Why was Pakistan placed on the 'Grey List' of Financial Action Task Force (FATF)? What are the implications and what measures should Pakistan take to move out of this list ?
Financial Action Task Force (FATF) :
Pakistan was officially placed on the Financial Action Task Force (FATF) 'grey list' on Feb 21 2020,failing the country's efforts to avoid the designation. Being placed on the 'grey list' means that Pakistan's financial system will be designated as posing a risk to the international financial system because of "strategic deficiencies"in its ability to prevent terror financing and money laundering.
After being placed on the 'grey list', Pakistan will be directly scrutinised by the financial watchdog until it is satisfied by the measures taken to curb terror financing and money laundering.
The country spent three years on the 'grey list' between 2012 and 2015, without the designation affecting its ability to float international bonds, borrow from multilateral bodies,receive or send remittances or conduct international trade.
The status does little more than raising the compliance burden on counterparts, such as correspondent banks,dealing with entities within Pakistan's financial system, and therefore attaches an additional cost to many external sector transactions.
A 37-nation FATF plenary held its first meeting on Pakistan in February 2020 where China,Turkey and Saudi Arabia opposed the United States-led move to place Pakistan on the watchlist. But the US pushed for an unprecedented second discussion on Pakistan, held on February 22, 2020.By then, Washington had convinced Riyadh to give up its support to Pakistan in return for a full FATF membership. This left only two - China and Turkey - in the Pakistan camp, one less than the required number of three members to stall a move.
At this stage, the Chinese informed Islamabad that they were opting out as they did not want to “lose faceby supporting a move that's doomed to fail”. Pakistan appreciated the Chinese position and conveyed its gratitude to Turkey for continuing to support Islamabad against all odds.
What are the 'Black' and 'Grey' Lists?
These two terms actually do not exist in official FATF terminology. The group does identify “jurisdictions with weak measures” through two documents issued at the end of the plenary held thrice a year.The first document is the FATF's “public statement” that identifies two sets of countries. The first category groups countries into what is roughly equivalent to a 'black list' and is for “countries or jurisdictions with such serious strategic deficiencies that the FATF calls on its members and non-members to apply counter-measures”.The second category constitutes countries for which “FATF calls on its members to apply enhanced due diligence measures proportionate to the risks arising from the deficiencies associated with the country”.While North Korea is listed in the first category, Iran falls in the second. Pakistan was, however, not identified in the public statement. Rather, in June 2018, Pakistan was the new country listed in the second document issued after a plenary meeting. This second document was called “Improving Global AML/CFT Compliance:On-Going Process”. This is what is known, colloquially, as the 'grey list'.
Why was Pakistan put on the FATF 'grey list'?
Pakistan had first figured in a FATF statement after the plenary of February 2008. At that time,FATF had noted Pakistan's recent progress in adopting anti-money laundering legislation but urged financial institutions to be aware of the “remaining deficiencies” that could constitute a vulnerability in the international financial system. Pakistan gave a “high level" commitment in June 2010 that it would work with FATF and Asia Pacific Group, the regional FATF-like body, to sort out these differences. But, it continued to not demonstrate enough progress to be taken out of the grey list even in October 2011. The FATF public statement of February 2012 listed Pakistan among countries who have “Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies".The FATF's main concern was that Pakistan did not have appropriate legislation to identify terror financing, as well as, confiscate terrorist assets. Pakistan went out of the Public Statement to the second statement of“Improving public compliance" from June 2014,which noted that the country had made "significant progress".
After three years, Pakistan was back on the 'grey list' in June 2018.The FATF press release indicated that the 'action plan' should largely look at plugging the holes in terror financing and activities of UN-designated terrorists. The action plan submitted by Pakistan has 26 points, including demonstrating that targeted financial sanctions against all UN-designated terrorists have been implemented.
What has happened since Pakistan was put on the 'grey list'?
Since June 2018, all the FATF plenares have retained Pakistan on the grey list. However, it was not enough to be brought out of the 'grey list'. But, it was sufficient that Pakistan could not be bumped up to the FATF public statement which, with China,Turkey and Malaysia backing Islamabad. Pakistan raised the pitch that the FATF had been politicised, with Pakistan stating that India wanted to destroy Pakistani economy.China has also stated that there were “political designs" behind “some countries which want to include Pakistan in the blacklist”.
What are the implications?
Pakistan will have to comply with remaining crucial 13 points till June 2020, including prosecution and conviction of banned outfits and proscribed persons, for which the list already provided to Islamabad in order to come out of grey list of Financial Action Task Force (FATF).The details of remaining 13 points of action plan exclusively available with The News disclosed that Pakistan will have to submit progress report on crucial points within next couple of months and progress on these points can pave the way for coming out from grey list. If progress is not made then the dream of coming out from grey list will not be materialised. Out of 27 points action plan given by FATF, it had declared Pakistan fully compliant on 14 points and now there was new deadline of June 2020 for complying on remaining 13 points in a bid to ensure exit from the grey list of watchdog combating money laundering and terror financing around the globe known as FATF. “Practically, Pakistan has limited timeframe to comply with remaining 13 crucial conditions as the country will have to submit its progress report to joint working group (JWG) of FATF till April 15,2020. There is only one month left for making progress on important remaining points to demonstrate that Islamabad is seriously moving towards implementation on FATF conditions,”. Then face to face meeting is expected to take place in second week of May 2020 probably at Bangkok where Pakistan will have an opportunity to defend its progress report. Finally the FATF's plenary session is expected to meet in Paris in first week of June 2020 for deciding the fate of the country over the grey list. According to the list of remaining 13 points of 27 action plan
(1) Pakistan will have to demonstrate effectiveness of sanctions including remedial actions to curb terrorist financing in the country;
(2) Pakistan will have to ensure improved effectiveness for terror financing of financial institutions with particular to banned outfits;
(3) Pakistan will have to take actions against illegal Money or Value Transfer Services (MVTS) suchas Hundi-Hawala;
(4) Pakistan will have to place sanction regime against cash couriers;
(5) Pakistan will have to ensure logical conclusion from ongoing terror financing investigation of law enforcing agencies (LEAs) against banned outfits and proscribed persons;
(6) Pakistani authorities will have to ensure international cooperation based investigations and convictions against banned organisations (list provided to Pakistan) and proscribed persons (listprovided to Pakistan);
(7) The country will have to place effective domestic cooperation between Financial Monitoring Unit(FMU) and LEAs in investigation of terror financing;
(8) Prosecution of banned outfits and proscribed persons (list provided to Pakistan);
(9) Demonstrate convictions from court of law of banned outfits and proscribed persons (list providedto Pakistan);
(10) Seizure of properties of banned outfits and proscribed persons (list provided to Pakistan);
(11) Conversion of madrassas to schools and health units into official formations(list provided to Pakistan);
(12) To cutt off funding of banned outfits and proscired persons; and
(13) Pakistan will have to place permanent mechanism for management of properties and assets owned by the banned outfits and proscribe persons (list provided to PAksitan).
The FATF had already declared Paksitan fully compliant on 14 points out of total 27. The FATF given 27 points action plan in June 2018 when itplaced Islamabad into grey list. In Octuber 2019 plenary meeting, Pakistan was declared fully compliant on five points which are
(1) Understanding risks of counter financing terrorist (CFT) by the financial sector;
(2) Out reach sessions of Anti Money Laundering (AML) and CFT for the financial institutions;
(3) Developing an integrated database at airports;
(4) Mechanism to publicise designated persons and entities; and
(5) Terrorist Financing (TF) specific units and analysis done by Financial Monitoring Unit (FMU) and State Bank of Pakistan (SBP).
The FATF plenary in February 2020 found Pakistan compliant on 9 points of remaining points of action so Pakistan declared compliant on 14 points of total 27 point action. The FATF had found Pakistan compliant on
(1) Audit of financial institutions by the State Bank of Pakistan
(2) Suspicious Transaction Reports (STRs) disseminations and analysisi done by FMU
(3) Terror Financing risk assessment and its implementation
(4) Inter Coordination mechanism of federal and Provincial departments
(5) Parallel investigations by Counter Terrorism Departments (CTDs)
(6) Risk asesssment of cash smuggling
(7) Implementation of domestic cooperation to counter cash smuggling
(8) Understanding TF by the judiciary through conducting awareness and training session
(9) Risk based outreach of Designated Non-Banking Financial Institutions (DNBFI) and Non Profit Organizations (NPOs).
