking, bribery, corruption, and misappropriation of public funds. These are then introduced in the financial system and laundered for further use.
To keep track of global developments and progress made by member countries, the FATF regularly convenes to identify and review jurisdictions with strategic Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) deficiencies. The four-day-long virtual meeting of the International Co-operation Review Group (ICRG) was concluded on February 25, 2022. The FATF reviews jurisdictions based on threats, vulnerabilities, or risks arising from the jurisdictions.
As per FATF protocols, a jurisdiction is reviewed when:
- It does not participate in an FATF-style regional body (FSRB) or does not allow mutual evaluation results to be published promptly; or
- It is nominated by an FATF member or an FSRB. The nomination is based on specific money laundering, terrorist financing, or proliferation of financing risks or threats coming to the attention of delegations; or
- It has achieved poor results on its mutual evaluation, specifically:
- it has 20 or more Non-compliant (NC) or Partially Compliant (PC) ratings for technical compliance; or
- it is rated NC/PC on 3 or more of the following Recommendations: 3, 5, 6, 10, 11, and 20; or
- it has a low or moderate level of effectiveness for 9 or more of the 11 Immediate Outcomes, with a minimum of two lows; or
- it has a low level of effectiveness for 6 or more of the 11 Immediate Outcomes.
Pakistan is one of those nations marked by the global watchdog as a jurisdiction with increased monitoring due to strategic deficiencies in its AML/CFT regime. Pakistan was assigned this designation initially in June 2018. However, despite a lapse of more than 40 months Pakistan’s journey to satisfy the global community regarding its efforts related to AML-CFT is not ending. Though Pakistan’s compliance on the technical side has significantly improved, but their effectiveness ranked as poor. This fact can be verified through the recent consolidated rating assigned to Pakistan, based on the 3rd follow-up report, which has marked Pakistan as fully compliant on 8 recommendations, partially compliant or with moderate shortcomings on 3, largely compliant on 27 with minor shortcomings, and non-compliant or with major shortcomings on 2 recommendations, respectively. The same consolidated assessment report further states that Pakistan’s effectiveness measures were rated on a scale of a high, substantial, medium, and low levels of effectiveness, based on eleven immediate outcomes (IOs). Pakistan’s levels of effectiveness were rated low on 10 and medium for one IO, which relates to international cooperation. The recent consolidating rating, released in February 2022, shows that no progress in compliance level was noted in the ICRG Group’s current meeting.
Though Pakistan complied with 30 action items the remaining four action items are yet to be complied with. FATF wants Pakistan to address concerns related to the provision of evidence that it actively seeks to enhance the impact of sanctions beyond its jurisdiction by nominating additional individuals and entities for designation at the UN; and 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. The consolidated assessment rating released in February 2022 noted no change in Pakistan’s compliance ranking. Though final decision is awaited till the time of writing these lines, yet it is widely believed that the detailed review regarding Pakistan’s progress will be made in June 2022.
Apart from these concerns, Mutual Evaluation Report further raised concerns regarding AML-CFT understanding. In this regard, the role of regulators becomes most significant in providing guidelines and sector-specific training to the concerned professionals. However, this role is not being played in its true sense. The State Bank of Pakistan (SBP) is a regulator of the banking and non-banking financial institution whereas the Financial Monitoring Unit (FMU), a Financial Intelligence Unit of Pakistan, is responsible for evaluating suspicious transactions, sharing information of money laundering related with law enforcement agencies, detecting terrorist financing and other financial crimes. However, it appears that both these institutions either lack expertise and skills or have no interest to enforce international best practices standards in their domains. The previous slapping of penalty of $225 million by the New York State’s Department of Financial Services (NYSDFS) on Habib Bank Limited and now Federal Reserve Board imposes a penalty of $20.4 million on the National Bank of Pakistan (NBP) for anti-money laundering violation is a charge sheet for both SBP and FMU. The Parliament should summon the heads of both institutions and should ask them to explain the reason for their failure in time to detect the deficiencies in their AML-CFT regime which brought us international embarrassment.
The Parliament should further inquire from SBP and FMU that since March 14, 2016, when NBP and its branch in the United States entered into a written agreement with the Federal Reserve Bank and NYSDFS to correct deficiencies of the branch in compliance with the BSA/AML requirements in 2016. What actions have these institutions taken to evaluate the NBP’s AML-CFT compliance program? If the NBP’s compliance program was evaluated by both institutions then what was the outcome? Parliament must inquire whether in case the domestic compliance program related to AML-CFT was working well then why the bank failed to implement the same parameters on its US operations. The terms of the Cease and Desist Order of Assessment of Civil Penalty (the Order) show that NBP was not even meeting the basic requirements of AML-CFT.
The Federal Reserve raised concern on the role of the senior management regarding AML-CFT compliance, BSA/AML compliance program, internal control, risk assessment, customer due diligence, retention of customer information, including suspicious transaction reporting. Similar concerns were raised in the Mutual Evaluation Report 2019. Apart from the financial institutions, the reports raised questions regarding SBP’s understanding of AML-TF risks. The report highlights that reporting of suspicious transactions does not commensurate with the country’s risk profile.
All these issues raised by either Asia Pacific Group (APG ) or the US regulator shows that our AML-CFT regime needs structural reforms. We have highlighted them in our various articles with respect to the existing framework of AML-CFT which is being run by federal secretaries and controlled by federal ministers, majority of whom are facing corruption allegations. Pakistan needs to revisit its existing AML-CFT framework and to form an independent body.
Moreover, a proactive and risk-based approach can help Pakistan in protecting its financial system and other sectors from misuse by criminals and terrorists and to emphasize providing technically sound professionals who have awareness and understanding of Money Laundering and Terrorist Financing risks. They should be given the mandate to set regulatory obligations and take enforcement actions while monitoring compliance with AML/CFT obligations. Criminal elements keep on identifying loopholes and exploring new avenues which can help them to conduct their illicit activities, hence, these regulatory institutions must be smart enough to tailor their approach in accordance with different risks arising from a variety of sectors.
Equilibrium must be achieved in a way that regulatory activities do not place unnecessary burdens on sectors, entities, and activities with low-risk ratings. This is critical for maintaining the momentum of formal economy which indirectly reduces overall Money Laundering and allied risks by increasing documentation and transparency. The transition from a broad one-fit for all policy to a sector-specific and risk-based approach will take time as it requires a change in the compliance and enforcement culture, and simultaeneously requires continuous commitment and investment in capacity building and training of resources. However, once implemented, a firm risk-based approach will enable Pakistan in chalking out appropriate strategies to address the full spectrum of risks spread across multiple sectors and entities.
Huzaima Bukhari, Advocate High Court & Adjunct Faculty at Lahore University of Management Sciences (LUMS), is a member Advisory Board and Visiting Senior Fellow 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 co-authored a book, Pakistan Tackling FATF: Challenges and Solutions, with Dr. Ikramul Haq