Sunday, 27 June 2021

How FATF grey list impacts Pakistan and what progress has been made

Islamabad: The Financial Action Task Force (FATF) decided to keep Pakistan on its grey list until further progress despite the country complying with 26 out of 27 action plans. The decision was termed as “unfortunate and discouraging” by the political leaders and legal experts.

Pakistan was placed in June 2018 on the FATF’s grey list and urged to strengthen anti-money laundering and increase fight against financing terror. Pakistan has enacted 17 laws against money laundering and terror financing and initiated several legislative amendments during the last two years to comply with FATF criteria.

In the June 25 plenary, the global anti-money laundering watchdog issued a new six-point action plan for Pakistan to simultaneously address deficiencies identified in the 2019 Asia Pacific Group on Money Laundering (APG) Mutual Evaluation Report (MER).

This is a new challenge for Pakistan struggling to get off the grey list since 2018. “Pakistan has achieved exemplary progress despite the tough action plan, tight timelines and pandemic challenges” said Minister Hammad Azhar, who is the chairman of the FATF coordination committee.

Pakistan is committed to complying with both FATF evaluation processes and is determined to exit the grey list in 12 months, Azhar said in a press briefing on June 25. “We have set a target to complete all the action plans in 12 months” which normally countries take two years, he said.

Is FATF being used for political purposes?

Pakistan’s Foreign Minister Shah Mahmood Qureshi on Saturday questioned the watchdog’s decision to keep Pakistan on the grey list despite the implementation of 26 out of 27 points. It needed to be looked into “whether FATF is a technical forum or a political one and if the forum was being used to serve political motives” he said, stressing that there is no justification for the move. He also said that Pakistan will continue to take anti-terrorism and anti-money laundering measures as “these are in Pakistan’s own interest.”

Setback for government and legal experts

Pakistani officials were optimistic about getting off the grey list in June 2021 due to upgraded rankings in the recent reports but the outcome was disappointing for experts as well. “This is an unfortunate development and a blow to advocates and practitioners of international law in Pakistan” as FATF not only retained Pakistan on the grey list but also provided an additional action plan, Jamal Aziz, executive director at Research Society of International Law (RSIL), told Gulf News.

Jamal Aziz Image Credit: Supplied

This move also supports the “opposing view held by many that global governance processes and legal frameworks are motivated by political considerations as opposed to adherence to the law,” he said.

Most stringent FATF plan

In June 2021, RSIL – one of the largest legal think-tanks in Pakistan – published a detailed report on Pakistan’s FATF-related progress. When compared with countries such as Iceland, Bangladesh, Bhutan that exited the grey list, the report found that “FATF’s scrutiny on the status of Pakistan’s TF/ML investigation and prosecution was nowhere near as stringent for the other countries.”

Pakistan’s 27-point action plan “may be the most ambitious plan handed to any country by the FATF” but in response Pakistan undertook massive structural reforms to improve compliance in alignment with global standards. That in itself is “a success story for a country facing as uphill risks and challenges as Pakistan” Aziz remarked.

Economic implications of FATF grey list

Being on the FATF grey list means the country will face enhanced monitoring procedures. Although there are no direct economic implications, the listing has affected several sectors. This is not the first time that Pakistan has been on the grey list but the monitoring mechanism is stricter now as the listings “did not carry the financial, geopolitical or reputational implications” previously.

“This is evident from Pakistan’s own history with the global AML/CFT watchdog as this time Pakistan was required to display effective results very rapidly and the whole review progress has attracted significant media coverage” said Jamal Aziz.

“The adverse economic effects of grey-listing are increasingly evident and have an impact on foreign direct investment (FDI) and ease of business whereas hostile states have also used Pakistan’s status to damage its reputation as a responsible member of the international community,” Aziz explained.

A 2021 research paper published by an independent think-tank, Tabadlab, reported that grey-listing spanning from 2008 to 2019, may have resulted in GDP losses worth $38 billion.

“The main impact of being on the grey list is that it raises the risk that the country could be placed on the black list which is a serious threat and factor that discourages investors,” Ali Farid Khwaja, a London-based financial expert and chairman of KASB Securities, Pakistan’s leading stock brokerage and investment bank, told Gulf News.

Given the geopolitics of the region, he also feared that “FATF is being used as a stick to make Pakistan yield to political demands.”

Ali Farid Khwaja Image Credit: Supplied

Many Pakistanis have criticised FATF for acting a “politically driven forum to exert pressure on Pakistan” to achieve desired objectives. Describing the reasons behind the frustration in the public, Barrister Taimur Malik said that “FATF is perceived as a geopolitical tool because of an increasing awareness that Pakistan’s legal, regulatory and financial frameworks are much more robust than other countries, which are currently in the grey list and even those which are not on the list.”

The legal reforms and compliance “has enhanced customer due diligence requirements for ordinary citizens and businesses and people now feel the impact of the FATF requirements,” said Malik, partner at a leading international law firm.

Barrister Taimur Malik Image Credit: Supplied

Opportunity to strengthen financial mechanisms

Experts believe that recommendations by FATF are in Pakistan’s own interest. On a positive note, “Pakistan’s grey-listing has enabled policymakers with the political impetus to undertake long-required structural reforms in the criminal justice sector, banking and finance, regulatory compliance and initiate checks and balances.

“The new action plan will allow the country to focus on Designated Non-Financial Business and Professions (DNFBPs) and improve international cooperation which will yield positive results for its economy, rule of law and governance frameworks in the long-run.”

The one remaining action item, which is a key priority for FATF, is related to investigations and prosecutions of UN-designated terrorist groups. For the new action plan, Pakistan will have to ensure robust financial crime control, engage in international cooperation in ML/TF investigations and regulating real estate agents and dealers of precious gems and stones, which are high-risk sectors for money laundering in Pakistan.



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