The Financial Action Taskforce (FATF), the global anti-terrorist financing and anti-money laundering watch dog, during its plenary session on June 25, 2021 reviewed the progress Pakistan has made on compliance with its standards and decided to retain it on the grey list or the list of ‘jurisdictions under increased monitoring’.
Pakistan has been facing the FATF’s scrutiny since 2018 for its inability to curb the terrorist financing and money laundering activities being undertaken on its soil. It has had several reviews since 2018, conducted every four months, to access its progress along the action plan created by the FATF for the country to implement corrective measures. It has made incremental progress with every review but has been given repeated extensions to allow it more time to fully comply with the 27 FATF action items that it was found to default on.
The June 25threview found Pakistan non-complaint with just one of the 27 action items. The previous review was in February 2021 and since it had made significant progress in addressing deficiencies in 24 of the 27 action plan items, it was allowed an extension till June 2021 to fully comply with the remaining three items. The FATF has now urged Pakistan to address as soon as possible the one remaining action item on terrorist financing by demonstrating that the investigations and prosecutions it is undertaking, target senior leaders and commanders of UN designated terrorist groups. The next review will take place in October 2021.
Other than a commitment to comply with the one remaining action item, Pakistan has also made a further high-level commitment in June 2021 to address the strategic deficiencies related to a new action plan that focuses on combating money laundering. The country will now work towards addressing its strategically important AML/CFT (anti money laundering/countering terrorist financing) deficiencies, namely by: (1) enhancing international cooperation by amending the money laundering law; (2) demonstrating that assistance is being sought from foreign countries in implementing UNSCR 1373 designations; (3) demonstrating that supervisors are conducting both on-site and off-site supervision commensurate with specific risks associated with Designated Non-Financial Businesses and Professions (DNFBPs) , including applying appropriate sanctions where necessary; (4) demonstrating that proportionate and dissuasive sanctions are applied consistently to all legal persons and legal arrangements for non-compliance with beneficial ownership requirements; (5) demonstrating an increase in money laundering 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; and (6) demonstrating that DNFBPs are being monitored for compliance with proliferation financing requirements and that sanctions are being imposed for non-compliance.
FATF’s grey listing has certainly come at huge economic costs to the nation, with foreign firms now far more cautious about investing in it. A paper, ‘Bearing the cost of global politics – the impact of FATF grey-listing on Pakistan’s economy’, published by an Islamabad-based think-tank, Tabadlab, shows that that Pakistan’s grey-listing by the FATF from 2008 to 2019 may have resulted in a cumulative GDP loss of $38 billion.
If Pakistan fails to meet its obligations by October 2021, it risks being blacklisted by the FATF, effectively shutting down its access to international banking networks, including multilateral and bilateral development funds. Other punitive measures include targeted financial sanctions in accordance with United Nations Security Council Resolutions and further economic isolation.
The FATF will urge member countries to close existing branches, subsidiaries and representative offices of Pakistani banks that operate in its member countries and terminate all correspondent banking relationships with Pakistani banks. The FATF will advise foreign banks to withdraw their presence from Pakistan. Its sovereign credit ratings will be further downgraded and the country will be unable to access funds from multilateral development banks and international markets. Significantly, Pakistan will also be forced to reveal the safely guarded details of some projects under the China Pakistan Economic Corridor (CPEC).
Even while it is on the grey list, it is increasingly becoming difficult for the country to get financial aid from the International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and the European Union, thus further enhancing problems for the debt-ridden nation which is in a difficult financial situation.
Pakistan during its recent discussions with the IMF on its $ 6 billion loan programme revealed that it would need more time to comply with FATF’s standards citing the delays due to the COVID-19 pandemic and other capacity constraints. At the October 2020 plenary, Pakistan had failed to fulfil six out of 27 obligations. Pakistan had requested an extension by similarly citing the impact of the COVID-19 pandemic on its healthcare system and its economy.
The IMF has warned that there are substantial risks associated with Pakistan’s growth outlook, amplified by the coronavirus pandemic. “Failures to meet programme objectives, including those related to the authorities’ AML/CFT action plan with the FATF, could hamper external financing and investment,” it has cautioned.
This is not the first time Pakistan has been included on the FATF’s grey list. It has already been on the list from 2012 to 2015 and was taken off due to the corrective measures it undertook at that juncture.
One of the important reasons why the FATF has refused to take Pakistan off the grey list is due to the nation’s failure to take action against UN-designated terrorists like Jaish-e-Mohammed (JeM) chief Masood Azhar, Lashkar-e-Taiba (LeT) founder Hafiz Seed, and Zakiur Rehman Lakhvi, the LeT’s operational commander. Azhar, Saeed, and Lakhvi are the most-wanted terrorists in India for their involvement in numerous terrorist acts, including the 26/11 Mumbai terror attacks and the 2019 bombing of a CRPF bus in Jammu and Kashmir’s Pulwama.
India has been critical of Pakistan’s inability to curb money laundering and terrorist financing and the continuous extensions given, and has been gathering diplomatic support to pose punitive actions against Pakistan. On several occasions, India has raised its voice against the involvement of elements within Pakistan in a number of terror cases on Indian soil, including the above-mentioned attacks. After the Pulwama attack, India presented evidence to the FATF that revealed links between Pakistani agencies and the Jaish-e-Mohammad, which had taken responsibility for the attack, including funding support. So, the October plenary will be very crucial for India.
Prime Minister Narendra Modi, at the G20 summit in Argentina in 2018, made AML/CFT issues a priority through his nine-point agenda to deal with fugitive economic offenders and terror financing. He urged the FATF to formulate a standard definition of fugitive economic offenders and develop standardised procedures for the ‘identification, extradition and judicial proceedings for dealing with fugitive economic offenders, to provide guidance and assistance to G20 countries, subject to their domestic laws’.
But India is not the only country that has suffered due to such acts of terror. After the 9/11 US attacks, Wall Street Journal reporter Daniel Pearl had travelled to Pakistan to work on stories about militant groups when he was kidnapped and beheaded by terrorists in Karachi. Four people including the principal accused, Omar Saeed Sheikh, were acquitted by the Pakistan Supreme Court in January 2021. The United States and other nations have criticised the acquittal.
Reports claim that France has taken exception to Pakistan’s position in the aftermath of the Prophet’s cartoon controversy. Last November, Pakistan witnessed a huge protest demanding that Islamabad severe diplomatic ties with Paris and boycott French products. Demonstrators trampled on images of the French president and burned French flags.
Thus, India will be supported by the U.S, U.K, France and Germany, which took the early lead on putting Pakistan on the grey list to get the country to work towards combatting militancy and to close financing loopholes to terrorist groups. But India’s efforts will be opposed by China, Pakistan’s all-weather friend, and countries of the Gulf Cooperation Council (GCC), Turkey, Malaysia and Russia, who have shown their support to Pakistan in the past and had prevented it from being blacklisted.
During the October 2021 plenary, the world will be on the lookout to see if Pakistan can fully commit to the FATF’s action plans by then or whether they will seek and receive yet another extension. This plenary will also gauge the ability and effectiveness of the FATF in enforcing strict standards and taking punitive actions against non-compliant states.
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This article is written by Purvaja Modak, Research Fellow, International Relations – Geoeconomics, Centre for Public Policy Research