The FATF Conundrum

The FATF Conundrum

How to avoid being blacklisted?

Aftab H. Wahla

The continued grey-listing on the part of Financial Action Task Force, the anti-money laundering and counter-terror financing global watchdog, has emerged as a major source of concern for the policymakers of Pakistan as the constant threat of blacklisting with potentially terrible financial and economic consequences continues to haunt the incumbent government. Now that the recent plenary meeting of FATF, held at Orlando, USA, from 16 to 21 June has shown deep reservations on the degree of technical, administrative and legal compliance of FATF recommendations and action plan shown by Pakistan, it will be fruitful to have some basic understanding about FATF so as to suggest some legal, political, diplomatic and administrative remedies to remove once for all the sword of Damocles ever hanging on the head of Pakistan.

FATF is a 38-member intergovernmental agency which was established in 1989 during a G-7 summit in Paris with an initial aim to develop and implement measures to curb money laundering. Later, in 2001, its mandate was expanded to include counter-terror financing efforts.  FATF expanded its area of jurisdiction again in 2012 by adding counter-financing for weapons of mass destruction or counter-financing for proliferation efforts in its mandate. Now this organization works in close collaboration with its members (36 countries and 2 organizations, i.e. European Commission and Gulf Cooperation Council), associate members (FATF-style regional organizations like Asia-Pacific Group), international financial institutions (IMF, World Bank, etc), observers (international organizations like UN Security Council) to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, curbing terror-financing and eliminating threats to the integrity of international financial system. Succinctly, FATF is policymaking body that forces the countries having strategic deficiencies in their economic system to bring about legislative and regulatory reforms in order to make their respective financial systems compatible with FATF Recommendations which it developed in 1999 and revised later on, in 1996, 2001, 2003 and 2012.

As far as the jurisdiction of FATF is concerned, it helps member countries identify and analyze threats to the integrity of their financial systems; supports risk assessment at national, regional and global level; assesses and monitors the degree of technical compliance, implementation and effectiveness of anti-money laundering and counter-terror financing regimes of member countries; points out high-risk, non-cooperative and strategically-deficient countries and penalizes them to ensure complete, irreversible and verifiable compliance towards FATF recommendations; assists international bodies like UN Security Council in the implementation of resolutions on terror-financing and non-proliferation; and develops universally applicable methods and procedures to decide downgrading or upgrading of the countries falling under the categories of black or grey list.

FATF, like other international entities, has well-structured organizational setup. The organization comprises plenary, president, vice-president, steering group and secretariat. The plenary is the most important organ of FATF as it is a policymaking body and decides all important matters with consensus. All 36 member countries enjoy voting power in the plenary meetings which are held thrice a year: February, June and October. The plenary meetings decide categorization of countries based upon the strategic deficiencies in their financial systems. The decisions are made through consensus. In order to avoid blacklisting, the country in question requires the support of at least three members and for de-listing from grey category, the country must have the support of at least 15 members of plenary.

Pakistan has never been in good books of FATF. We have had very troubled relations. Before 29 June 2018 downgrading, Pakistan remained in the grey list in 2008 and again from 2012 to 2015. The consequences of the downgrading depend upon the geostrategic calculus and political considerations of member jurisdictions. Despite remaining in grey list from 2012-2015, Pakistan managed to safeguard its financial system from any negative implications, but now the situation seems more worrisome and precarious. Inaction or business-as-usual approach could throw the country into Black List and it would be a nightmarish scenario given the ongoing multiple economic crises. It is pertinent here to identify the areas in which Pakistan is lacking and in which areas we have made commendable progress during the last 14 months.

Pakistan had made high-level political commitment in June 2018 to work with FATF and Asia Pacific Group (APG) on a 10-point plan of action to strengthen anti-money laundering and counter-terrorist financing (AML/CFT), and address strategic counter-terror financing deficiencies in its financial system. The areas which Pakistan needed to improve included proper identification and assessment related to risk associated with terror-financing; application of remedial actions and sanctions to create effective compliance for AML/CTF; sustained actions on the part of competent authorities to identify and take action against illegal money or value transfer services (Hawala or Hundi); actions against cash carriers and illicit movement of currency to minimize the chances of terror-financing; inter-agency coordination including between the provinces and the federation; investigations and prosecutions targeting UN-designated persons and entities on the part of law-enforcement agencies; effective, proportionate and dissuasive sanctions against UN-proscribed entities, and capacity enhancement of prosecutors and judicial officers; targeted financial sanctions against all terrorists (Jamat-ul-Dawa, Jaish-e-Muhammad, etc.) designated under UN Security Council resolutions 1267 and 1373; enforcement against TFT (Targeted Financial Sanctions) violation through administrative and criminal penalties; and deprivation of resources and usage of resources owned by designated persons and entities.

In June 2018 Plenary Meeting, Pakistan was given time-bound tasks corresponding to each of weaknesses identified by FATF. Pakistan was asked to take action on some of the items of action plan till January 2019. However, February and June 2019 meetings did not go well for Pakistan. FATF, while acknowledging that Pakistan had taken steps towards improving its AML/CFT regimes including operationalizing the integrated database for its currency declaration regimes and revised its TF risk assessment, urged Pakistan, in its February 2019 meeting, to undertake swift actions on further improving the understanding associated with terror-financing. The situation was not much better in Orlando Plenary Meeting as well. Pakistan not only narrowly escaped back-listing – thanks to support of Turkey, Malaysia and China – it also received stern warning over lack of proper understanding regarding transnational terror-financing risks (financing to anti-India Jihadi organizations). The meeting did recognize the continuous improvement in risk-assessment but urged Pakistan to swiftly complete action plan by October 2019; otherwise, FATF will take further steps at that time for insufficient progress (a thinly-veiled reference towards blacklisting).

Notwithstanding the fact that blacklisting is not a very likely outcome of October meeting since India has nothing to offer to bargain the support of China and Saudi Arabia with any kind of diplomatic leverage as both China and Saudi Arabia have achieved what they intended to in June 2018 – presidency and membership of FATF, respectively – any remotest prospective of backlisting is bone-rattling and blood-curdling scenario for policymakers of Pakistan as no one would like to have termination of IMF programme, suspension of World Bank assistance, blanket banning on transnational banking transactions, virtually insurmountable trade barriers, diplomatic isolation, crippling sanctions and cutting of national financial system from global finance. These terrible consequences, particularly amidst ongoing worst economic recession, do demand administrative, political, legal, regulatory, financial and diplomatic remedial measures to help Pakistan come out of the list of strategically deficient countries.

Administratively speaking, the implementation of item 5 (inter-agency coordination), 6 (effective investigation and prosecution) and 7 (capacity-building of state agencies) of 10-point Action Plan requires well-coordinated and well-delineated efforts on the part of state to improve the efficiency of our military and civilian agencies. Multi-agency coordination is the need of hour to plug the strategic lacunae in our financial system. In this regard, almost half a dozen government departments are required to launch well-coordinated, coherent effort to demonstrate compliance to FATF recommendations and Action Plan. Nacta, FIA, CTD, provincial home departments, ministries of interior and foreign affairs would be the key institutions in executing the heavy agenda we have been given by FATF. Items six and seven demand capacity-building of our civilian and military LEAs with particular emphasis on police, Federal Investigation Agency (FIA) and provincial counterterrorism Departments. It is worth-discussing here that FATF in item 7 not only demanded effective investigation and prosecution but also asked for prosecution that results into effective, proportionate and dissuasive sanctions in order to elicit compliance on the part of designated persons and entities. To ensure execution on this item, Pakistan needs to overhaul all pillars of our criminal justice system: investigation, prosecution, adjudication and conviction. These far-reaching actions can only be materialized via comprehensive capacity building programmes of our prosecutors and judicial officials. In addition to FATF requirements, this area of reforms is in the interest of Pakistan as well, so government must treat it as an area of utmost urgency.

Politically speaking, swift compliance on items 1 (understanding regarding risk with TF), 8 (TFS against UN-designated entities) and 10 (confiscation and freezing of assets owned by proscribed organizations) would require considerable spending of political capital and demonstration of political will. The government of Pakistan has taken momentous steps in this regard: blanket banning of the JD, JeD and their charity wings, treating banned outfits as high-risk entities, confiscation of their moveable and immoveable properties, blocking their accounts and financial flows and detention of their top leadership are some of these steps. In the own reports of FAFT Plenary session of February and June, Pakistan has made progress in revision of national risk-assessment corporate sector associated with terror financing. One major objection that India raised in June Plenary was the detention of UN-designated top leadership under maintenance of public order rather under Anti-Terrorism Act, Pakistan has also resolved this objection by arresting key operatives of JD and JeM under terror-financing charges.

In terms of legal and regulatory efforts to curb illegal money and value transfer and illicit currency movement (item nos. 3 and 4 of Action Plan), Pakistan has taken a number of steps to strengthen legal and enforcement mechanism against money laundering. In this regard, establishment of the Directorate of Cross Border Currency Movement to maintain database for currency seizure and suspicious transactions in close collaboration with Financial Monitoring Unit of State Bank of Pakistan (SBP) and Federal Board of Revenue (FBR); strengthening customs procedures on borders and inland movement of funds and assets; formulation of Data and Risk Analysis Cell to maintain database of currency seizures, currency declaration, banking transactions and benami accounts; clampdown on illegal value transfer system (Hawala or Hundi) are worth-mentioning regulatory measures. The continuation of these measures would require the proactive and efficient role on the part of the SBP and Security and Exchange Commission of Pakistan (SECP). The role of these regulators would be critical in helping country move out of the grey list. As for legal framework against money laundering, we have comprehensive Anti-Money Laundering Act, 2010, and 20 plus relevant laws, three sets of regulations and 10 types of reporting formats, and guidance to combat money laundering and prevent terror-financing. In addition, the incumbent PTI government has made counter-money laundering efforts as its utmost urgency and these crimes have become center stage in our political debate which bodes well for Pakistan’s jihad against this evil.

There is no denying the fact that decision-making in FATF is politically and strategically-dictated and it necessitates strong and aggressive diplomatic push to secure support and enough votes to come out of FATF grey list. As it has been discussed earlier that Pakistan needs at least 15 votes for getting out of the grey list and minimum 3 votes to avoid blacklisting, it is high time our Foreign Office launched diplomatic campaigns in coordination with other stakeholders in major capitals of the world. In this regard, Prime Minister Imran Khan’s visit to Washington could pave the way for convincing non-aligned members of FATF to vote for Pakistan. With the inclusion of Saudi Arabia, Pakistan has now four countries on its side – others are China, Turkey and Malaysia. Pakistan’s diplomatic endeavours with PM’s state visits to different countries particularly to Russia and the United Kingdom, could be instrumental in moving out of the grey list. Any negligence in this regard can cost Pakistan dearly despite demonstration of full compliance to the technical side of Action Plan: administrative, regulatory, monitoring and enforcement efforts.

Pakistan is world’s 6^th most populous country and it also enjoys the status of a nuclear power. Remaining continuously on grey list does not bode well for our financial and economic system and is precarious for our vital regional and global interests. Though it is hard to counter Indian lobby in major capitals of the world owing to its huge human and material resource, Pakistan must tell the world that we rank fifth in Terrorism Index due to more than $120 billion worth economic losses owing to decade-old counter-terrorism fight we have fought to defeat the monster of terrorism, our nation has sacrificed 70,000 plus lives in this bloody decade. We must tell the world that proxy war is not even in our own interest, transnational terrorism as the instrument of foreign policy may have been used by India in Afghanistan to instigate insurgency and separatism inside Pakistan but Pakistan has neither resources nor intention to finance proxies here as stability and regional peace and security is in our own interest. India must look upon its own wrongdoings that are creating sense of deprivation in its own people. Pakistan has nothing to do with that.