One question being asked feverishly today is: will Pakistan exit the FATF gray list? Predicting one or the other way is difficult, however, one thing is certain–Pakistan will not go on the blacklist. Whether we will come out depends more on our foreign relations than compliance with the technical standards. Compliance or no compliance, India, being one of the 39 members of FATF, will for sure oppose our exit from the grey list. China, Turkey, and Saudi Arabia had earlier supported our exit but we need 13 members to be on our side, not just 3. If we can win the new Biden administration to our side then surely we will exit. The million-dollar question is, can we win Biden? This will crucially depend on how the Biden administration views the peace deal with Afghanistan.
Geo-politics and foreign relations apart, the technical standards given by the FATF are difficult to meet. At the last meeting, the task force asked Pakistan to comply with a list of 27 points standards. The recent FATF-related legislation in Pakistan, the arrest/detention of certain people, different checks on banking transactions, and foreign currency dealings are an attempt to meet the conditions laid down by the FATF. Purely, on merit there seems to be a lot of progress, however, still, the diplomatic overtures underpin by national interests of member countries will have the final say.
The original recommendations of the FATF drawn up in 1990 were designed to combat the use of financial systems for laundering drug money. Immediately after 9/11, they expanded the mandate of FATF to include financing of terrorist acts and terrorist organizations in its fold. The FATF mandate says:
“Countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action, including designating an authority or mechanism to… ensuring that the risks are mitigated effectively… Countries should apply a risk-based approach (RBA) to ensure that measures to prevent… money laundering and terrorist financing are commensurate with the risks identified”FATF Mandate
The wording of the mandate implies that countries have to identify for themselves whether they are a high-risk or low-risk country and what measures will combat money laundering and terrorist financing within their country. However, the judge, jury, and executioner over the risk assessment and the combat measures taken by a country, is the FATF. Given the subjective nature of the risk assessment and the combat measures undertaken, it is not too difficult to change the goal post, asking a country to ‘do more’, if the geopolitical dynamics so demand.
We owe some of this trouble to ourselves. If we receive billions through wire transfer in the account of a very poor person and these transfers make headlines as well, then this will not help Pakistan’s cause at the FATF. Such transfers imply that the country’s financial systems are quite weak. However, for any money laundered into Pakistan or out of the country, there has to be a sender or a recipient country of such money–one wonders whether such sender or recipient country is also on the grey list?
The list of countries under the increased watch of FATF includes Pakistan and it also includes Panama–famous for the Panama Leaks. Another jurisdiction that earned fame during the leak’s time was the British Virgin Islands–but it is not on FATF’s watch list of countries. Could this be because of the special nature of its jurisdiction, ‘overseas British territory’, or is there something else to it. Britain of course is a member of the FATF.
Compliance with the FATF standards means introducing measures that have made it slightly more difficult to open and operate a bank account in Pakistan. Know Your Customer (KYC) requirements have increased for the banks. This is bound to affect financial inclusion adversely. If banks and the country at large decide to embrace the use of technology, woes of the customers will be less-rather than asking clients to run helter-skelter for providing a copy of the national ID card, the banks must link with the NADRA database to allow direct verification of the details of a client from the certified database. This will also kill the potential of submitting someone else’s ID card to support a transaction without his/her explicit permission. This would also make us more compliant with the FATF.
Given our serious efforts to comply, if we exit the grey list, we should remain on our toes. Any member country of the FATF can report another country needing to be watched more closely, and this can start proceedings for a greater watch. With India being a member of the FATF, our FATF-woes are not likely to end too soon. The solution lies in making ourselves economically strong enough that twisting our arm hurt the Have-countries–but this will take time and effort.
International Standards on Combating Money Laundering and Financing of Terrorism & Proliferation, the FATF Recommendations, Updated October 2020, FATF
Mutual Evaluation of Pakistan, 1st Follow-up Report, September 2020, Asia/Pacific Group on Money Laundering, APG Secretariat, Sydney, Australia. https://www.fatf-gafi.org/media/fatf/documents/reports/fur/APG-1st-Follow-Up-Report-Pakistan-2020.pdf