Pakistan’s escape from FATF’s grey list

ISLAMABAD:

In February of 2020, the president of the Financial Action Task Force (FATF) gave Pakistan a stark warning: either enact laws in line with the body’s Anti-Money Laundering (AML) and Combating Terrorism Financing (CFT) standards along with bringing the country’s regulatory framework in line with international standards or be ready to face consequences.

And the consequences were grave – so much so that they could have completely dried up the already low levels of foreign direct investment estimated at hardly $1.6 billion in this year. Had Pakistan not complied, it would have had to deal with an increase in the cost and time it takes to send foreign remittances back home from abroad. Its banks would have struggled to carry out international transactions, leading to an eventual slowdown of the wheel of an economy already teetering on the brink of being crippled.

But almost two and half years down the line – in June 2022 – the FATF says that the initial determination of Pakistan’s efforts to comply with two separate action plans “warrants an on-site visit to verify that the implementation of Pakistan’s AML/CFT reforms has begun and is being sustained, and that the necessary political commitment remains in place to sustain implementation and improvement in the future”. Where four years ago the country was fully or largely compliant with hardly 10 out of the 40 universal FATF recommendations, it now stands compliant with 35, placing it among the top five nations that have AML and CFT regimes compliant with FATF standards. The top three, just for context, are the United Kingdom, the United States and Italy.

“Pakistan is not being removed from the grey list today. The country will be removed from the list if it successfully passes the onsite visit,” FATF president Marcus Pleyer said last week. The purpose of the onsite visit, he said, is to verify the completion of reforms to check whether they are sustainable and irreversible. In between these two timelines is the story of the use of lawfare approach against Pakistan, efforts by Pakistani authorities to put laws and regulatory frameworks in the right shape to avoid blacklisting and reverse decades-old policies and strategies that also allowed New Delhi to change the constitutional and demographic status of Indian Illegally Occupied Jammu and Kashmir.

A stern warning

In February 2020, the FATF plenary had warned that “all deadlines in the action plan have expired and should significant and sustainable progress, especially in prosecuting and penalizing terror financing, not be made by the next plenary, the FATF will take action, which could include the FATF calling on its members and urging all jurisdictions to advise their investors to give special attention to business relations and transactions with Pakistan.” It was a clear warning to blacklist Pakistan. Exactly two years before, in February 2018, the FATF had decided to place Pakistan on the grey list with effect from June that year and handed it over a list of 27 conditions that it needed to implement to exit the grey list. For the first time, the IMF had also included exit from the grey list part of its conditions set for the $6 billion bailout programme for Pakistan.

The FATF is an inter-governmental body that enjoys the backing of the United Nations. Its enforcement arms are strengthened by FATF-styled regional bodies and it also gets support from the International Monetary Fund and the World Bank to enforce financial punitive measures. The France-based FATF, founded in 1989 on the initiative of the G-7, an organisation of the world’s seven largest advanced countries, monitors countries’ money flow and penalises those whose financial systems are abused for money laundering and terrorism activities.

The FATF had taken a decision without waiting for a fresh Mutual Evaluation Report (MER) by the Asia Pacific Group (APG) – the FATF styled regional body in whose jurisdiction Pakistan lies. The MER is usually a requirement to see whether the country’s AML and CFT related laws, rules and risk frameworks are technically compliant, the inter-agency coordination, judicial system for prosecution and convection are effective and the nation also cooperates with foreign jurisdictions to curb menace of terrorism and money laundering.

A country can be put on the grey list for one of three main factors: it is not a member of the FATF or a FATF styled regional body, it performed poor on the MER or any of FATF or regional body member may nominate a country for being placed on the list due to deficiencies in its AML and CFT regimes. In Pakistan’s case, there was more than one reason to put it on the grey list.

Missed opportunities

In October 2019, the Asia Pacific Group – one of the nine FATF styled regional bodies – released its comprehensive Mutual Evaluation Report. The report had been based on Pakistan’s performance against 40 recommendations of the FATF till October 2018. The report showed that out of FATF’s 40 recommendations on curbing money laundering and combating the financing of terrorism, Pakistan was fully compliant only on one. It was largely compliant on nine, partially compliant on 26 and non-compliant on four recommendations. On the level of effectiveness of Pakistan’s AML/CFT, Pakistan was found moderately effective only on one benchmark while on the remaining nine its effectiveness was declared as low as of October 2018 cut-off date.

The APG 2019 report highlighted that Pakistan faced significant risk of terror financing both from legitimate and illegitimate sources as well as weak or no, regulation and supervision of certain sectors such as hawala/hundi, NPOs and DNFBPs (Designated Non-Financial Businesses and Professions) and porous borders. The implementation situation was so bad that the APG had asked Pakistan in 2009 to have proper DNFBPs framework, which we did not implement till 2020.

“The terror financing cases are identified by a number of mechanisms but not via financial intelligence,” according to the APG report. Here too, the APG had made similar observations a decade ago about the country’s risk assessment framework but no action was taken. At the very least, it was a pathetic report for Pakistan that also underscored that the country did not improve even on areas that had been identified in 2009 by the APG.

The report also underlined that key Pakistani regulators – the State Bank of Pakistan and Securities and Exchange Commission of Pakistan – had very limited understating of the money laundering and terror financing regimes. “Pakistan should adequately identify, assess and understand its money laundering/terror financing risks including transnational risks and risks associated with terrorist groups operating in Pakistan such as Da’esh, AQ, JuD, FiF, LeT, JeM and HQN, and this should be used to implement a comprehensive and coordinated risk-based approach to combating money laundering and terror financing,” the report stated. “Also terrorist groups operating in Pakistan are reported to include but not limited to, ISIS-Khorasan, Tehreek-e-Taliban Pakistan, Quetta Shura Taliban, Haqqani Network and Lashkar-e-Taiba (including its affiliates Jamaatud Dawa and Falah-i-Insaniat Foundation), which raise funds through a variety of means, including direct support, public fundraising, abuse of NPOs, and though criminal activities,” APG 2019 report added.

The report said that corruption, drug trafficking, fraud, tax evasion, smuggling, human trafficking, and organised crime were major predicate offences to money laundering and areas of high risk. The APG advised that Pakistan should significantly enhance the use of financial intelligence in money laundering, terror financing, and predicate crime cases, particularly the use of financial intelligence to target terrorist groups and higher- risk predicate crimes. It also sought improvement in asset confiscation that should commensurate with Pakistan’s money laundering and terror financing risks, including cross-border currency.

The situation was so bad that back in 2018 Pakistani authorities had very little understanding of the country’s money laundering and terror financing risks, and the private sector also had a mixed understanding of risks. While Pakistan established a multi-agency approach to implementing its AML/CFT regime, it was not implementing a comprehensive and coordinated risk-based approach to combating money laundering and terror financing.

For money laundering, there was no clear understanding among competent authorities, including LEAs. “Competent authorities are focused on predicate crimes and are unable to clearly differentiate money laundering from predicate offences which generate illicit proceeds,” the APG pointed out. “For terrorism financing, Pakistani authorities had a mixed understanding of risk. Federal Investigation Agency had a low level of terror financing risk understanding, while provincial police, counter-terrorism departments (CTDs) have a better understanding of those risks within their provinces.

“The State Bank of Pakistan did not have a clear understanding of the money laundering and terror financing risks unique to the sectors it supervises,” stated the APG report. There was little evidence that the SECP’s supervisory activity was improving AML/CFT behaviour. Pakistan Post, CDNS, and DNFBPs were not supervised for AML/CFT compliance. Also, Pakistan’s law enforcement efforts to address money laundering were not consistent with its risks.

Most banks and larger exchange companies had an adequate understanding of their AML/CFT obligations but all other financial institutions had limited understanding of their money laundering and terror financing risks; they were in a nascent stage of implementing the risk-based approach and internal controls; smaller entities lacked proper systems to identify Politically Exposed Persons (PEPs). Pakistan had limited mitigating measures for legal persons and there was no supervisory oversight for AML/CFT purposes.

The use of lawfare

Many countries, particularly the United States and India, had long been demanding through the FATF forum that Pakistan should target eight groups – the Afghan Taliban, Jamaat-ud-Dawa (JuD), Haqqani Network, Jaish-e-Mohammed (JeM), Lashkar-e-Taiba (LeT), Falah-e-Insaniyat Foundation, al-Qaeda and Islamic State.

After the poor evaluation report, Pakistan made its Director-General of Military Operations (DGMO) in-charge for the implementation of FATF recommendations while the then federal minister for economic affairs Hammad Azhar was nominated for coordination from the civilian side.

This was a turning point when Pakistan finally decided to take the FATF threat serious and started delivering on conditions that it had resisted long. Pakistani courts started handing over sentences to JUD chief Hafiz Muhammad Saeed, with latest one given in April this year when he was awarded a combined sentence of 33 years imprisonment in two cases of terror financing. It was unthinkable till few years ago.

Pakistan also amended 14 laws to ensure technical compliance with the FATF recommendations, including few for the sake of avoiding being blacklisted. Still, the world powers were not satisfied and they wanted effective implementation of these laws. The journey has not ended yet and there is no time to relax. India will not let the pressure off from Pakistan.

In July last year, India’s Minister for External Affairs S Jaishankar said the Modi-led Bharatiya Janata Party (BJP) government had ensured that Pakistan remained on the FATF grey list. It had achieved what Dehli otherwise could not think even.

India and the US jointly proposed on June 1, 2022 to list Pakistan based terrorist Abdul Rehman Makki under the UN Security Council’s Al-Qaeda (Dae’sh) and ISIL Sanctions Committee, also known as the UNSC 1267 Committee. Both India and the US have already listed Makki as a terrorist under their domestic laws. Abdul Rehman Makki is the deputy Amir/Chief and head of the Political Affairs of Lashkar-e-Tayyiba (LeT) /Jamat ud-Dawa (JuD), which itself is a UN proscribed terrorist entity.

Pakistan has in the past publicly expressed its concerns about use of the FATF for political purposes. In an interview to Anadolu Agency -a Turkish media outlet – last year, Pakistan’s then law minister Barrister Farogh Naseem had said that “Even [though} the FATF people are good people. I’m not being critical against them…But as long as these (FATF) standards are universally applied, and not applied to only Pakistan, and as long as there is no international politics, then we welcome FATF. Let it be applied to everyone,” he said, questioning why Pakistan was still on the list. “There should be no international politics, but FATF is being used to arm twist. Then what can we say?”

Need for compliance and vigilance

The FATF will soon send a mission to Pakistan to kicking off the process to remove Pakistan from the grey list. Any of the FATF or APG member countries can opt to be part of the on-site mission team and India may not like to lose the opportunity. The mission will see progress on the ground, the commitment of the political leadership to stay on course and importantly to make sure that all the steps that have already been taken are irreversible, including actions against leadership of terror outfits.

All the Pakistani stakeholders still need to prove to the FATF upcoming mission that no serious deficiency remains in its AML and CFT regimes. The on-site inspection team will submit its report to the FATF and on the basis of on-site team report, the FATF will announce the decision of keeping or removing Pakistan from the grey list in the next plenary.

It is also the responsibility of the FATF that its on-site mission remains focused on strengthening of the AML and CFT regimes, rather on any specific individual on behest of any member country.

Pakistani authorities need to consolidate their efforts and make sure that all actions taken in past two years are irreversible, this time for the sake of people and prosperity. World now knows our games.

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Hafiz Saeed – A Timeline of Convictions and Arrests

 

• Hafiz Saeed was sentenced to 33 years in jail on April 9, 2022. ATC had awarded combined sentence of 33 years imprisonment in two cases from 2019 of terror financing registered by the Counter Terrorism Depart­ment (CTD).
• Hafiz Saeed was convicted in another terror financing case, sentenced to 5-and-a-half year in prison on November 19, 2020. ATC in Lahore had convicted Jamatud Dawa leader, who was already in jail serving two sentences of five-and-a-half-years each, handed down to him in February 2020.
• Pakistan has arrested him several times since the 9/11 attacks in the US, but it never charged him with specific offences and always set him free in the end.
• Hafiz Saeed was put under house arrest on a number of occasions, first when the Indian government blamed him for masterminding the December 2001 attack on its parliament, and then after the Mumbai train bombings of 2006.
• He was also put under house arrest several times between 2008 and 2009 following accusations that the LeT had carried out the 2008 Mumbai attacks.
• On each of these occasions, Pakistani government did not frame charges against him. Instead, it continued to file for extensions of his house arrest which the courts would ultimately refuse, setting him free.
• Pakistan has done enough to satisfy FATF but will Pakistan be able to convince FATF teams when they come for physical inspection likely later this year.

Crackdown on JuD leadership

• ATC sentenced Prof Malik Zafar Iqbal, Hafiz Abdul Salam and Hafiz Abdul Rehman Makki on August 29, 2020. The court awarded a collective imprisonment of 16-and-a-half year to Iqbal and Salam while one-and-a-half-year jail term to Makki.
• Pakistan sentenced three top JuD leaders, including deputy JuD chief Abdul Rehman Makki, head of fundraising Zafar Iqbal and media chief Yahya Mujahid, for terror financing on December 3 2020. Iqbal and Mujahid were given prison terms of 15 and a half years each, while Makki was sentenced to six months in prison.
• CTD had registered 23 FIRs against the leaders of the JuD in different cities of Punjab.

Asset freeze

• Pakistan freezes 964 assets of banned JuD, JeM in September 2020. Senate was told that 907 of the frozen properties belonged to JuD and 57 to JeM.
• A total of 611 properties of JuD were frozen in Punjab, followed by 108 in Khyber-Pakhtunkhwa, 80 in Sindh, 61 in AJK, 30 in Balochistan and 17 in Islamabad.
• The frozen properties of the JuD include 76 schools, four colleges, 330 mosques and seminaries, 186 dispensaries, 15 hospitals, 262 ambulances, a funeral bus, three disaster management offices, 10 boats, 17 buildings, a plot, an agricultural land and two motorcycles.
• Falah-e-Insaniat Foundation was a charity organisation established by Jamat-ud-Dawa amd it was banned in 2019.

In August 2020, Pakistan banned 88 new terrorists, in compliance with the new list issued by the United Nations Security Council (UNSC). The banned terrorists include Hafiz Saeed, Masood Azhar and Dawood Ibrahim