FATF review - legal system upgraded

Pakistan has taken steps to avoid black list but these should be expressed aggressively

KARACHI:

Pakistan was added to the grey list of Paris-based Financial Action Task Force (FATF) in 2018 after failing to comply with its parameters.

The four broad parameters where Pakistan failed were anti-money laundering and terror financing, prosecuting and penalising terror financing, transparency and secrecy in financial institutions and implementing an effective national mechanism to check illegal funding of terrorist outfits.

The global watchdog had asked Islamabad to implement a plan of action by the end of 2019, which was extended later due to the pandemic. If Pakistan fails to comply with the FATF’s directive by October, it could slip into the black list alongside North Korea and Iran for not taking concrete action to arrest terror financing.

FATF is an inter-governmental policymaking body established in 1989 during the G7 summit in Paris. It works to generate political will of its member states to bring about national legislative and regulatory reforms and develop policies against money laundering.

Currently, FATF has 39 members alongside nine FATF-styled regional bodies (FSRBs) that play an essential role in promoting the implementation of FATF recommendations, and provide expertise and input for FATF policymaking.

Over 200 jurisdictions have committed to the FATF recommendations through the global network of FSRBs and FATF memberships.

The main objective of FATF is to establish norms and standards of legal, regulatory and operational measures to combat money laundering, terrorist financing and other related threats to security and integrity of the international financial system.

However, the FATF has no investigative authority. It is mandated to work with nation-states to bring legislative reforms for combating money laundering, financing of terrorism and proliferation of weapons of mass destruction.

FATF also monitors the situation of its members in taking adequate measures and establishing institutions to fight money laundering and terrorist financing alongside identifying national-level vulnerabilities of its member states and protecting the international financial system from misuse.

FATF issues two types of lists which classify the level of vulnerabilities within the monitored entities. The first is the black list, which contains non-cooperative countries or territories (NCCTs). These NCCTs supposedly support terror funding and money laundering activities.

Currently, Iran and North Korea are part of the black list as they have not committed to an action plan with the FATF to address the deficiencies. North Korea was added to the list in October 2010 while Iran was included in February 2012.

Myanmar has been the closest to getting on and off the black list when it was declared as a “jurisdiction with strategic deficiencies” in October 2015 but was able to avoid it in February 2016.

FATF requires its member states to take counter-measures to reduce exposure to these economies, ensuring that the financial system is not at risk of money laundering and terror financing.

The second is the grey list. Here, countries are considered safe havens for supporting terror funding and money laundering and their inclusion in the list serves as a warning that they may enter the black list.

As of August 2020, there were 18 nations on the grey list. Out of these, financial services of four nations (Bahamas, Barbados, Jamaica and Mauritius) have been under heightened monitoring while Panama is on the radar as a tax haven and for the remaining countries the coverage is the entire economy.

Pakistan’s case

A virtual meeting of the FATF plenary, scheduled for October 21-23, will decide the fate of Pakistan. In February, the FATF gave Islamabad a four-month grace period to complete its 27-point action plan, noting that Islamabad had delivered on 14 points but missed 13 other targets.

After that, Pakistan has worked extensively to upgrade its legal system to match international standards, amended about 15 laws, as required by the FATF and imposed sanctions on key figures of terror outfits.

Implementation of these regulations and actions on these laws have taken place, albeit at a slower pace. The government of Pakistan is in a Catch-22 situation.

While there is no dearth of commitment to clamping down on money laundering or terror financing, these actions would result in reducing the undocumented economy and further slow down the economic growth already challenged by the Covid-19 outbreak.

What is the darker shade

A nation that enters the black list goes through more of a psychological challenge and faces an uphill task in managing its cash flow.

A cursory review of publicly available policies of multilateral funding agencies and related documents of other entities/ countries show that there is no specific action listed which is obligatory on these institutions.

Based on the relationship of the ill-fated countries with key member states of multilateral agencies, they may face:

• Abatement of approved or cancellation of fresh funding from multilateral agencies

• Increased scrutiny of cash flow into and out of the marked nation, resulting in slowed flows

• Sanctions on financial institutions domiciled in the country

• Reduced trade volume as suppliers and vendors from developed countries exercise caution

• Wary investors reducing FDI and investment flows.

• Reduced economic growth as inflation rises and crowds out local investment

• Tightened fiscal space as government consolidates resources to meet external challenges

It is not in the world’s best interest or of India to push Pakistan towards the FATF black list as the backlash may do more harm than good. This is specifically in the perspective that marking countries is supposedly not the goal, the remedy and countering leakages is the goal of FATF.

Pakistan has taken considerable steps to distance itself from the black list but these need to be expressed more aggressively before cobwebs of grey list are cleared.

In my opinion, the challenge that Pakistan faces is not on the legislative front. What we lack is to build a case and showcase the steps taken for anti-money laundering and combating terrorist financing.

Apart from this, we have not been able to push through and drive the real impact and challenges that we face in implementation of these activities.

The writer is a student of behavioural finance, a treasury professional and a visiting faculty at IBA

 

 

Published in The Express Tribune, October 12^th, 2020.

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