FATF ( Financial Action Task Force) & Pakistan

 By Maj Gen Pankaj Saxena VSM, (Retd)
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FATF retained Pakistan on a grey list in a decision taken during its Plenary Meet of 21 to 23 October 2020. What is FATF? What is its grey list? What is the interaction of Pakistan with FATF? What is the way ahead for India in relation to Pakistan and FATF?

FATF is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat money laundering (ML). In 2001, its mandate was expanded to include terrorism financing.  In April 2012, it added efforts to counter the financing of proliferation of weapons of mass destruction. In October 2019, the G20 asked the FATF to consider the Anti Money Laundering/ Counter-Financing Terrorism (AML/CFT) issues relating to so-called stable coins, particularly so-called “global stable coins. The report confirms that the FATF Standards apply to so-called stable coins. However, the report also recognises that this is a rapidly evolving area and that it is essential to continue to closely monitor the ML/TF (Terror Financing) risks of stable coins.

It has its headquarters at   Paris, France. FATF’s aim is to prevent financial illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. With more than 200 countries and jurisdictions committed to implementing them, the FATF has developed the FATF Recommendations or FATF Standards, which ensure a coordinated global response to prevent organised crime, corruption, terrorism, and proliferation funding.

  The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system. Starting with its own members, the FATF monitors countries’ progress in implementing the FATF Recommendations, reviews money laundering and terrorist financing techniques and counter-measures, and, promotes the adoption and implementation of the FATF Recommendations globally.

The FATF currently comprises of total 39 members.

          (a)     37  countries and two regional organizations (European Commission and the Gulf Cooperation Council).

          (b)     Associate Members – 9.

          (c)     Observer Organisations – 28.

          (d)     FATF Observer Nation – Indonesia.

The FATF President is a senior official appointed by the FATF Plenary from among its members. In April 2019, the revised Mandate extended the terms of the FATF Presidency to a two-year period. The term of the President begins on 1 July and ends on 30 June two years after assuming office. Dr. Marcus Pleyer of Germany assumed the position of President of the FATF on 1 July 2020. He succeeded Xiangmin Liu of the People’s Republic of China.  Increased tenure will increase consistency in policy issues of FATF.

FATF Lists

Very often grey and blacklists are mentioned. However, there is no such official terminology.

FATF Blacklist.   Officially known as  ‘High-Risk Jurisdictions subject to a Call for Action’. The FATF blacklist sets out the countries that are considered deficient and/or non-cooperative in their anti-money laundering and counter financing of terrorism regulatory regimes. The list is intended to serve not only as a way of negatively highlighting these countries on the world stage, but as a warning of the high money laundering and terror financing risk that they present. It is extremely likely that blacklisted countries will be subject to economic sanctions and other prohibitive measures by FATF member states and other international organizations. The blacklist is updated periodically in official FATF reports. The current FATF blacklist includes two countries: North Korea and Iran.

FATF Grey list.    Officially known as  ‘Jurisdictions Subject to Increased Monitoring’. When  FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. Countries on the list may face economic sanctions from world’s financial institutions and experience adverse effects on trade.The countries on the grey list are assessed directly by FATF or  FATF-style regional bodies (FSRBs) to report on their progress.. The grey list is updated regularly. The current FATF grey list, issued on 23 October 2020, includes sixteen following countries: Albania, the Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Myanmar, Nicaragua, Pakistan, Panama, Syria, Uganda, Yemen and Zimbabwe.

FATF and FATF-Style Regional Bodies (FSRBs)

The Asia/Pacific Group on Money Laundering (APG) is one of the FSRB. It is an inter-governmental organisation consisting of 41 members (12 are also members of FATF) in the Asia-Pacific region. The purpose of APG is to ensure the adoption, implementation, and enforcement of internationally accepted AML and CFT standards and proliferation financing standards set by  FATF.  APG was created in 1997. It is an Associate Member of the FATF since 2006. MER and follow up of Pakistan is done by APG.

 Follow-up Process FATF And FSRBs

The follow-up process enables FATF and the FSRBs to track progress made by countries in addressing their AML/CFT risks and deficiencies.  Follow up process are of two types:-

          (i) Regular follow-up as the default monitoring mechanism, based on a system of regular reporting.

          (ii) Enhanced follow-up, involving a more intensive process of follow-  up, for countries with significant deficiencies, or countries making insufficient progress. In deciding whether to place a country in enhanced follow- up, the Plenary considers both the level of technical  compliance and of effectiveness reached by the country

                                       FATF, PAKISTAN AND ‘GREY LIST’

Pakistan has undergone a mutual evaluation in 2009 and 2019. The MER-2009 pointed out strategic deficiencies in Pakistan’s AML/CFT regime and, in consequence, Pakistan made the political commitment at the highest level to address such deficiencies in a time-bound manner. However, Concerned with the tardy pace of implementation, on June 24, 2011, the FATF observed: “The FATF is particularly concerned with the lack of implementation regarding Pakistan’s terrorist financing offence and calls upon Pakistan to demonstrate specific action.” Subsequent to this, Pakistan was put on the grey list on October 19, 2012. While grey-listing, FATF appreciated Pakistan’s efforts in some technical areas but remarked: “However, despite Pakistan’s high-level political commitment…Pakistan needs to enact legislation to ensure that it meets the FATF standards regarding the terrorist financing offence and the ability to identify, freeze, and confiscate terrorist assets.”

Pakistan came out of the grey list on February 27, 2015 with FATF remarking: “Pakistan will work with APG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report, in particular, fully implementing UNSC Resolution [United Nations Security Council Resolution 1267.” Pakistan got out of the grey list by adopting some legal measures in form but saving its “strategic assets”(terrorists), which were sanctioned under UNSCR 1267. Pakistan’s elected government writ is limited. Pakistan Army runs the policy to be adopted for Pakistan-based terrorist organizations. FATF accepted political commitment without understanding that it had no mandate to do so. Pakistan’s deceit coupled with FATF’s ignorance enabled it escaping the grey list.  A decision taken on doubtful assurances and without considering effective performance had to be revisited. Three votes from the FATF’s members are needed for a country not to be put in the grey list. China, Turkey and Saudi Arabia ( leading the six-nation Gulf Cooperation Council (GCC) ,that voted as one bloc, were against Pakistan being put in the grey list.  Saudi Arabia, with some coaxing by US, understood Pakistan’s game and China opted for a larger role in FATF rather than support Pakistan  Thus, Pakistan was again grey listed in June 2018. From Jun 18 Pakistan continues to fail to meet the successive deadlines set by the FATF.

Recent Developments In Pakistan

Pakistan media and establishment dutifully blame India for exerting pressure through FATF. Mr. Rehman Malik, former Interior Minister of Pakistan, has published an open appeal and promised to approach the International Court of Justice challenging the legitimacy of FATF to play the role of financial observer of world states. Islamabad also hired US lobbying firm Linden Strategies to sell its narrative that Pakistan was on track to deliver on its obligations. Pakistan has passed laws in Sep 2020 claiming that these are in compliance of the FATF standards. Out of 27 points action plan given by FATF to Pakistan, Pakistan was declared fully compliant on five points In October 2019. The FATF plenary in February 2020 found Pakistan compliant on nine additional points.

FATF Plenary 21 to 23 October 2020 And Pakistan.

This Virtual Plenary meet was held in the backdrop of the persisting COVID-19 pandemic with all its ill effects. The pandemic has severely impacted some authorities’ ability to implement measures to detect, prevent, and investigate money laundering and terrorist financing. The functioning of the FATF follow-up process has also been adversely affected demanding some policy and procedural tweaking. The FATF seems to have adopted a cautious approach during this meet due to the Pandemic.  The FATF Plenary decided to hold the next Joint Experts’ Meeting virtually from 23-25 November 20, to discuss current and emerging money laundering and terrorist financing risks. The meet notes that Pakistan has made significant progress and has now largely addressed 21 of the 27 action items Pakistan is urged to swiftly complete its full action plan by February 2021. Another deadline to be breached! The remaining six points of the action plan are all related to terror financing, enforcement of the law, and effectiveness on the ground

Pakistan is touting this achievement that 21 of 27 FATF recommendations having been implemented. It is noteworthy that the basic issue, which has been continuously flagged by the FATF against Pakistan, relates to terror financing and action against proscribed persons and entities. This is where it has been failing and this is where it has to deliver. Under a risk-based approach, critical failing in even one criterion can lead to blacklisting. In 2019 Pakistan declared victory by remaining on the Grey list as Indian efforts to get it blacklisted were defeated. In 2020 the tone has changed. Greylist is hurting Pakistan and remaining on Greylist is not an option. There is increased optimism In Pakistan that blacklisting is off the table and exiting grey list could happen in 2021. This optimism may also have its roots in muted discussion in India on the blacklisting of Pakistan by FATF.

India-FATF-Pakistan

As a policy, India has no formal talks with Pakistan on any issue especially terrorism. India knows that the subject of terrorism is beyond the sphere of influence of Pakistan’s elected government. Thus, it is pointless to talk to the selected Government. Indian Army has taken proactive and punitive actions against terrorists in J&K on Line of Control and beyond in Pakistan.  Indian Air Force also conducted airstrikes in Pakistan on terrorist Camps. These political decisions backed by effective execution by armed forces have not only discredited Imran Khan’s Government but more importantly, Pakistan Army’s image in its own country is dented. Diplomatically India has made a concerted attempt to expose Pakistan’s complicity in employing terrorism as state policy at all world forums. FATF which aims is to prevent illegal activities of ML/CFT/Proliferation financing and the harm they cause to society has also been kept informed of grave threat posed by Pakistan to international finance.

Way Forward for India.

FATF operates on a well-defined charter and guidelines. India must step up its efforts to report on Pakistan to FATF and address all issues related to FATF charter and guidelines being flouted by Pakistan.

       (a)  Joint Experts’ virtual meeting from 23-25 November must be utilised to inform the experts regarding emerging trends in Pakistan’s state-sponsored terrorism e.g. use of drones to supply arms and ammunition across the borders.

        (b)  India must keep highlighting the dual governance system of Pakistan. Democracy and democratically elected Government is a   farce.  It is run by Army and the selected (elected) PM is a rubber stamp. Pakistan is a terrorist state is a fact known to the world.

Osama was eliminated in Pakistan. General Musharraf has accepted that they supported militant organisations. Atrocities in Baluchistan, oppression of minorities, women and weaker section is well known.  Governance is weak and law enforcement pathetic. Media cannot speak, the judiciary is tamed, and the police is draconian. The economy is faltering. Corruption is rampant. In matters related to terrorism, the elected government has no authority. Thus the elected government is not competent to give any commitment. Effectiveness of laws passed and their implementation on the ground by on-site visit must be ensured.

          (c) Vigorous collection of data and its presentation to all international organizations on Pakistan’s state-sponsored terrorism, drug money, and its linkages to terrorism will have to continue.

          (d) Pakistan has the capacity to meet FATF standards but is unwilling          to do so. It is a nuclear state and is involved in proliferation of WMDs.     It is heavily involved in drug money. FATF must view Pakistan as a     comprehensive threat and it cannot be treated at par with countries   like Mauritius, Zimbabwe, etc

           (e)  Pakistan is a case study to appreciate the challenges faced by the FATF. Having faced close scrutiny, it has avoided effective implementation of the recommendations on one hand and avoided blacklist on the other. Pakistan blackmails the world that dead     Pakistan is more dangerous than surviving one. This threat works. Weakness in the FATF categorization structure of the so-called white, grey, and black does not permit a flexible and graduated response. Pakistan is also aware of this dilemma, that the only option available to the FATF after the grey list is one it may not be willing to take. This provides considerable space for manipulation and maneuver to Pakistan. Pakistan’s case is damaging the credibility of FATF. It is felt that number of gradations may be increased and while grading composite threat analysis of Pakistan to include ML, CFT, Proliferation, Foreign Fighters, etc be carried out.

          (f)  Reportedly terrorists from Pakistan terror factory are finding their way to fight for Azerbaijan. This export of terrorists as foreign fighters   needs to be highlighted.

          (g) India, has knowledge of Pakistan’s functioning and needs to inform the world that world organizations that are funding Pakistan through grants and loans are actually funding global terrorism and abetting crime and corruption in Pakistan. Thus, endangering the international finance structure. Pakistan deserves to be blacklisted for World’s safety.

Conclusion

The threat of Pakistan is looming large on the international financial system. The world, especially FATF needs, to take note of this real threat. To reign in Pakistan, tough action is warranted even if it involves a change in FATF categorization regime. Pakistan must not be allowed to take advantage of the pandemic. As for India, there is political will, effective execution by armed forces. It is time for Indian Diplomats to deliver to prevent the unfortunate exit of Pakistan from grey list to white list possibly in Jul 21.

End-Notes

1.      http://www.fatf-gafi.org/.

2.      http://www.apgml.org/.

  1. https://idsa.in/issuebrief/fatf-in-need-darker-shades-grey-psgautam-121020.
  2. https://nation.com.pk/14-Aug-2020/an-open-appeal-to-icj-against-fatf.
  3. https://www.moneycontrol.com/news/world/pakistan-hires-us-lobbying-firm-to-move-out-of-fatf-grey-list-ahead-of-key-meet-5949881.html.
  4. https://theprint.in/world/pakistan-parliament-joint-session-passes-3-fatf-related-bills-to-avoid-being-blacklisted/504416/
  5. https://www.thenews.com.pk/print/629673-pakistan-must-comply-with-13-points-to-come-out-of-fatf-grey-list.
  6. shttps://www.claws.in/influence-operations/#respond.