Implementing FATF Action Plan – a painstaking process
Amid a stream of encouraging news on the economic front – falling current account and fiscal deficits, rising tax and inland revenues, and rising foreign investments and exports among others – the recent decision of Paris based terror financing watchdog, the Financial Action Task Force (FATF) to maintain Pakistan on its grey-list was a reminder of the many challenges the present government has inherited.
Due to its perceived high risks of terror financing, Pakistan has to complete FATF's International Cooperation Review Group (ICRG) action plan in 15 months, something which takes other countries over two years on average. Despite the painstaking process that has been undertaken by the government to complete ICRG’s action plan, Pakistan’s continuing position on the grey-list highlighted the necessity of further improvements.
FATF reviewed the measures taken and progress made by Pakistan in anti-money laundering and fighting terrorism financing since June last year, when the country first made a high-level political commitment to work with the FATF to address its related deficiencies.
At the end of the plenary session, FATF recognized that the measures taken by Pakistan to meet ICRG’s action plan meant it had fully completed five action items, partially completed a further 17, and only five remained incomplete. Nevertheless, the watch-dog expressed serious concerns with the deficiencies in Pakistan’s transnational terror financing risks, and at the country’s failure to complete ICRG’s action plan within the agreed timeline.
The FATF has recommended that Pakistan complete its full action plan by February next year and has warned that “should significant and sustainable progress not be made across the full range of its action plan 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 Financial Institutions (FIs) to give special attention to business relations and transactions with Pakistan.”
Soon after this announcement, Pakistan’s finance ministry in a statement reaffirmed the country’s commitment to implementing the action plan. The finance advisor to the Prime Minister, Mr. Abdul Hafeez Shaikh, in a press briefing in Washington DC reiterated the government’s determination to fulfil the obligations of the FATF action plan, but the challenges in achieving these objectives remain considerable.
The task force’s objectives are not limited to laws and their implementation, but also to the capacity to improve Pakistani law enforcement agencies and ensure convictions.
The task force’s objectives are not limited to laws and their implementation, but also to the capacity to improve Pakistani law-enforcement agencies and ensure convictions.
While enforcement and effective regulation has been largely successful in the formal sector, there is a lot of work that needs to be done in the informal sector. Pakistan’s government has committed itself to ensuring that all non-banking financial institutions such as currency exchanges as well as designated non-financial businesses (including real estate, gems and precious metals’ sectors), that can be conduits for illicit movement of currency will be fully regulated. As a result, 64,000 non-profit organizations have already been mapped for risks of terror financing and money laundering.
But prosecution and convictions remain a challenge. While the two financial regulators, the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan have built capacity as institutions to put in place risk-based supervisory frameworks, Law Enforcement Agencies (LEAs) and the judiciary have until recently lagged behind.
In order to address this deficiency, the government has upgraded both terror financing and money laundering risk assessment systems. A risk-based investigation strategy had been prepared for LEAs, as well as the establishing of effective inter-agency coordination mechanisms.
The government has also stated its plans to establish an autonomous FATF secretariat for better coordination between the federation, provinces and different institutions. In order to meet the organization’s tight deadlines, the government has constituted FATF cells in all its departments related to the ICRG action plan items. The general terms of reference for these cells is to generate, disseminate, and analyze information in order to complete ICRG action plan items.
The success of these steps as they are fully implemented by the government should be reflected in a significant increase in the number of terror financing and money laundering prosecutions, which result in successful convictions such that they are proportionate to the level of risk.
Now, the government will need to build upon the progress made to date on its partially complete ICRG action items, as well as address the five that remain incomplete. Though the Federal Minister for Economic Affairs, Hammad Azhar, is confident that the government will achieve its targets before the February 2020 deadline, the challenge ahead to complete all the items seems a deeply onerous one.
– Javed Hassan is a graduate of Imperial College London and an MBA from London Business School. He is an investment banker who has worked in London, Hong Kong, and Karachi.