The act of placing Pakistan in the list of Countries with strategic deficiencies in their Anti Money Laundering /Combatting Financing of Terrorism (AML/CFT) processes have been in the news for some time. This list is commonly referred to as the Gray list. This was part of efforts by the  Financial Action Task Force (FATF),an intergovernmental organisation, which was formed  at the Paris G-7 summit in July 1989[1] to strengthen and protect  integrity of the financial sector. It focusses primarily on the  challenges of money laundering, financing of terrorism and proliferation. The FATF now acts as the ‘Global Watchdog’ along with its other regional partners like Asia Pacific Group (APG)[2] etc. The continuing process of monitoring and review of policies and implementation by these bodies provide the basis for preparation of periodical reports and review lists. Pakistan was placed on the ‘Gray’ list for its persistent failure to comply with the FATF  recommendations[3] relating to anti money laundering and  countering terror financing.

2. This was, however, not the first occasion for Pakistan. The FATF had earlier (2012) placed Pakistan in the Gray list on grounds of  strategic deficiencies in its AML and CFT framework and had recommended that Pakistan should enact an appropriate legislation to comply with meet the FATF standards with respect to CFT and adapt its related framework  to identify, freeze and confiscate terrorist assets. Pakistan was taken off the list after it, subsequently, amended its domestic anti-terrorism legislation to align with global standards recommended by the FATF.  The second  time listing of Pakistan in the same list came about in the wake of growing concern in the international community over activities of Pak based terror outfits and a perceived connivance of a section of military-bureaucratic caucus to permit if not directly encourage such groups in their violent activities.

3. The normal process at FATF is of a decadal review of each country, after which decisions are taken on Grey or Black Listing. Pakistan was brought to the Grey List through an emergency procedure, called Nomination. UK, USA, Germany and France nominated Pakistan in January 2018 and the FATF placed it on the Grey List. However, if China had not supported the nomination, it would not have succeeded. The Indian role in trading support for the Vice Presidency for China versus China supporting the nomination of Pakistan, has not been written about much.

4. Throughout 2017, several FATF member states have been voicing their  concerns about failure of Pakistan to deliver on its commitment to strengthen the preventive measures to prevent terror financing (TF) and to initiate appropriate actions including freezing of assets of terrorist organisations. In January 2018, the United States moved a motion in the FATF to add Pakistan to the Gray list because of these  deficiencies in CFT processes.  The motion was subsequently supported by the UK, France and Germany. In February 2018, the FATF plenary  meeting decided to place Pakistan in the Gray list which came into force in June 2018. The reaction in Pakistan to this Gray listing was on expected lines. Some sections predictably tried to blame India for this action of the FATF. Indian side displayed maturity and behaved responsibly throughout as is expected of a member of the FATF. Some of the extreme comments/analysis emanating on behalf of Pakistan side even went to the extent of questioning the legitimacy of the FATF. The return of Pakistan to the Gray list is a clear pointer that it will have to traverse a long distance in order to register a credible and cognisable progress in its AML and TF framework and enhance effectiveness of its agencies concerned.

5. The Asia Pacific Group (APG), a multi-lateral ,inter-governmental regional arm of the FATF  has   41 members in the Asia-Pacific region, as well as organisations, and observers from outside the region. Under Article 1 of its Terms of Reference,2012, the APG is a non-political, technical   body, whose members are committed to the effective implementation and enforcement of the internationally accepted standards against money laundering, financing of terrorism and proliferation financing set by the Financial Action Task Force.  The APG has recently published “Anti-money laundering and counter-terrorist financing measures - Pakistan, Mutual Evaluation Report” in October 2019[4].

6. Salient observations of the report reveal the gaps – both structural and procedural- in the preparedness of Pakistan agencies  in critical areas. According to the report under reference, the first ML and TF ‘National Risk Assessment in 2017’ lacks a comprehensive analysis; ‘Competent authorities’ at varying levels including the private sector, was described as having  only ‘a mixed understanding of risks. The document further notes non-implementation of  ‘a comprehensive and co-ordinated risk-based approach in combating ML and TF’ ; only a nominal acceptance of ‘a multi-agency approach’ and  use of ‘financial intelligence to combat ML, TF, predicate crimes and to trace property for confiscation purposes’ to ‘a minimal extent’. The document points out structural shortcomings such as  inability of the FMU to spontaneously or upon request disseminate information and the results of its analysis to provincial CTDs - designated as TF investigation authorities’.  This, as would be expected, weakens the overall impact of such efforts considerably. Consequently, these institutions (CTDs) are left to their own devices. Some CTDs do access FMU information and financial intelligence for their TF investigations but only after wading through a time-consuming procedural layer rather than operating under an enabling framework focussed on a result-oriented response to disrupt TF.

7. Dwelling on the performance of Law Enforcement Authorities of Pakistan, the report observes that  their ’efforts  are not consistent’ with the risks. Prosecutions in AML and CFT cases were poor ( 354 out of 2420 AML investigations ; out of 58 convictions in TF cases  49 were from the province of Punjab ). Legal powers are not being exercised to  ‘freeze, seize, and prevent dealing with property subject to confiscation in ML cases and that ‘the value of confiscated funds is not commensurate with Pakistan’s ML/TF risk profile’. Although Pakistan has a significant challenge of Terror Financing (TF) ‘financial intelligence’ pathway was not being used. TF cases are identified by several mechanisms but not via financial intelligence. Also, surprisingly, there has been no  TF investigations  directed against ‘legal persons’ (not natural persons). According to the report, action taken under ML and TF categories were inconsistent with the level of threat faced by Pakistan. Notwithstanding a few steps aimed at improving coordination in the sphere of TF and integration with counter-terrorism strategies, there are instances that suggest a reluctance to do much in this regard at the apex level. 

8. Though Pakistan has adopted UNSCR 1267 by issuing Statutory Regulatory Order, Statutory Regulatory Order suffered from technical shortcomings in many cases. While most banks etc made procedural changes in  pursuance of requirements under UNSCR 1267 and UNSCR 1373 to freeze  funds, the level of compliance in the non-banking sector and DNFBPs did not pass muster. The report records that the ‘State Bank of Pakistan does not have a clear understanding of the ML and TF risks unique to the sectors it supervises’ and the ‘Securities and Exchange Commission of Pakistan has a limited understanding of ML/TF risks . The document notes that Pakistan has not put any ‘measures in place to address the ML and TF risks posed by trusts, including foreign trusts, and waqfs’; that there is no ‘formal framework for Money Laundering Act (MLA) but can execute MLA on the basis of treaties, reciprocity and some legislative provisions’ Even here the report finds Pakistan response once again inconsistent with its ‘Risk profile’;  and that LEAs  of  Pakistan are ‘not using the FMU to seek financial intelligence from foreign FIUs effectively’. The APG report while acknowledging efforts made by Pakistan to improve its compliance in terms of AML and TF related responses brought out the serious and  lingering deficiencies persisting within its structural, legal and supervisory frameworks in Pakistan. The overall tenor of the report suggested inadequacy   and  inertia within the Government led sphere to bring about relevant change that is consistent with the challenges confronting Pakistan.

Impact on Pak Economy

9. Economy of Pakistan is already under severe stress with a trade deficit of $37 billion and foreign loans accounting for 24% of the GDP. Annual debt servicing siphons away $8.3 billion. Continuation of Pakistan in Gray list of the FATF may further accentuate its travails and adversely impact its creditworthiness. In case,  the FATF goes ahead with blacklisting (formally known as ‘Call for Action) of Pakistan, this could bring to halt capital flows and significantly lower inward investment. Meanwhile, Pakistan is also working to float Panda bond , worth $1 billion in China next year during Jan-Mar 2020 in collaboration with the Citibank to shore up its foreign currency reserves. Pakistan has already initiated other steps to increase revenue generation including  a significant increase in electricity prices besides re-introduction of debt servicing surcharge in power bills on account of circular debt-related fresh borrowings. The latter measures in the medium and long term may not please the masses.

10. Economic growth of Pakistan remains weak and significant fiscal adjustment will be needed in the coming years. Slowing economy could undermine fiscal consolidation strategy and opposition to institutional reforms, which in turn may lead to economic stagnation. Economic growth has slowed in recent months with weakening large-scale manufacturing activities. Rising Public debt is yet another long-term problem for Pakistan. The general government debt, including guarantees and IMF borrowing, rose to 88% of GDP by end of last fiscal year, which was higher by 8.7% of the GDP against the IMF’s own estimates, according to the report. The significant increase in its public debt puts a question mark on the health of its economy in the long run. There are apprehensions about the Pak Banking System particularly in terms of exercising poor controls over AML and CFT standards. Continued Gray listing will make it difficult for Pakistan to send remittances freely, increase cost of business for traders’ as Pak banks will face higher scrutiny in international payments and impede their unfettered access to channels of foreign banks to do business.

11. While Pakistan has been on the Grey List, the four nominating countries and China appear to have extracted several concessions and favours, including providing technical assistance via helping Pakistan establish several new networks and databases, with adequate assistance in software and hardware installations. These were installed in Pakistan’s financial regulators like SBP and FMU, in banks and at all Customs check posts. These were the overt favours, the covert ones, including the much-hyped US-Taliban deal, will be known when the deep states involved desire.

12. Pakistan continues to enjoy support from its allies. There was some element of  doubt in this as China is currently the Chair in FATF as even the President Xiangmin Liu from China was quoted having observed in an earlier review that Pakistan needs to do more, and it needs to do it fast. It is, however, now understood that FATF’s Review Group met in Beijing recently and China, the ‘all-weather friend, and the US were on the same side in support of Pakistan. It is also known that the other nominating countries, Australia, New Zealand and even Japan found Pakistan’s compliance with the 27-point Action Plan, to be of a higher order. India appears to have been diplomatically isolated at the meeting. It remains to be seen whether the FATF Plenary (Paris, Feb 16-21) take Pakistan off the Grey List. If Pakistan’s well-informed media reports are to be believed, Pakistan has plans of eliciting political support from at least 12 members, in order to propose a resolution to take it off the Grey List. These are expected to included China, Turkey, Malaysia, Indonesia and Saudi Arabia for sure. If the EU and CANZUS also join the bandwagon, India’s troubles with militancy in Kashmir will begin, again on that even the US which needs Pakistan in its negotiation with Taliban and now getting embroiled with Iran,  might not be willing to go all the way . This explains the International Monetary Fund (IMF) bail out made available to Pakistan last year to tide over its financial crisis when Pak was desperate for foreign assistance.

13. The IMF approved (July 2019) a 39-month extended arrangement under the Extended Fund Facility (EFF) for an amount of US$6 billion or 210 percent of quota to support the Pakistan authorities’ so-called economic reform program. This was granted while acknowledging failure of Pakistan due to “ Misaligned economic policies, including large fiscal deficits, loose monetary policy, and Défense of an overvalued exchange rate, fuelled consumption and short-term growth in recent years”[5]. It also referred to steadily eroding macroeconomic buffers, increased external and public debt, and depleted international reserves, unaddressed structural weaknesses ,a chronically weak tax administration, a difficult business environment, inefficient and loss-making State-Owned Enterprises, and low labour productivity amid a large informal economy. It sought to  justify its action on the ground that economic and financial stability was at risk, and prospect of growth insufficient in the absence of an urgent policy action. Throughout the 39-month period of the EFF the IMF would monitor the economic programme  of Pakistan though there is  lingering scepticism about Pak intent or ability to mend its ways.  

14. There could be another issue. As per rules, Pakistan must share complete details of all its foreign funding with the IMF including that of Chinese funded China-Pakistan Economic Corridor (CPEC) which may be a little problematic. As of now, the details of CPEC projects have been kept secret. Disclosure of the details of CPEC project could be a major setback for both China and Pakistan. There is also a likelihood of an increase in Chinese lending. Given its stakes in CPEC, China may lend money to Pakistan and manage to keep the CPEC agreements secret.

15. In another unusual move, Pakistan Government nominated Gen. Qamar Javed Bajwa a member of the National Development Council in mid-July 2019. The General has since been given a three-year extension as the Chief of the Army albeit after a bit of controversy. In October last year, Gen Bajwa  , flanked by Financial Adviser Abdul Hafeez Shaikh, Federal Board of Revenue Chairman Shabbar Zaidi and Minister Economic Affairs Division Hammad Azhar also reportedly interacted with Business leaders. According to a media report, he floated the idea of an internal committee to deal with the issues raised by the Business leaders. This suggests an expanding role of the Pak army in the economic arena in addition to traditional influence wielded by it over policy making in the areas of security and foreign relations. Pak Army has been playing a role in Pak economy informally. Participation of the Army Chief in NDC gives it a formal role, however, the nature of its role in the formal economy is still unclear.  While co-opting the Army formally in economic and development  issues may strengthen PM Imran Khan in shoring up his position politically but would it help improve compliance with AML and CFT recommendations of the FATF ? That remains a moot question.

16. For more than 18 months, during pendency of the Grey List, Pakistan’s open support to infiltrating terrorists into the Valley were at a low key, with only 4 infiltrators killed on the LOC in 2019, compared to more than 40 in 2018. The fear of FATF’s Black List is now over. Hence, it can safely be predicted that difficult times are about to begin in the Valley, yet again. If that happens there is no doubt that India- Pakistan relationship will nose-dive further. Government of India, which had succeeded diplomatically to an extent to explain to the world its predicament in the face of violent activities of non-state actors from across the border. The recent set-back should be a cause for introspection on India.

17. While the lessons for Pakistan is clear that time is running out and; it is in a bind with very limited options. It, however, must understand that indulging in further obfuscations on the issues of Money Laundering and Financing of Terror would not work. Pakistan should and must put in place, a set of credible and comprehensive measures backed by appropriate legislation, and necessary structural framework for co-ordination and monitoring for their sincere implementation– without any further delay. It must do so  for its own sake, the future of the  people of Pakistan and the region.

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