The FATF and the economy | Political economics


After a week of political unrest, Pakistan’s opposition parties succeeded in removing Imran Khan from the post of Prime Minister through a no-confidence resolution. It is the first time in the history of Pakistan that a prime minister has been unable to retain the confidence of the National Assembly for a full term.

Following the successful no-confidence motion under Article 95 of the constitution and the intervention of the Supreme Court, Mian Muhammad Shahbaz Sharif, the candidate jointly presented by the Pakistan Democratic Movement (PDM), who is also the President of the Pakistan Muslim League (Nawaz), was elected as the 23rd Prime Minister of the Islamic Republic of Pakistan. He took the oath from office as President of the Senate on April 11.

Shahbaz Sharif enjoys a good reputation as an administrator who delivers projects at “God’s speed”. He is said to be the key force in overcoming the energy crisis in Pakistan. Its ability to provide governance and execution of development projects is well known. However, his previous experience was limited to provincial politics and administration. National policy issues remained the subject of his older brother, the three-time prime minister of Pakistan, who was disqualified for life by the Supreme Court under Article 62(1)(f) of the constitution. (PLD 2017 SC 692 and PLD 2018 SC 1). The challenges facing the federal government, particularly in the current situation, will test its capabilities and skills.

Pakistan is currently facing a series of economic, constitutional, national and international challenges. The people of Pakistan are looking forward to relief in terms of controlling inflation and creating employment opportunities so that they can easily meet their basic needs.

The outgoing government has left Pakistan on the brink of default. Foreign exchange reserves of the State Bank of Pakistan (SBP) are depleting at an alarming rate. Pressure may mount further with rising global energy prices. The government of Pakistan Tehreek-i-Insaaf (PTI) left reserves at $17.4 billion and a dollar to rupee parity at one dollar equivalent to 189 rupees, the highest in our history.

Pakistan needs immediate financial support from international donors and friendly countries to maintain its reserve at a reasonable level. The most immediate task for Miftah Ismail and his team will be reviving the stalled $6 billion International Monetary Fund (IMF) bailout. Our consistent failure to meet agreed terms has jeopardized the continuation of this program.

The current fiscal year, which will end on June 30, will have a historically high current account deficit (CAD) and an unsustainable budget deficit of over 4 trillion rupees. The new government therefore has no choice but to increase taxes on businesses and the already struggling working class, as well as to raise the prices of petroleum products and electricity to close these gaps.

In addition to these internal challenges, the new coalition government will face the Financial Action Task Force (FATF) in June 2022. Despite high-level political commitment to work with the FATF and the Asia-Pacific Group (APG) to strengthen its anti-money laundering and financing of terrorism (AML-CFT) regime, Pakistan missed several deadlines to implement the first action plan. Additionally, in June 2021, the FATF included an additional six-point action plan to be completed by June 2022 – this was based on the anomalies highlighted by the APG in the mutual evaluation report published in 2019 and follow-up reports. However, after almost four years, Pakistan is still on the list of jurisdictions under increased scrutiny.

The outgoing government has left Pakistan on the brink of default. Foreign exchange reserves of the State Bank of Pakistan (SBP) are depleting at an alarming rate.

Pakistan’s level of compliance according to the updated consolidated assessment ranking was last assessed as fully compliant out of eight recommendations, partially compliant or with moderate deficiencies out of three, largely compliant out of 27 with minor deficiencies and not compliant or with major shortcomings on two recommendations. Pakistan’s effectiveness was rated on a scale of high, substantial, medium, and low levels of effectiveness and based on 11 immediate outcomes (IRs). Pakistan’s efficiency levels were rated low out of 10 and average for one result (related to international cooperation).

With this level of compliance, Pakistan may not be able to impress the FATF at the next plenary meeting. The FATF verification process identify jurisdictions with strategic gaps by placing those on its list of jurisdictions under heightened scrutiny. It includes countries that perform poorly in its mutual evaluation. It specifies the criteria as having at least 20 non-compliant (NC) or partially compliant (PC) ratings for technical compliance; or it is classified NC/PC on 3 or more of the following recommendations: 3, 5, 6, 10, 11 and 20; or it has a low or moderate level of effectiveness for 9 or more of the 11 immediate outcomes, with a minimum of two weak; or it has a low level of effectiveness for six or more of the 11 immediate outcomes.

During these four years, we have focused on technical compliance, despite the reservations of the FATF and other leading international institutions. We have hardly taken the trouble to correct the anomalies in our basic AML-CFT operational framework. A The Financial Control Unit (FMU) was created in 2007. In February 2015, he obtained the autonomous body status. This so-called autonomous body is supervised by the general committee made up of federal cabinet secretaries, including the president of the National Accountability Bureau. The general committee is subordinate to the national executive committee composed of ministers considered politically exposed persons (PEPs) so that their involvement in dealing with AML-CFT issues is considered high risk.

The new law, as written, is complicated and confusing. It comprises several bodies and committees whose competences and scope overlap. For example, lawyers and accountants, who are considered vulnerable to money laundering and terrorist financing, have been given the power to self-regulate. This new law also gives professional bodies the power to act as appeal authorities. This goes against the principles of independence and could lead to conflicts of interest.

A comparison of our progress and the immediate results requirements to assess the effectiveness of our system shows that we have not followed international best practice in addressing FATF concerns..

Although it seems difficult for Pakistan to respond to FATF concerns at the next meeting, it actually depends on the personal interest shown by the Prime Minister, the Ministry of Foreign Affairs and the Prime Minister’s team who s deal with FATF issues. It is high time for the government to review the laws, rules and regulations already in place to address risk, policy and coordination concerns.

The government should also focus on addressing concerns about corporations, trusts and other legal arrangements. Since non-profit organizations are more vulnerable to money laundering, the government should undertake a full risk assessment of all other work and funding beyond their designated area. Pakistan should also take strict measures against banned outfits and investigate their sources of funding by assessing the risks associated with new technologies.

Likewise, we must work to improve the operational regime and minimize the role of politically exposed persons in the processing of AML-CFT related decisions. A major challenge for the new government is to satisfy the concerns of the FATF so that we can gain respect globally. This will only be possible when we are fully aware of our responsibilities and when experts deal with these issues. Maintaining the status quo will further undermine the confidence of foreign investors and will have an impact on our economy.

Abdul Rauf Shakoori is a US-based corporate lawyer

Supreme Court Advocate Dr. Ikramul Haq is Adjunct Professor at Lahore University of Management Sciences (LUMS)

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