Pakistan Compliance with FATF | Political economics


Jhe Financial Action Task Force (FATF) has worked to create an enabling environment that helps both government and the private sector prepare against the challenges of money laundering and terrorist financing. Advances in technology, the development of tax havens and complex corporate structures continue to allow criminals to hide their identities and their illicit activities such as drug trafficking, human trafficking, bribery, corruption and embezzlement of public funds. These are then fed into the financial system and laundered for later use.

To monitor global developments and the progress made by member countries, the FATF meets regularly to identify and review jurisdictions with strategic gaps in the fight against money laundering and terrorist financing (AML-CFT). The FATF’s International Cooperation Review Group (ICRG) reviews jurisdictions based on threats, vulnerabilities and risks arising from jurisdictions.

The last four-day virtual meeting of the ICRG ended on February 25.

In accordance with FATF protocols, a jurisdiction is reviewed when:

It does not participate in a FATF-type regional body (FSRB) or allow rapid publication of the results of mutual evaluations; Where

He is appointed by a FATF member or an ORTG. The appointment is based on specific risks of money laundering, terrorist financing or proliferation of financing risks or threats brought to the attention of the delegations; Where

It scored poorly on its mutual evaluation, in particular:

– it has at least 20 non-compliant (NC) or partially compliant (PC) ratings for technical compliance; Where

– it is rated NC/PC on at least three of Recommendations 3, 5, 6, 10, 11 and 20; Where

– it has a low or moderate level of effectiveness for nine or more of the 11 immediate results, with a minimum of two weak; Where

– it has a low level of effectiveness for at least six of the 11 immediate results.

Pakistan is one of the countries that have been flagged by the global watchdog as a jurisdiction with heightened scrutiny due to strategic loopholes in its AML-CFT regime. Pakistan was granted this designation initially in June 2018. However, despite a lapse of over 40 months, Pakistan’s journey to satisfy the global community regarding its AML-CFT related efforts does not end. Although Pakistan’s technical compliance has improved significantly, its efficiency is rated as poor. This fact can be verified by the recent consolidated rating given to Pakistan, based on the third monitoring report, which marked Pakistan as fully compliant on eight recommendations, partially compliant or with moderate deficiencies on three, largely compliant on 27 with minor shortcomings. and non-compliant or with major deficiencies on two recommendations, respectively. The Consolidated Assessment Report further indicates that Pakistan’s effectiveness measures were rated on a scale of high, substantial, medium and low levels of effectiveness, based on 11 immediate outcomes (IRs). Pakistan’s levels of effectiveness were rated low out of 10 and medium for an IO, which relates to international cooperation. The recent consolidation rating, published in February 2022, shows that no progress in the level of compliance was noted at the current ICRG meeting.

Once implemented, a firm risk-based approach will enable Pakistan to develop appropriate strategies to address all risks spread across multiple sectors and entities..

Although Pakistan has complied with 30 action points, the remaining four action points are yet to be complied with. The FATF wants Pakistan to address concerns about providing evidence that it is actively seeking to enhance the impact of sanctions beyond its jurisdiction by nominating additional individuals and entities for United Nations (UNS) designation; and demonstrate an increase in ML investigations and prosecutions and that proceeds of crime continue to be restricted and confiscated in line with Pakistan’s risk profile, including working with foreign counterparts to trace, freeze and confiscate assets. The Consolidated Assessment Score issued in February 2022 noted no change in Pakistan’s compliance ranking. Although the final decision is awaited until the time of this writing, it is widely believed that a detailed review of Pakistan’s progress will be carried out in June 2022.

In addition to these concerns, the mutual evaluation report raised concerns regarding the understanding of AML-CFT. In this regard, the role of regulators becomes most important by providing guidelines and sectoral training to the professionals concerned. However, this role is not played in its true sense. The State Bank of Pakistan (SBP) is a regulator of banking and non-banking financial institutions, while the Financial Monitoring Unit (FMU), a financial intelligence unit of Pakistan, is responsible for assessing transactions money laundering information related to law enforcement, detecting terrorist financing and other financial crimes. It seems that these two institutions lack the expertise and skills or have no interest in enforcing international standards of best practice in their fields. The previous slap of a $225 million penalty by the New York State Department of Financial Services (NYSDFS) to Habib Bank Limited (HBL), and now the Federal Reserve imposing a $20.4 million penalty dollars to the National Bank of Pakistan (NBP) for anti-money laundering violation is a charge sheet for SBP and FMU. Parliament should summon the heads of the two institutions and ask them to explain the reason for their failure to detect the shortcomings in their AML-CFT regime that have embarrassed us internationally.

Parliament should also ask the SBP and FMU what steps these institutions have taken to assess the NBP’s BC-CFT program since the Federal Reserve became concerned about the role of senior management regarding AML compliance. -CFT, BSA/AML compliance program, internal control, risk assessment, customer due diligence and retention of customer information, including suspicious transaction reporting. Similar concerns were raised in the 2019 mutual evaluation report. In addition to financial institutions, the reports raised questions regarding SBP’s understanding of AML-CFT risks. The report points out that the reporting of suspicious transactions was not commensurate with the country’s risk profile.

All these questions raised either by the Asia Pacific Group (APG) or by the American regulator show that our AML-CFT regime needs structural reforms. We have highlighted these in various articles regarding the existing AML-CFT framework which is managed by federal secretaries and controlled by federal ministers, the majority of whom face allegations of corruption. Pakistan needs to review its existing AML-CFT framework and form an independent regulator.

A proactive and risk-based approach can help Pakistan protect its financial system and other sectors from abuse by criminals and terrorists. It must deploy technically sound professionals who know and understand the risks of money laundering and terrorist financing. They should be mandated to set regulatory obligations and take enforcement actions while monitoring compliance with AML-CFT obligations. Criminal elements continue to identify loopholes and explore new avenues that can help them carry out their illicit activities. Regulatory institutions must be smart enough to adapt their approach to the risks arising from a variety of sectors.

The balance must be struck so that regulatory activities do not impose unnecessary burdens on low-risk sectors, entities and activities. This is essential to maintain the momentum of the formal economy which indirectly reduces overall money laundering and related risks by increasing documentation and transparency. The transition from a broad one-size-fits-all policy to a sector-based and risk-based approach will take time as it requires a change in compliance and enforcement culture. This simultaneously requires continued commitment and investment in capacity building and resource training. Once implemented, a firm risk-based approach will enable Pakistan to develop appropriate strategies to address all risks spread across multiple sectors and entities.

Huzaima Bukhari, High Court Barrister and Adjunct Professor at Lahore University of Management Sciences (LUMS), is an Advisory Board Member and Visiting Senior Researcher at the Pakistan Institute of Development Economics (PIDE).

Abdul Rauf Shakoori is a US-based corporate attorney and white-collar crime and sanctions compliance expert. They recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions with Dr Ikramul Haq

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