The Financial Action Task Force (FATF) has been striving to create an enabling environment that facilitates both government and the private sector to gear up against money laundering and terror financing challenges. Technological advancements, the development of tax havens and complex corporate structures continue to enable criminals to hide their identity and their illicit activities such as drug trade, human trafficking, bribery, corruption and misappropriation of public funds. These are then introduced in the financial system and laundered for further use.
To keep track of global developments and progress made by member countries, the FATF regularly convenes to identify and review jurisdictions with strategic anti-money laundering and counter financing of terrorism (AML-CFT) deficiencies. The FATF’s International Cooperation Review Group (ICRG) reviews jurisdictions based on threats, vulnerabilities and risks arising from the jurisdictions.
The most recent four-day virtual meeting of the ICRG concluded on February 25.
As per FATF protocols, a jurisdiction is reviewed when:
It does not participate in an FATF-style regional body (FSRB) or does not allow mutual evaluation results to be published promptly; or
It is nominated by an FATF member or an FSRB. The nomination is based on specific money laundering, terrorist financing or proliferation of financing risks or threats coming to the attention of delegations; or
It has achieved poor results on its mutual evaluation, specifically:
– it has 20 or more non-compliant (NC) or partially compliant (PC) ratings for technical compliance; or
– it is rated NC/PC on three or more of the Recommendations 3, 5, 6, 10, 11, and 20; or
– it has a low or moderate level of effectiveness for nine or more of the 11 immediate outcomes, with a minimum of two lows; or
– it has a low level of effectiveness for six or more of the 11 immediate outcomes.
Pakistan is one of the nations that have been marked by the global watchdog as a jurisdiction with increased monitoring due to strategic deficiencies in its AML-CFT regime. Pakistan was assigned this designation initially in June 2018. However, despite a lapse of more than 40 months, Pakistan’s journey to satisfy the global community regarding its efforts related to AML-CFT is not ending. Though Pakistan’s compliance on the technical side has significantly improved, their effectiveness is ranked as poor. This fact can be verified through the recent consolidated rating assigned to Pakistan, based on the third follow-up report, which has marked Pakistan as fully compliant on eight recommendations, partially compliant or with moderate shortcomings on three, largely compliant on 27 with minor shortcomings and non-compliant or with major shortcomings on two recommendations, respectively. The consolidated assessment report further states that Pakistan’s effectiveness measures were rated on a scale of a high, substantial, medium and low levels of effectiveness, based on 11 immediate outcomes (IOs). Pakistan’s levels of effectiveness were rated low on 10 and medium for one IO, which relates to international cooperation. The recent consolidating rating, released in February 2022, shows that no progress in compliance level was noted in the current ICRG meeting.
Once implemented, a firm risk-based approach will enable Pakistan in chalking out appropriate strategies to address the full spectrum of risks spread across multiple sectors and entities.
Though Pakistan complied with 30 action items the remaining four action items are yet to be complied with. The FATF wants Pakistan to address concerns related to the provision of evidence that it actively seeks to enhance the impact of sanctions beyond its jurisdiction by nominating additional individuals and entities for designation at the United Nations (UNS); and demonstrating an increase in ML investigations and prosecutions and that proceeds of crime continue to be restrained and confiscated in line with Pakistan’s risk profile, including working with foreign counterparts to trace, freeze and confiscate assets. The consolidated assessment rating released in February 2022 noted no change in Pakistan’s compliance ranking. Though the final decision is awaited till the time of writing these lines, it is widely believed that a detailed review regarding Pakistan’s progress will be made in June 2022.
Apart from these concerns, the Mutual Evaluation Report raised concerns regarding AML-CFT understanding. In this regard, the role of regulators becomes most significant in providing guidelines and sector-specific training to the concerned professionals. However, this role is not being played in its true sense. The State Bank of Pakistan (SBP) is a regulator of the banking and non-banking financial institution whereas the Financial Monitoring Unit (FMU), a financial intelligence unit of Pakistan, is responsible for evaluating suspicious transactions, sharing information of money laundering related with law enforcement agencies, detecting terrorist financing and other financial crimes. It appears that both these institutions either lack expertise and skills or have no interest to enforce international best practices standards in their domains. The previous slapping of a penalty of $225 million by the New York State’s Department of Financial Services (NYSDFS) on Habib Bank Limited (HBL), and now the Federal Reserve Board imposing a penalty of $20.4 million on the National Bank of Pakistan (NBP) for anti-money laundering violation is a charge sheet for both the SBP and the FMU. The parliament should summon the heads of both institutions and ask them to explain the reason for their failure to detect the deficiencies in their AML-CFT regime which brought us international embarrassment.
The parliament should also inquire from the SBP and the FMU what actions these institutions have taken to evaluate the NBP’s ML-CFT programme since the Federal Reserve raised concern on the role of the senior management regarding the AML-CFT compliance, BSA/AML compliance programme, internal control, risk assessment, customer due diligence and retention of customer information, including suspicious transaction reporting. Similar concerns were raised in the Mutual Evaluation Report of 2019. Apart from the financial institutions, the reports raised questions regarding SBP’s understanding of AML-TF risks. The report highlights that reporting of suspicious transactions was not commensurate with the country’s risk profile.
All these issues raised by either Asia Pacific Group (APG ) or the US regulator show that our AML-CFT regime needs structural reforms. We have highlighted them in various articles with respect to the existing framework of AML-CFT which is being run by federal secretaries and controlled by federal ministers, of whom a majority are facing corruption allegations. Pakistan needs to revisit its existing AML-CFT framework and form an independent regulator.
A proactive and risk-based approach can help Pakistan in protecting its financial system and other sectors from misuse by criminals and terrorists. It must deploy technically sound professionals who have awareness and understanding of money laundering and terrorist financing risks. They should be given the mandate to set regulatory obligations and take enforcement actions while monitoring compliance with AML-CFT obligations. Criminal elements keep on identifying loopholes and exploring new avenues that can help them conduct their illicit activities. The regulatory institutions must be smart enough to tailor their approach in accordance with the risks arising from a variety of sectors.
Equilibrium must be achieved in a way that regulatory activities do not place unnecessary burdens on sectors, entities and activities with low-risk ratings. This is critical for maintaining the momentum of the formal economy which indirectly reduces overall money laundering and allied risks by increasing documentation and transparency. The transition from a broad one-fit-for-all policy to a sector-specific and risk-based approach will take time as it requires a change in the compliance and enforcement culture. It simultaneously requires continuous commitment and investment in capacity building and training of resources. Once implemented, a firm risk-based approach will enable Pakistan in chalking out appropriate strategies to address the full spectrum of risks spread across multiple sectors and entities.
Huzaima Bukhari, Advocate High Court & adjunct faculty at Lahore University of Management Sciences (LUMS), is a member of the Advisory Board and a visiting senior fellow of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in White Collar Crimes and Sanctions Compliance. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions with Dr Ikramul Haq