Money Laundering and Counter-terrorism Financing in the Legal System of Pakistan

Kamran Adil

Introduction

The Asia/Pacific Group (APG) On Money Laundering of the Financial Action Task Force (FATF) issued a Mutual Evaluation Report (hereinafter MER) on Pakistan in October 2019. It is an interesting read for anyone interested in understanding governance in Pakistan. It maps the trajectory of policymaking and implementation thereupon between the federal and the provincial governments. It also informs upon the interaction of foreign, economic, defence and internal security polices with each other. The instant write-up is exploratory in nature as it will try to examine the chief findings of the MER from the perspective of legal system of Pakistan; the exploration is being carried out in thematic manner:

International Legal Framework

1. FATF and Pakistan

The cardinal principle of ‘Pacta Sunt Servanda’ (agreements must be kept) implies that Pakistan has signified its consent to be part of the international legal framework that obliges it to follow FATF requirements. Research shows that FATF was established at a G-7 Summit in Paris, France, in 1989. But, in spite of not being a part of G-7, how Pakistan became part of the legal obligations emanating out of FATF that was a by-product of G-7? There is no straight answer to this question. In fact, international soft law enabled involvement of Pakistan into the FATF arrangements. The extant Charter of the FATF is styled as FATF Mandate (2012-2020) – these are the rules that govern the working of FATF. The Mandate provides for three types of affiliates:

1. Member Jurisdictions (outlined in Annex A and includes China and India)
2. Associate Members (outlined in Annex B and includes APG and FSRBs (FATF-styled Regional Bodies))
3. Observers (outlined in Annex C and includes international organizations like the UN, the IMF and the World Bank)

The network of agreements with the international organizations and member states along with endorsement by UN Security Council resolutions on counter-terrorism that integrated the international legal framework on money laundering with counter-terrorism financing constitute the international legal framework that binds Pakistan to follow the FATF requirements. It may be noted here that the International Monetary Fund (IMF) recently included compliance of FATF recommendations as structural benchmarking/condition for its Extended Fund Facility (EFF). The contractual obligation on behalf of Pakistan towards IMF is an additional binding element besides the international soft law in the form of UNSC resolutions and the obligations flowing from other international instruments/agreements. Though FATF is apparently rule-based and claims to be apolitical, to receive better treatment at FATF, Pakistan must strive to become its full-time member so that it can voice its views and concerns at the relevant forum.

2. APG and Pakistan

Insofar as the APG is concerned, it may be noted that it was established in 1997. It is presently governed by its Terms of Reference, 2012 that were agreed in 2012. India and Pakistan joined it in 2012; its Para 5.2 provides for mutual evaluation by the states part of the APG. The mutual evaluation is considered a ‘peer review’ process, and failure to comply with the process and its follow-up has been made consequential by linking it to international financial system through FATF and related bodies/organizations.

The Mutual Evaluation Report 2019

1. Résumé of the Report

Earlier a Mutual Evaluation of Pakistan was carried out in 2009. As a consequence, the Anti-Money Laundering Act, 2010, was promulgated in Pakistan. The regime of the offences dealing with money laundering and counter-terrorism financing, however, remained separate. The two regimes were concurrent, and not mutually exclusive. The MER 2019 is divided into eight chapters that deal in detail with technical compliance of the 40 Recommendations of the FATF and analyze the effectiveness of the compliance. Chapters 3 and 4 of the Report dilate upon Pakistan’s legal system and its effectiveness with special reference to criminal justice system. Chapters 1, 2, 5, 6, 7 and 8 elaborate on risks, coordination, supervision and international cooperation of Pakistan in the field of money laundering and counter-terrorism financing. Some key findings of MER are summarized and analyzed hereunder:

1. The MER has noted that Pakistan completed its own risk assessment in 2017 and rated itself ‘medium’. It was opined that Pakistan’s assessment about itself is not comprehensive;
2. Financial intelligence is used by Pakistan to only ‘a minimal extent’;
3. The investigations and prosecutions are not commensurate to Pakistan’s risk profile;
4. The Law Enforcement Agencies’ (LEAs) powers of seizure of property acquired by the ML/CT are not fully used;
5. Natural persons instead of legal persons have been subject of investigations and prosecutions by the LEAs;
6. Pakistan’s effort of implementing the UN Security Council Resolution 1267 through Statutory Regulatory Order (SRO) is not being used at all levels and non-banking sector must be made to implement it fully;
7. Pakistan’s non-formal sector of economy needs to be brought into the implementation mechanism to bring about the desired results.

Analysis

The key findings are important and must be examined and considered by the policymakers and academicians alike. The MER offers statistical data and analysis which must be interpreted in the context of Pakistan’s legal and justice system. Broadly, from viewpoint of legal system of Pakistan, following points merit consideration:

1. The legal framework of the criminal justice system in Pakistan is detection based and has little support for kinetic enforcement actions on preventive side. The FATF methodology of introducing a risk based approach is not flawless as it is designed in and around a formal economy and does not fully capture and measure the issues in an equity based and informal economy.
2. The concept of predicate offences has been borrowed from the Palermo Convention (the United Nations Convention against Transnational Organized Crime, 2000). The concept of ‘predicate offence’ envisions a primary offence that generates money that can be used in secondary offences of money laundering and terrorism financing; this requires proving two different offences that contribute towards each other. Section 2(s) of the Money Laundering Act, 2010 has defined it not conceptually but by way of reference. In any case, Pakistan’s criminal justice system that is divided between provincial and federal investigation, prosecution and adjudication institutions needs lot of capacity building and legislation in the areas of procedure and evidence to reckon with jurisprudence of predicate offences.
3. The money laundering and counter-terrorism financing, as noted in the Report, is directed towards largely natural persons. This focus, as observed in the Report, needs to be addressed but this can only happen when the criminal investigation related to legal persons are procedurally addressed by enabling legal synergy between the investigation, prosecution and registration entities. The principles of criminal liability of directors of the companies and other legal vehicles must also be interpreted in a manner that the benefits of veil of incorporations are denied to delinquents and fraudsters. This might require legislation besides case-law developed by the superior judiciary for its subordinate courts.
4. In the area of international cooperation, the predicate offences approach introduces the problem of double criminality. At the moment, Pakistan is using a broad characterization of predicate offences to widen the net of money laundering and counter-terrorism financing investigations and prosecutions, but when it comes to restitution of assets internationally and arrest of wanted white collar criminals, the problem of double/dual criminality in different jurisdictions becomes acute.
5. The collection of electronic and forensic evidence in criminal investigations must be streamlined by getting Pakistan’s forensic labs internationally accredited so that no question can be raised about the quality of evidence and about its conformity to the international human rights law.
6. The Report requires Pakistan to use ‘financial intelligence’, which is and can be used for furtherance of criminal investigations, but specific legislation is required to provide it evidential value of corroborative nature in addition with other evidence of primary nature that can then be used for prosecution and adjudication.
7. The laws of money laundering and counter-terrorism financing are different and offer two concurrent regimes for investigators and prosecutors. The concurrence of regimes offers opportunities for accused in cases of money laundering and counter-terrorism as they shop fora of adjudication and utilize case transfer legal provisions and jurisprudence to weaken the prosecution of cases registered against them.

Pakistan’s Experience with FATF

Pakistan’s FATF experience clearly underscores the political dimensions of this organisation. For instance, even when Pakistan was on the black or grey list, there was little financial pressure on the country. It received several bailouts from the IMF and generous assistance from the US. This was due to American dependence on Pakistan for counterterrorism cooperation. It is only after the growing Indo-US partnership, especially after Trump’s election, that the FATF has been used as a means of political leverage. And the goal posts keep being pushed back with demands to do more.

FATF double standards have also been underscored by international experts. For instance, the western elite FATF countries cannot explain the money laundering exposed by the Panama Papers, involving major Western banks. BCCI was penalised for drug money laundering but not one of its major clients, the CIA, which used the bank in the Iran Contra Affair. Nor have the links between BCCI and former US presidents George H W Bush and Bill Clinton been investigated. Meanwhile, drug trafficking remains a lucrative business in the West, apart from Western-sourced terrorism financing for ISIS. Consequently, several scholars and legal experts criticise FATF as a “tool that powerful countries use to force their preferences on others” and to “paint non-compliant states as rogue and unreliable”.

While Pakistan needs to take action for its own sake, it also needs to use its leverage with the US, such as in Afghanistan and counterterrorism, to ensure that its financial and security interests are not jeopardised. Pakistan should also highlight FATF’s double standards such as ignoring Indian support to TTP and BLA terrorists against Pakistan, and India’s own money laundering.

FATF: An Introduction

FATF is an inter-governmental body, including some international organisations, that was set up in 1989 by the Group of Seven (G-7) industrialised countries to combat the problem of drug and money laundering. After the 9/11 terrorist attacks, its mandate included Terrorism Financing (TF). In 2012, it was further extended to the financing of proliferation of weapons of mass destruction. Its “task” is to examine international money laundering mechanisms, monitoring legislative, financial and law-enforcement efforts at the national and international levels, reporting on compliance and issuing recommendations and standards to combat money laundering. Using relevant regulations of the OECD, World Bank, IMF and the UN — such as Security Council resolutions 1267 and 1373 relating to terrorist groups and terrorism financing — the FATF has evolved 40 recommendations on money laundering and TF. Non-compliant countries are first put on a grey list and given specific actions and policies to implement within a specific timeframe. They could also be subjected to sanctions and denial of funding from the IMF, World Bank and ADB, reduction in international trade and access to financial markets and international boycott. If they still fail to comply, they are placed on the black list with mandatory sanctions and international isolation. Currently, Iran and North Korea are black-listed.