The removal of Pakistan from the Financial Action Task Force (FATF) grey list was a big win for the country. FATF, an international watchdog on money laundering and financing of terrorism, had placed Pakistan’s name on the list of countries under “increased monitoring,” also known as the “grey list” in 2018. The progress made by Pakistan in carrying out the tasks laid down by the FATF action plan has strengthened Pakistan’s legal and regulatory framework against money laundering and financing of terrorism at par with international standards.
In mid-June this year, a FATF statement said that Pakistan has met all 34 items on its action plan. “As a result of this action plan, Pakistan has made significant improvements to strengthen the effectiveness of this framework for combating terrorism financing,” FATF President Raja Kumar said in an announcement in October. The importance of this success cannot be overstated.
When FATF was first formed in 1989, it was focused on combating money laundering. In 2001, its scope was expanded to curbing terror financing. Pakistan is a member of the Asia Pacific Group (APG) on Money Laundering. Jurisdictions that join the APG, either as members or as observers, commit to the recommendations of the FATF. The global markets view them as standards that countries are expected to follow.
Pakistan was first placed on the grey list in 2008, and removed in 2010, after the country “demonstrated progress in improving its anti-money laundering (AML)/combatting financing of terrorism (CFT) regime, including enacting a permanent anti-money laundering law.” It should be noted that FATF regulations were lenient back then and Pakistan was taken off the grey list after it committed to implementing AML and CFT measures. However, it couldn’t fulfil that commitment. Pakistan was placed on the grey list again in February 2012 after FATF found that the country was not fully compliant with the standards for effectively combating money laundering and terror financing. Pakistan was removed from the grey list in 2015 after it had established the legal and regulatory framework to meet the commitments in its action plan under the leadership of the PML-N government.
In 2018, Pakistan was nominated by developed countries led by the US for listing in the grey list as opposed to a mutual evaluation process agreed with the country in question. International politics played a big role in this decision as Pakistan was singled out from the rest of the countries in the region. Pakistan had no choice but to prepare an action plan and get the approval of the international watchdog to avoid being blacklisted. Its difficulties didn’t ease there. The country’s action plan was found inadequate in a subsequent review in August of that year and it was warned of action in case significant and sustainable progress was not made across the full range of action plans by the next plenary scheduled for February 2020. Failing to take these measures could have jeopardized Pakistan’s international transactions and business relations.
Although the task appeared daunting at first, Pakistan’s military and political leadership came together to address this issue critical to Pakistan’s economic survival.
A high-powered 12-member National FATF Coordination Committee ensured the execution of all FATF-related tasks. The committee comprised federal secretaries of finance, foreign affairs and interior besides heads of all the institutions and regulators concerned with money laundering and terror financing. They included the governor of the State Bank of Pakistan (SBP), the chairman of the Securities and Exchange Commission of Pakistan (SECP), the director general of the Federal Investigation Agency (FIA), member (customs) of the Federal Board of Revenue (FBR) and DG of the Financial Monitoring Unit (FMU). The committee also had three senior officials from the military’s General Headquarters (GHQ). The State Bank of Pakistan and SECP also played a crucial role in addressing the FATF action points.
Pakistan introduced about a dozen new laws, and authorities such as the SBP and SECP passed a few dozen rules and regulations. Most of the legislative work done during this time was on FATF. As a result, Pakistan’s legislative framework, banking rules, and infrastructure in terms of AML and CFT are better than those of other countries in the South Asian region. It is now one of the better-organized and better-documented economies in the world.
A 15-member joint delegation of the FATF and APG that paid an onsite visit to Pakistan from 29 August to 2 September was satisfied that the implementation of Pakistan’s AML/CFT reforms had begun and the necessary political commitment was in place to sustain implementation and improvement in the future. After four years of concerted efforts to upgrade its financial systems to satisfy the international watchdog, Pakistan’s name has been removed from the list.
Prime Minister Shehbaz Sharif congratulated the civil and military leadership after Pakistan’s name was removed. In addition to lauding the efforts of Foreign Minister Bilawal Bhutto, he commended “all political parties for putting up a united front to get Pakistan out of the grey list” in a tweet. This was the second occasion after 2015 when a PML-N government managed to get Pakistan off the unenviable list.
Although the legislative and regulatory changes have increased the cost of doing business in Pakistan in the short run, a strong regulatory framework will benefit the country in the long run. It will improve Pakistan’s investment climate and credit ratings.
The new rules require enhanced due diligence and compliance, which means there is an additional burden on the regulated entity, whether in the banking sector, stock market, or even lawyers and auditors. More detailed information is required for a stock trading account or a bank account. In the case of a foreign entity doing business in Pakistan, the banks are required to carry out enhanced due diligence to verify the ultimate beneficial owner. The cost of compliance gets passed on to the end customers eventually.
Despite these challenges, the removal from the FATF grey list has improved Pakistan’s global standing in terms of perception and image. It also eased the process of how international organizations and fund managers interact with Pakistani entities – banks, traders or companies – while onboarding them at their end.
Going forward, Pakistan will accrue several benefits from the implementation of changes to comply with FATF standards. One of the biggest challenges facing Pakistan’s economy was that most of its wealth was trapped in undocumented sectors, such as real estate and gold. Compliance with FATF-related actions might move the money to documented sectors.
Second, Pakistan was compelled to adopt digital technology. In the stock trading and wealth management areas, new technologies were implemented to deal with compliance requirements and similar changes happened in the banking sector.
Global banks treat compliance far more seriously now than they did five years ago. When foreign entities interact with Pakistan they will observe how all agencies have updated their governance, policies, and systems and would like to repeat their experience and share it with others. This will have a significant cross-border impact.
Third, the International Monetary Fund (IMF) made FATF and its action points a part of its loan facility to Pakistan. Other multi-lateral agencies take their cue from IMF, whose determinations are considered crucial by all international financial institutions. Being on the white list gives Pakistan space to secure capital from other lending agencies.
Fourth, it has improved the climate for foreign direct investment (FDI). Whenever any foreign company commits capital in a long-term business in a country, they take AML and CFT into serious consideration to see whether the governance structure of the country is viable for capital, human, and franchise safety. A stamp of approval from FATF has prepared the ground for increased FDI.
Last but not the least, the removal from the FATF grey list has proved that the military and political parties can come together to achieve broader national goals. It is hoped that such a partnership continues for tackling other political and economic issues facing the country.