Yes! We were pushed into Financial Action Task Force (FATF) trap through an Indo-US conspiracy by circumventing the then in-vogue procedures, and because Saudis ditched us at the eleventh hour. Even then, wailing about it is not likely to come to our rescue. There is need for a multidisciplinary professional approach to unshackle out of FATF trap. In February 2018, the FATF had found serious deficiencies in the country’s anti-money laundering and combating financing of terrorism regimes. It placed Pakistan on grey list with effect from June 2018 for its failure to curb terror financing and enact appropriate measures to stop money laundering. FATF gave final warning to Pakistan in October last year to show full compliance by February 2020.
It is refreshing that the FATF Working Group has expressed satisfaction while reviewing Pakistan’s performance report from October 2019 till January 2020 in compliance with the global illicit financing watchdog’s action plan carrying 27 recommendations about the country’s anti-money laundering and combating financing of terrorism (AML/ CFT) mechanism. The group also reviewed answers given by Pakistan in a 650-page report to the global financial watchdog, and it will be considered by the body’s plenary meeting starting from February 16 in Paris. Pakistan will be judged by this plenary meeting on the basis of the Joint Group’s report for a possible exit from the ‘grey list’ or at least avoiding an entry into the black list.
Ambassador Alice Wells, US Acting Assistant Secretary of State, Bureau of South and Central Asian Affairs applauded Pakistan’s efforts to implement 27 point action plan of FATF, on January 20. The comments came after she was briefed by senior Ministry of Interior officials about Pakistan’s efforts to meet the FATF’s requirements. She was all praise for Pakistan’s progress despite “scarcity of the resources”. “The US delegation applauded the progress made by the Government of Pakistan despite the scarcity of resources,” the interior ministry statement said. The briefing on FATF compliance was given just a day before the body’s meeting in Beijing. In October 2019, the FATF had expressed disaffection over Pakistan’s progress and gave Islamabad until February to meet its requirements or face the consequences.
In October, Pakistan was found largely compliant against five targets, which the authorities now say have reached to 17. In October, the FATF had declared another five action points related to convictions, targeted financial sanctions as non-compliant, whose status, as per Pakistani authorities’ claim, is now partially compliant. Only those technical issues remain unaddressed where legal amendments are needed or actions need more time, according to the sources. The amendments have been proposed and the bills are at various stages of approval. Essentially, Pakistan has made movement towards showing effectiveness, but at this stage complete compliance cannot be shown on all 27 action points. Translation of investigations into convictions, dissuasive penalties and sanctions and understanding of transnational outward risks are some of the pending areas that require further work.
Days before a crucial meeting of the Joint Group of the FATF, in Beijing, on January 21 and 22, Pakistan submitted progress report to the group stating that says it had made significant progress on the implementation of 27-point FATF determined plan. India and China jointly co-chaired the meeting. According to progress report, the government claimed that it had largely addressed 22 points related to curbing money laundering and terror financing. Pakistan will be judged by an FATF plenary in February on the basis of the Joint Group’s report. Pakistan has sought the global body’s support to declare at least 22 points largely addressed during the review meetings.
Pakistani showed full compliance on five action points and largely compliant status on another 17. Officials thought progress was good enough for the FATF to strike the country’s name off its grey list. Pakistani authorities had taken a position in the progress report that the country will keep submitting progress reports on the remaining five action points related to measures against cash couriers, terrorism financing risk assessments and amendments in laws.
Pakistan is required to amend five laws to show full compliance with the FATF action plan. They are: the Anti-Money Laundering Act 2010, Foreign Exchange Regulations Act 1947, the Mutual Legal Assistance Act, the United Nations Security Council Act 1948 and Anti-Terrorism Act 1997.The UNSC Act is proposed to be brought in line with the ATA 1997. It is being proposed to increase the imprisonment time and penalties in terror financing related cases. The Securities and Exchange Commission of Pakistan has showed compliance on almost all the targets. Its targets were largely related to creating awareness about money laundering and terror financing, risk assessments of the companies, non-profit organisations and giving warnings and imposing penalties on violations. The SECP did not find any case related to terror financing. The major outstanding areas remain action against cash curious by the Federal Board of Revenue and Terrorism Financing Risk Assessment by the law enforcement agencies.
Government on January 06 hoped to win a “largely-compliant” rating from the FATF on the implementation of its 27 action points, which might help the government get more time for full compliance. For the February plenary meeting of the FATF “our target is to be largely complaint on most of the action points”, Director General of Financial Monitoring Unit (FMU) Mansoor Siddiqui told a parliamentary panel during a meeting of the Senate Standing Committee on Finance, which was convened to approve amendments to the Anti-Money Laundering (AML) Act and the Foreign Exchange Regulations Act. This statement came two days before the submission of Pakistan’s last progress report on the implementation of the FATF Action Plan to the Joint Group of the FATF. “In the past six months, we have won the support of a number of countries and also made significant progress in implementing the Action Plan,” Siddiqui added. In January last year, Siddiqui said, “we were largely compliant only on one action item” but by October “we were largely complaint on five action points”. In the Feb 2020 report, Pakistan will still be “partially” compliant on some of the points but most action points will be largely addressed.
Let’s hope so. For exiting the grey list, Pakistan needs to show full compliance on all the action points by Feb 2020, according to the FATF statement issued in October last year. According to government officials they were hopeful because Pakistan had made “major progress” by completing national risk assessment report, developing an effective interagency coordination framework and conducting a review of the risk-based supervisory policies by the regulators and the law-enforcement agencies. He said decisive actions had been taken against the entities concerned and mapping and supervision of non-profit organisations had been completed.
Pakistan continues to be included in the FATF’s list of jurisdictions with serious AML/ CFT deficiencies. The Asia Pacific Group on money laundering also discussed Pakistan’s Mutual Evaluation Report, noting that existing efforts were “inconsistent with the level of risks and greater effectiveness needs to be demonstrated”.
DG FATF’s Action Plan focuses on curbing terror financing through terror financing risk assessment and supervisory actions, terror financing risk in cash couriers and countering actions, terror financing inquiry and investigations and application of targeted financial sanctions.
There are risks for remaining on the grey list. The probable risks related to grey listing of Pakistan include enhanced due diligence of financial transactions and opening of accounts in foreign jurisdictions. Moreover, there are difficulties in banking relationships and higher compliance cost for financial institutions. Likewise, there are negative impact on foreign direct investment and international trade. It takes longer time to open letter of credit and the cost is also high. It risks affecting pricing of multilateral transactions.
Committee Chairman Senator Farooq H Naek did not take up the proposed bills after the government could not satisfy the committee about the need of these amendments. Government officials gave contradictory statements about the need for bringing changes in the Anti-Money Laundering Act of 2010 and Foreign Exchange Regulations Act 1947. Additional Finance Secretary said that these changes were proposed to bring transparency in the laws, while the DG FATF said that the changes were proposed to meet the requirements of the FATF and the Asia Pacific Group. The committee chairman directed that the government present the agreements with the FATF before the committee, so that it might judge whether the proposed changes were needed. “The committee would support any legal change that is desired by the FATF but my apprehensions are that the government is using the FATF name to get its own things done,” Naek said. He added that the government was “making half-hearted attempts”.
In 2018 and 2019 the UN Security Council had passed resolutions that made implementation of the FATF recommendations binding and in case of deficiencies, sanctions could be imposed that may carry economic cost. Five laws are being amended, which are at various stages of approval at present. The Anti-Money Laundering Act 2010 and Foreign Exchange Regulations Act 1947 are before the Senate committee for approval after being endorsed by the National Assembly standing committee. The Mutual Legal Assistance Act has been introduced before the National Assembly while the amendments are being proposed to comply with the United Nations Security Council Act 1948 and Anti-Terrorism Act 1997. Nine amendments are proposed to the AML Act to make it consistent with the FATF standards and enhance punishments to make them effective.
Pakistan is also undergoing a separate scrutiny process by the Asia Pacific Group that has found Islamabad’s compliance to only 10 recommendations out of 40. Similarly, out of 11 effectiveness indicators, Pakistan is found at moderate effective level only against one indicator. Pakistan has also made a national strategy to avoid blacklisting by the AGP and it will submit the first implementation report in February.
According to the International Monetary Fund (IMF) Pakistan remains at risk of being placed on FATF “blacklist” that could have implications for capital inflows to the country. “A potential blacklisting by FATF could result in a freeze of capital flows and lower investment to Pakistan,” stated the recent staff-level report that was finalised during the visit of the IMF team to Pakistan. The report states that the quality of fiscal adjustments under the IMF programme was not high in the first quarter (July-September). First-quarter budget targets were met by blocking Rs40 billion payments to the Benazir Income Support Fund beneficiaries and severely curtailing health and education spending by Rs92 billion across Pakistan by federal and provincial governments. The IMF programme continues to face significant risks, both from domestic and external factors, the report added. Potential external risks include blacklisting by FATF that could result in a freeze of capital flows to Pakistan, slow progress in refinancing/re-profiling loans from major bilateral creditors, and increasing difficulties arising from a weaker global economic backdrop.
Due to a delay in completing the 27-point Action Plan, the IMF has also accordingly adjusted a programme condition to complete the work from October 2019 to June 2020. Pakistan has to show a substantial level of effectiveness to the IMF by end-March 2020 that should be consistent with FATF Immediate Outcome 9 on terrorism financing investigations and Immediate Outcome 10 on targeted financial sanctions. The resistance to reform from vested interest groups could undermine the programme’s fiscal consolidation strategy and put debt sustainability at risk. “[The] failure to meet programme objectives could jeopardise the availability of external financing,” cautioned the IMF.
The IMF has kept the economic growth rate target unchanged at 2.4% for the current fiscal year but added net exports are now expected to provide a larger contribution to growth mainly due to greater import compression. Growth is projected to strengthen to around 3% in the next fiscal year as policies take hold and confidence and investment strengthen. The IMF has also kept medium term economic growth rate prospects unchanged at 4.5% to 5%. “Anecdotal evidence suggests unemployment is rising, but this may be masked by considerable underemployment in the informal sector”. The social conditions remain challenging and poverty remains a significant concern and there is a large gender gap.
Average CPI inflation is projected to decelerate slightly to 11.8% in this fiscal year as administrative and energy tariff adjustments are expected to offset the effects from weak domestic demand, said the IMF. Thereafter, inflation is expected to converge to SBP’s 5% to 7% in medium- term. Despite signs that inflation has started to stabilize, headline and core inflation remain high and are expected to decline only gradually. The general government debt, including guarantees and IMF borrowing, rose to 88% of GDP by end of last fiscal year, which was higher by 8.7% of the GDP against the IMF’s own estimates, according to the report. For this fiscal year, the IMF has upward revised its public debt and liabilities projections to 84.7% of the GDP or Rs. 37.6 trillion, showed the report. The IMF had earlier projected public debt and liabilities at Rs35.7 trillion or 80.5% of the GDP. It has now increased the estimates by 4.2% of the GDP or Rs1.9 trillion.
IMF continues to assess that debt remains sustainable over the medium-term, given the broadly unchanged macroeconomic framework, the policies to date, and the authorities’ policy commitments ahead. “However, debt sustainability has become subject to somewhat higher risks due to the fiscal underperformance in FY 2019, a higher debt outturn, and higher financing needs”. Pakistan’s capacity to repay its IMF obligations in a timely manner remains adequate but subject to higher than usual risks. There are “elevated risks” to Pakistan’s repayment capacity on account of the low reserves and delayed adoption of adjustment policies. Moreover, higher public debt and gross financing needs are adding to these risks. The IMF has estimated annual circular debt servicing costs in excess of Rs100 billion, which it wants to be recovered from honest consumers and to compensate for theft.
It’s time for the national leadership to shield the FATF issue from petty politics and launch a concerted campaign to get the country out of FATF straitjacket. Foreign Office had put in effort to convince like-minded countries to strike Pakistan’s name off the grey list on the basis of significant progress on the 22 points. However, for exiting the grey list, Pakistan needed to show full compliance on all the action points by February 2020, according to the FATF statement issued in October last year.
Before every key meeting of FATF or its affiliates, a hype is created at domestic level that during upcoming session, Pakistan would tear apart FATF straightjacket due to its performance. The result has so far been to the contrary. The government must understand that task in this context in not fooling the domestic audience, but to outsmart the FATF experts. In addition, one must remain mindful that Pakistan’s exit from the FATF is intricately linked with departure of American troops from Afghanistan; and for both There’s many a slip ‘twixt the cup and the lip!
