Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s journey towards reclaiming its space as a cooperative nation with strong controls over anti-money laundering and financing of terrorism on the global index has entered its final phase. The last Plenary of the Financial Action Task Force (FATF), under the German Presidency of Dr. Marcus Player, admitted that Pakistan’s continued political commitment to combating both terrorist financing and money laundering had led to significant progress. Members of the global watchdog also acknowledged that Pakistan had satisfactorily demonstrated its commitment to terrorist financing investigations and prosecutions and to target senior leaders and commanders of UN-designated terrorist groups. It further noted that there was a positive upwards trend in the number of money laundering investigations and prosecutions, pursued in line with Pakistan’s risk profile. The members also found that Pakistan largely addressed its 2021 action plan ahead of the deadline.
In the recent Plenary, FATF made the initial determination that Pakistan has substantially completed its two action plans covering 34 items, and thus warranted an on-site visit to verify that the implementation of Pakistan’s Anti-Money Laundering and Counter Financing of Terrorism [AML/CFT] reforms have begun and that these could be sustained. For this purpose necessary political commitment remains in place to sustain implementation and improvement in the future. Despite admitting improvement in Pakistan’s AML-CFT framework, the global watchdog did not remove Pakistan’s name from the list of jurisdictions under increased monitoring and made it conditional to the on-site evaluation of compliance with FATF standards made so far. The exact date (hopefully as early as possible) for the on-site visit is yet to be finalized, FATF will continue to monitor COVID-19 situation.
The Minister of State for Foreign Affairs, Hina Rabbani Khar, in her press briefing, explained that on its 2018 action plan, Pakistan submitted the eleventh report to FATF which was unanimously acknowledged by the member states as largely compliant with no pendency of the action and later on further three reports with reference to 2021 action plan related to money laundering compliance were presented. The State Minister congratulated the nation for completing the action plan year ahead of the prescribed timeline. She added that this swift pace and progress were indicative of the comprehensive reforms and actions that had been carried out by Pakistan in the AML/CFT domain and the sustained momentum of efforts. Pakistan’s positive and speedy progress was greatly appreciated and welcomed by FATF members, she added.
Pakistan is in the grey list since June 2018. During these four years, Pakistan was slapped with two FATF action plans with 27 and 7 action items to address and during these four years, Pakistan’s pace towards addressing the FATF’s concerns vis-à-vis highlighting this issue at international forums and seeking their cooperation to address the country’s concerns was very poor. In various articles, we have persistently addressed this matter mentioning the problems with our compliance and the foreign office’s role yet no attention was paid to our suggestions. Pakistan has not yet fully complied with the FATF action plan but the outcome of the recent assessment ranked it as substantially complied. Convincing FATF to admit our progress and move on to the next step for evaluating the effectiveness level of our technical compliance is an achievement with the credit going to our foreign office team, people engaged to deal with FATF compliance, Pakistan armed forces, and intelligence agencies.
Pakistan is entering a new phase of compliance with the FATF action plan. The entire nation is anticipating that Pakistan will be removed from the grey list after the next plenary. However, the question arises if the new phase of on-site evaluation would be merely a symbolic trip to officially omit Pakistan from the grey list. However, it is not that simple. FATF measures the compliance level of any country by its technical compliances and their effectiveness. FATF assesses those ratings which reflect the extent to which a country has implemented the technical requirements of FATF Recommendations. While evaluating the country on technical compliance the watchdog also assesses that it has a proper framework of laws and enforceable means and the existence, powers, and procedures of competent authorities.
In the last few years, Pakistan amended Anti-Money Laundering Act, of 2010, and introduced regulations for different sectors that fall under the domain of the State Bank of Pakistan (SBP) as well as the Securities and Exchange Commission of Pakistan (SECP). Pakistan also introduced a new role for Statutory Regulatory Bodies. It also assigned powers to the Federal Board of Revenue (FBR) for monitoring Designated Non-Financial Businesses and Professions (DNFBP). However, this assessment does not include requirements for measuring the effectiveness of the AML-CFT framework in any jurisdiction. FATF uses separate parameters to assess the effectiveness of the framework which includes a component of the Methodology.
In the next phase of evaluating our system, FATF will assess if Pakistan’s current AML-CFT framework is achieving the required objectives and can be termed as an effective framework that can stop criminals from generating or hiding the proceeds of crime and also prevent the financing of terrorism. The watchdog will also figure out if there is any weakness in the framework concerning its laws, regulations, policies, and procedures.
As per the Report on the State of Effectiveness and Compliance with the FATF Standards, while evaluating AML-CFT framework, the assessment team looks at 11 Immediate Outcomes to determine the level of effectiveness of a country’s efforts. Countries deemed to be sufficiently effective receive a “substantial” or “high” rating of effectiveness (SE/HE) (as opposed to moderate to low ratings – ME/LE). Similarly, FATF Methodology, for assessing technical compliance with the FATF Recommendations and the effectiveness of AML/CFT systems guidelines states that measuring effectiveness could be about the intended result of (a) a policy, law, or enforceable means; (b) program of law enforcement, supervision, or intelligence activity; or (c) implementation of a specific set of measures to mitigate money laundering and financing of terrorism risks, and combating the financing of proliferation.
In this entire scenario, if we look at Pakistan’s compliance with FATF’s 40 recommendations, our level of effectiveness was ranked low on 10 immediate outcomes, while medium on one immediate outcome which pertains to international cooperation. Pakistan failed to obtain a substantial or high level of effectiveness for any of the immediate outcomes. Now if we compare this with FATF parameters for placing countries in the list of jurisdictions with increased monitoring and analyzing it with our current compliance level, Pakistan still needs to work hard for the satisfaction of FATF’s action plan.
According to FATF standards jurisdiction would be reviewed when:
- It does not participate in FATF-styled regional body (FSRB) or does not allow mutual evaluation results to be published promptly; or
- It is nominated by a FATF member or an FSRB. The nomination is based on specific money laundering, terrorist financing, or proliferation 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.
Though Pakistan has addressed issues about mutual evaluations and technical compliance, yet the performance of our compliance related to effectiveness measures does not qualify us to be placed back on the white list. Our current laws and regulations do not meet international standards. Pakistan Financial Monitoring Unit’s independence seems to be compromised. Former Finance Minister, Muhammad Ishaq Dar made it an autonomous body through a notification. It now works under the supervision of the General Committee comprising government cabinet secretaries that limit its independence. Further, the previous coalition government of Pakistan Tehreek-i-Insaf (PTI) tried to regulate it through different committees such as the National Executive Committee (NEC) having ministers qualifying as politically exposed people and considered high-risk majority of whom are facing corruption charges. The General Committee (Cabinet Secretaries), and the Financial Monitoring Unit (FMU) receive suspicious transaction reports and at the same time work under the influence of GC. Secondly, the role of various statutory Regulatory Bodies might come under question as well as it tantamount to conflict of interests.
Similarly, regulations related to Designated Non-Financial Businesses and Professions (DNFBP) are not aligned with international standards. The FATF team might show its concerns and ask for their revision as well. Moreover, FATF has not given us a clean chit regarding the compliance of terrorist financing investigations and prosecutions, targeting senior leaders and commanders of UN-designated terrorist groups but called it a positive upward trend in the number of money laundering investigations and prosecutions being pursued in Pakistan, in line with country’s risk profile.
Pakistan needs to work on dismantling the financial support of these individuals and organizations by introducing strict procedures for raising any type of donations/funding. Pakistan also needs to improve its risk profile, the policy concerning AML-CFT framework, and coordination among intelligence institutions to counter the creation, movement, and penetration of those illicit funds in our financial system.
We need to improve international cooperation so that the support to follow illicit money and criminals can be sought by passing and sharing critical information and exchanging financial intelligence to facilitate action against criminals and their assets. We also need to improve the supervisory regime in the light of concerns highlighted in the mutual evaluation report 2019 for financial institutions and DNFBPs. The supervisor should make sure that both sectors are applying preventive measures according to their risk profile and timely reporting suspicious transactions.
Pakistan should also improve its financial intelligence, operation of legal persons and arrangements, money laundering investigations, and prosecutions about which concerns have been shown by the Asia Pacific Group (APG) Mutual Evaluation implying doubts on our judiciary’s understanding of AML-CFT matters. All these actions require sincere efforts and continuous monitoring by a skilled workforce.
Pakistan can only achieve the required objectives if its AML-CFT framework is operating according to global standards coined by FATF. Evaluation will become a tough call for Pakistan, as FATF’s presidency is transferred to Singapore.
Moreover, this evaluation will be based on the personal judgment of FATF members (most probably APG will form a team to evaluate the effectiveness of our compliance). It will enhance the role of the Foreign Office to improve our relations with the member countries and keep them updated about our progress and efforts in countering the illicit flow of funds. Coordinated efforts by all stakeholders (Foreign Office, Interior Ministry, FMU, FATF Secretariat, armed forces, Director General Military Operation [DGMO], all intelligence agencies, SBP, SECP, FBR and others) will hopefully bring us good news in October 2022.
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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
The recent publication, co-authored by these writes with Huzaima Bukhari, is:
Pakistan Tackling FATF: Challenges & Solutions
https://www.amazon.com/dp/B08RXH8W46 and https://aacp.com.pk/
