Pakistan’s FATF blacklisting is highly unlikely

Pakistan’s FATF blacklisting is highly unlikely

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Pakistan Stock Exchange’s (PSX) benchmark KSE-100 shares index fell over 2 percent or 824.70 points to close at 40,008.29 on Dec. 23, ostensibly on the back of reports that Pakistan received 150 questions by the Asia Pacific Group (APG) in response to its report submitted to the anti-terror financing watchdog earlier. This once again raised fears of Pakistan being placed on the blacklist by the Financial Action Task Force (FATF). While in reality the chances of such an outcome are low, it nevertheless remains a source of concern not only for the market, but also for the overall economic reform agenda.

In its first review of the Extended Fund Facility (EFF) program released on Dec. 19, the International Monetary Fund (IMF) stated that potential external risks included a potential blacklisting by FATF, which could result in a freeze of capital flows to Pakistan and slow progress in refinancing/re-profiling loans from major bilateral creditors. Nevertheless, having pointed out the risks of blacklisting, the IMF also affirmed that the authorities have been addressing anti-money laundering and combating terrorism financing.

At the end of the last plenary session in October this year, FATF had indicated its satisfaction at the progress made by Pakistan in anti-money laundering and fighting terrorism financing since June 2018. It is worth noting that Pakistan has had to complete FATF's International Cooperation Review Group action plan in 15 months, something which takes other countries over two years on average. It is also worth noting that the market’s nervous response to the list of questions reflect an erroneous conflation of the FATF’s ICRG 27 point action plan that Pakistan is committed to implementing by Feb. 2020 - with the separate and distinct undertakings to APG that have a longer period for full implementation.

While it has been challenging for the government to meet all the commitments it has given to FATF, the government has demonstrated considerable determination to avoid slippages.

Javed Hassan

While enforcement and effective regulation in the formal sector have successfully been implemented for quite some time now, the Pakistan government has recently focused the bulk of its efforts on bringing the informal sector into compliance with the ICRG action plan. It has worked at 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, are fully regulated. Consequently, many thousands of non-profit organizations have already been mapped for risks of terror financing and money laundering.

While the two financial regulators, the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan, had already built capacity as institutions to put in place risk-based supervisory frameworks, the Law Enforcement Agencies (LEAs) and the judiciary, had until recently lagged behind. As a result, successful prosecution and convictions for offences were  a challenge.  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 establishment of effective inter-agency coordination mechanisms.

The success of these steps, as they are fully implemented by the government, is beginning to result in an increase in the number of terror financing and money laundering prosecutions. For example, an anti-terrorism court (ATC) in Lahore recently indicted Hafiz Saeed and his close aides - Hafiz Abdul Salam, Muhammad Ashraf and Zafar Iqbal on terror financing charges. It still remains to be seen how such indictments are successfully converted into convictions.

The government has established a National Coordination Committee and an autonomous FATF secretariat, which have been mandated to complete the action plan agreed with the FATF. In order to meet 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 are to generate, disseminate, and analyze information in order to complete ICRG action plan items.  

With the assurance of being provided technical assistance by several multilateral agencies, including the World Bank and IMF, the government feels confident that it will complete the action plan by the end June 2020. This will include the areas of risk-based supervision, terrorist financing investigations of designated entities, confiscation (specifically with regards to cross-border currency controls) and targeted financial sanctions on designated entities of concern.

By the end of March 2020, the government has stated it will improve measures to pursue investigations and prosecutions of terrorist financing by UN designated entities of concern; and effective implementation of targeted financial sanctions against their assets. While it has been challenging for the government to meet all the commitments it has given to FATF, the government has demonstrated considerable determination to avoid slippages. With support now being provided by international development agencies, it appears highly unlikely that Pakistan will be placed on FATF’s blacklist.

- Javed Hassan is an investment banker who has worked in London, Hong Kong, and Karachi. He tweets as @javedhassan. 

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