Why Financial Action Task Force and developing economies need more interaction 

Today several developing economies find themselves on the Financial Action Task Force (FATF) watch list, not knowing fully why they are part of this and how something within their national boundary may have contributed to the financing of terrorism. 
Understanding what FATF wants is immensely important for developing economies given the implications for a country if it is put on this list. The implications could include more stringent scrutiny by financial regulators and banking organizations, increased costs faced by traders and investors who may wish to deal with a country on the FATF list, and international lending institutions putting a maximum ceiling on transactions with such economies. 
FATF is an inter-governmental body dealing with threats to the integrity of the international financial system, which includes money laundering and terrorist financing. Most countries that host the major financial hubs globally are members of this body. FATF has the mandate to set principles and develop sound legal, regulatory and operational measures that could curb money laundering. 
Once countries find themselves on the FATF list, their international credit rating may be affected. This implies that the country’s ability to borrow from international capital markets or multilateral organizations may suffer. 
Dealings with some international banks that comply with FATF decisions could become difficult, making inflow and outflow of foreign transactions relatively costlier. A short-term fallout on the domestic stock market can also be expected as foreign participants may fear more stringent future measures against the country. If the country hosts branches of foreign banks, the regulators of these banks may ask to halt expansion of bank branches or gradually roll back operations if the country continues to remain on the list.

Understanding what FATF wants is immensely important for developing economies given the implications for a country if it is put on this list.

Dr. Vaqar Ahmed

The pressures become particularly acute if the country is facing pressures on the current account of the balance of payments as well as the local currency. In this case the last resort is the International Monetary Fund (IMF). One could expect a reluctance of IMF’s leading shareholders, including the US and the European Union, to bail out the country’s balance of payments unless it takes significant steps that make it a candidate for exit from the watch list. These steps could also be built-in as a conditionality for the bailout package by the IMF. 
A key question here is if measures by the FATF have really resulted in such negative implications for the growth and external account of economies that face tougher demands from the task force. 
If we take Pakistan’s example — a country that remained on the watch list between 2009 and 2015 — the pressures on economic growth cannot be fully attributed to the FATF decision. In fact, during these years the key constraint to growth was local energy shortages, which were overcome through the China-Pakistan Economic Corridor (CPEC) programme initiated in 2013. 
For most of the period during which Pakistan was on the watch list, there was weak hand-holding from the FATF on how it could be helped to exit (the list). Pakistan went ahead with strict measures against some organizations that may have been involved in activities that concerned FATF. Their operations under new names were also prohibited. 
Pakistan also overcame the deficiencies pointed out by FATF in 2010 regarding a weak legal and regulatory framework and the country implemented an effective action plan. The Anti-Terrorism Act ,1997 was amended by parliament, which empowered law-enforcing agencies to trail terrorist financing and anti-money-laundering cases. 
The Central Bank in Pakistan formulated the "Anti-money-laundering and combating terrorism" regulations in 2012 and advised  banks and development finance institutions to implement regulatory agenda as per international standards so that the risks generated by money laundering and terrorist financing could be neutralized.
There is a consensus in most developing countries that money laundering and terrorist financing should be curbed. However, greater engagement is required between FATF and countries with regulatory deficiencies that include Iran, Afghanistan, Bosnia and Herzegovina, Ethiopia, Iraq, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen. 
Only with more frequent interaction will both sides understand each other’s perspectives. It is important to note that when countries are put on this list it is not just the leadership that is being penalized but its people who, for the most part, have no role in ill-intentioned financial transactions.
— Dr. Vaqar Ahmed is a joint executive director, Sustainable Development Policy Institute, Pakistan (SDPI). He is the author of the book "Pakistan’s Agenda for Economic Reforms." Twitter: @vaqarahmed