Pakistan’s FATF Challenge

By: Asad Hussain

Grey must not convert into black!

Pakistan has been included in its grey list by the Financial Action Task Force for not stopping the ‘financing of terrorism’. Despite hectic diplomatic efforts to avoid the preordained fate, the decision was taken on June 28 at the plenary session of the Financial Action Task Force (FATF) in Paris, France, where caretaker Finance Minister, Shamshad Akhtar, represented Pakistan. The announcement is especially shocking as it came a day after Pakistan presented a comprehensive 26-point plan of action to the FATF to stifle funding for militant groups.

The international watchdog against money laundering and financing of terrorism, the Financial Action Task Force (FATF), has put Pakistan on a list of “jurisdictions with strategic deficiencies,” also known as the grey list. FATF’s reasoning is Pakistan’s “structural deficiencies” in anti-money laundering (AML) and combating financing of terrorism.

Pakistan has been placed among the jurisdictions (states) with strategic deficiencies: Ethiopia, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen. It will remain on the list for a year or so and will eventually be left out of it as it has in the past. Pakistan remained on the FATF’s grey list from 2012 to 2015.

The process began in February 2018 when the FATF approved Pakistan’s nomination for monitoring under its International Cooperation Review Group (ICRG). Pakistan was asked to prepare a plan to address the concerns of the international body and obtain its approval, or it could risk being moved to the black list. So, it presented a 26-point plan of action for the FATF planetarium with a commitment to implement it over a period of 15 months to address the concerns of global community.

Placement on the grey list could harm Pakistan’s economy as well as its international position. Earlier, Shamshad Akhtar had urged the FATF to remove Pakistan from its grey list. While the 37-nation FATF plenary began its process on Pakistan’s 26-point Action Plan over a 15-month period, the Pakistani delegation informed the guard of the steps that Islamabad had taken to eliminate money laundering and financing of terrorism to prevent the country from being placed on the grey list.

Many believe that Pakistan’s placement in the grey list is unjustified. There are many other countries with much higher risks that are nowhere to be found on either the grey or the black list. The Anti-Money Laundering Index of Basel Institute of Governance ranks 146 countries, based on money laundering and terrorist financing risk, corruption, public transparency and accountability, etc. Although Pakistan’s score on the index had been worsening in recent years, it has never been ranked as an extremely high-risk country. In 2017, Pakistan was ranked 46, meaning thereby that there were 45 other countries that have higher AML/CTF risks than Pakistan. Interestingly, most of these countries like Afghanistan, Sudan and Nigeria that were ranked 2, 29 and 33, respectively, have not been nominated for inclusion in the grey list.

Furthermore, it is not the first time that Pakistan has been placed on the grey list. In fact, it was as recently as 2015, when Pakistan last got out of this list. But the way it has been highlighted in media this time around is unprecedented.

Irrespective of these anomalies, however, the government cannot absolve itself of the responsibility of creating embarrassment at such a critical juncture when the country is looking to attract investment under CPEC. It is likely to shatter investor confidence and take a serious toll on FDI, remittances and trade, further worsening the balance-of-payments crisis.

What’s really worrying is that Pakistan’s inclusion in the grey list is not an isolated incident. The UK’s National Crimes Agency’s National Strategic Assessment of Serious and Organised Crime in 2018 found out that Pakistan was one of the five countries with most persistent impact across most of money laundering threats in the UK. Moreover, Pakistan is one of the three most ‘commonly seen’ source countries for politically exposed persons investing in the UK. The International Narcotics Control Strategy Report in 2014 also noted that the black market economy in Pakistan was generating substantial demand for money laundering and illicit financing.

The problem, therefore, is much larger than extremist religious organisations that are frequently mentioned in news reports and also includes vast amount of black money that is being laundered abroad. The vested interests of those involved have kept these channels open, also providing conduits for terrorism financing.

About the action

The FATF is an inter-governmental body established in 1989 to combat money laundering, terrorist financing and other related threats. FATF maintains two different lists of countries: those that have deficiencies in their AML/CTF regimes but they commit to an action plan to address these loopholes, and those that do not end up doing enough. The former is commonly known as grey list and the latter as blacklist.

Once a country is blacklisted, FATF calls on other countries to apply enhanced due diligence and counter measures, increasing the cost of doing business with the country and in some cases severing it altogether. As of now, there are only two countries in the blacklist — Iran and North Korea — and seven on the grey list, including Pakistan, Sri Lanka, Syria and Yemen.

Implications for Pakistan

FATF uses peer pressure through the age-old technique of name-and-shame. There are many factors at play and it remains unclear how negative Pakistan’s placement on the grey list will eventually turn out to be.

There is, however, no debate that it is indeed a negative. Here are some of the ways in which grey listing could affect Pakistan.

Pakistan’s banking channel could be adversely affected as it is inevitably linked with the international financial system.

The impact on Pakistan’s economy could be relatively wide, touching imports, exports, remittances and access to international lending.

Foreign financial institutions may carry out enhanced checking of transactions with Pakistan to avoid risk of violations pertaining to money laundering and financing of terrorism.

They may ask more questions and apply more checks. Some such institutions may also avoid dealing with Pakistan’s financial system altogether.

Another affectee is the sentiment of foreign investors. That Pakistan has been placed on the grey list has been covered in international news media and the fact will not go unnoticed by potential investors. Stock prices at Pakistan Stock Exchange (PSX) appear to have already felt this impact.

Perhaps the biggest threat from being placed on the grey list is Pakistan could be pushed further down to the black list.

This black list comprises Iran and North Korea, the two countries the West loves to hate. But placing Pakistan on the black list is probably a step too far to be on the cards at this stage.

These potential implications of grey listing need to be balanced against past experience.

Pakistan was on FATF grey list from 2012 to 2015, when it completed an IMF programme and also raised funds from international bond markets.

The country has also survived far graver financial challenges, such as those posed by nuclear explosions in 1998.