Pakistan may not be able to exit FATF grey list, post APG action

MANOJ JOSHI

Preliminary reports – that have not been officially confirmed yet – suggest that Pakistan has been ‘blacklisted’ by the 22nd Asia-Pacific Group on Money Laundering (APG), an affiliate of the Financial Action Task Force (FATF), that concluded in Canberra on 23 August. This should send alarm bells ringing in Islamabad.

On the eve of the meeting held in Canberra, the Pakistani authorities were allowing it to be known that they would sail through, based on the mutual evaluation report (MER), related to the work they had done in ‘strengthening’ anti-money laundering (AML) exercises, and ‘countering’ financing terror (CFT).

Now, however, they are saying that the MER may not reflect the ‘real’ progress that they had made since October 2018.

The APG and FATF processes are separate, but they have an important bearing on each other.

Has Pakistan Flunked the Test?

As per the reports which have mainly played out in the Indian media without any official confirmation yet, Pakistan seems to have flunked the test royally: the APG reportedly found that Islamabad failed to meet its rules on 32 out of 40 special standards and benchmarks, relating to its legal and financial system, and 10 of 11 ‘effectiveness’ parameters relating to the enforcement of safeguards against terror financing (TF), money laundering, and have effectively ‘blacklisted’ Pakistan by awarding it its lowest “enhanced expedited follow-up” ranking.

The APG and FATF processes are separate, but they have an important bearing on each other. It is clear now that Islamabad will not only find it difficult to extract itself from the FATF’s grey list – also known as “jurisdictions with strategic deficiencies” – but actually have to confront being blacklisted.

Islamabad might find it tough to get going in the FATF meetings – first, a review meeting in Thailand in September, and then the crucial plenary on 18-23 October.

FATF’s To-Do List for Pakistan

Pakistan was placed on the FATF grey list in June 2018. A press release  of the FATF at that time, noted that Pakistan had made a “high level political commitment” to work with the FATF and APG to strengthen its AML/CFT regime, and “address its strategic counter-terrorist financing related deficiencies”.

The FATF had given Pakistan a long list of things to do:

• First, to have Islamabad identify terrorism financing (TF) risks, and then assess and deal with them.
• Second, to demonstrate that remedial actions are applied in the case of AML/CFT violations, and that they are complied with by financial institutions.
• Third, to demonstrate that action is being taken against illegal money or value transfer services.
• Fourth, to show that action is being taken to identify cash couriers, and enforcing controls on illicit movement of currency.
• Fifth, improve coordination between the provinces and federal government.
• Sixth, show that the authorities are identifying and investigating terror-financing (TF) activity, and TF investigations and prosecutions are hitting the right persons and entities.
• Seventh, show that TF prosecutions are effective.
• Eighth, demonstrate effective action against all terrorists in the UN’s 1267 and 1373 designation lists.
• Ninth, demonstrate that designated persons are deprived of their resources.

In turn, Pakistan had given the FATF a 27-point Action Plan through which, it hoped, it could exit the grey list. A year later, in June 2019, the FATF said that Pakistan had failed to complete its action plan, and warned that Islamabad could face blacklisting if it did not meet its commitments by October.

Though Imran Khan has accused New Delhi of lobbying the FATF against Pakistan, the real push is coming from its members like UK, Germany, France and the US.

Real Pushback Against Pak from Western Countries

Earlier this month, Islamabad had given the FATF a 450-page compliance document outlining its actions against terror groups in the past 18 months, the changes it had made in laws dealing with terrorism, and so on. Pakistan claimed it had charged Lashkar-e-Taiba chief Hafiz Saeed with terror financing, and froze all the assets of the Jamaat-ud-dawa and other UN proscribed groups.

In view of the APG ruling, Pakistan’s chances of exiting the grey list look bleak. Indeed, Pakistan’s struggle now will be to stay out of the black list.

Clearly, the APG did not buy this and if its action is any guide, Islamabad is going to find it tough to get going in the FATF meetings – first, a review meeting in Thailand in September, and then the crucial plenary on 18-23 October.

India is a member of both the APG and the FATF, and though Imran Khan has accused New Delhi of lobbying the FATF against Pakistan, the real push is coming from its members like UK, Germany, France and the US, countries which play a key role in the global financial system and can impose restrictions and penalties on Pakistan.

It is more than likely that western countries are squeezing Pakistan where it hurts its pockets.

Potential Impact of Being Blacklisted

In view of the APG ruling, Pakistan’s chances of exiting the grey list look bleak. Indeed, Pakistan’s struggle now will be to stay out of the black list.

This would lead to a financial downgrade and restrictions on its markets. It would find it difficult to get more money from the IMF and other western countries or, for that matter, service its debts which take up a quarter of the government’s revenues currently. It is more than likely that western countries are squeezing Pakistan where it hurts its pockets.

Significance of Action Taken by FATF & Affiliates

The FATF is really about naming and shaming, rather than actually directly fighting terrorism. After all, people like Hafiz Saeed, the Haqqani network, and Masood Azhar are known and already proscribed.

But the importance of the action lies in the fact that like all political parties, insurgencies and terrorist groups require money to function. Squeezing their money supply is sometimes a more efficacious way of dealing with them, than sending in the police or the army. This is the logic that has confronted Pakistan since the Financial Action Task Force got underway.