FATF: facts and fiction
Pakistan should highlight FATF’s double standards such as ignoring Indian support to TTP and BLA terrorists
PHOTO: FILE
Much has been written and said in Pakistan recently about the Financial Action Task Force (FATF). The threat of being placed on its black list is being projected as a “Damocles sword” hanging over Pakistan with far-reaching negative consequences for our economy and security. It is, therefore, necessary to deconstruct the FATF by separating facts from fiction.
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 in the US, 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. Briefly, these involve implementing relevant international conventions, criminalising money laundering and confiscation of laundered funds, implementing customer due diligence, establishing financial intelligence units to monitor and disseminate suspicious transaction reports and cooperating internationally in investigating and prosecuting money laundering. 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.
Majority of the 39 FATF current members are developed states with only five belonging to the developing world. Additionally, there are eight associate members which include regional groups (such as the Asia-Pacific Group — APG) and Observer members which are awaiting full membership. The membership process is tedious and subjective. The applicant must support FATF policies and undergo satisfactory Mutual Evaluation. If it meets the criteria, it has to first become an observer. If not, a Contact Group is sent to advise on further measures needed to qualify.
Performance evaluation by FATF is conducted mainly by focusing on countries that lack the capacity or willingness to implement FATF requirements. This has been the case with Pakistan.
Within the Asia-Pacific regional group, Pakistan has undergone evaluations in 2005, 2009 and 2018. In 2005 and 2009, the evaluation exposed gaps — absence of national legislation for money laundering and terrorism financing as well as absence of a Financial Intelligence Unit. It was blacklisted from 2010-2012 for non-compliance. In 2012, it was upgraded to the grey list after enacting an Anti-Money Laundering Bill and setting-up a Financial Monitoring Unit, which addressed almost all the demands. Consequently, it was taken off the grey list in 2015 but was still required to fully implement UNSC resolution 1267; especially to sanction all UN-designated “terrorist” groups. While some action was taken, such as freezing assets and banning fundraising for Lashkar-e-Taiba and its affiliates, it was not considered sufficient as other UN designated groups were not covered.
In 2017, FATF adopted new procedures, bypassing regional groups in cases of countries having “strategic deficiencies threatening the international system”, in which case they would be placed on the grey list. By this time the US administration also changed, with Trump accusing Pakistan of supporting terrorism. India’s partnership with the US, the UK and France grew as well in this period. As a result, FATF pressure on Pakistan increased considerably and Pakistan was again placed on the grey list. By June 2018, this pressure grew further with increased demands, including the imposition of sanctions, asset freeze, prosecuting suspects plus new financial sector measures by the State Bank and the SECP, especially related to the Hawala/Hundi system and bulk cash smuggling. Consequently, Pakistan has to implement an Action Plan featuring 27 items, of which only five were achieved by the August 2019 meeting. It has till February 2020 to do so. If it does not, Pakistan could be downgraded from the grey to the black list.
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. 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.
Such 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”.
Published in The Express Tribune, November 5th, 2019.
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 in the US, 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. Briefly, these involve implementing relevant international conventions, criminalising money laundering and confiscation of laundered funds, implementing customer due diligence, establishing financial intelligence units to monitor and disseminate suspicious transaction reports and cooperating internationally in investigating and prosecuting money laundering. 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.
Majority of the 39 FATF current members are developed states with only five belonging to the developing world. Additionally, there are eight associate members which include regional groups (such as the Asia-Pacific Group — APG) and Observer members which are awaiting full membership. The membership process is tedious and subjective. The applicant must support FATF policies and undergo satisfactory Mutual Evaluation. If it meets the criteria, it has to first become an observer. If not, a Contact Group is sent to advise on further measures needed to qualify.
Performance evaluation by FATF is conducted mainly by focusing on countries that lack the capacity or willingness to implement FATF requirements. This has been the case with Pakistan.
Within the Asia-Pacific regional group, Pakistan has undergone evaluations in 2005, 2009 and 2018. In 2005 and 2009, the evaluation exposed gaps — absence of national legislation for money laundering and terrorism financing as well as absence of a Financial Intelligence Unit. It was blacklisted from 2010-2012 for non-compliance. In 2012, it was upgraded to the grey list after enacting an Anti-Money Laundering Bill and setting-up a Financial Monitoring Unit, which addressed almost all the demands. Consequently, it was taken off the grey list in 2015 but was still required to fully implement UNSC resolution 1267; especially to sanction all UN-designated “terrorist” groups. While some action was taken, such as freezing assets and banning fundraising for Lashkar-e-Taiba and its affiliates, it was not considered sufficient as other UN designated groups were not covered.
In 2017, FATF adopted new procedures, bypassing regional groups in cases of countries having “strategic deficiencies threatening the international system”, in which case they would be placed on the grey list. By this time the US administration also changed, with Trump accusing Pakistan of supporting terrorism. India’s partnership with the US, the UK and France grew as well in this period. As a result, FATF pressure on Pakistan increased considerably and Pakistan was again placed on the grey list. By June 2018, this pressure grew further with increased demands, including the imposition of sanctions, asset freeze, prosecuting suspects plus new financial sector measures by the State Bank and the SECP, especially related to the Hawala/Hundi system and bulk cash smuggling. Consequently, Pakistan has to implement an Action Plan featuring 27 items, of which only five were achieved by the August 2019 meeting. It has till February 2020 to do so. If it does not, Pakistan could be downgraded from the grey to the black list.
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. 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.
Such 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”.
Published in The Express Tribune, November 5th, 2019.