A team of the Financial Action Task Force, an inter-governmental body that combats threats to international financial system, is currently meeting in Paris. Over the next five days, it will review Islamabad’s progress on countering money laundering and terrorist financing and decide whether to downgrade Pakistan to its blacklist, or not.
A potential downgrade to FATF’s blacklist will have serious implications for Pakistan and here is why it matters.
Being on the blacklist means our banking system will be regarded as one with poor controls over Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT) standards.
The FATF doesn’t impose any sanctions directly, but its guidelines are taken seriously by global financial institutions. This means overseas Pakistanis who send remittances to Pakistan will be subject to more scrutiny. The traders who deal in imports and exports will also suffer because they have to make and receive payments with the help of international banks that may either increase the cost for our banks or simply not do business with us.
The implications for the economy as a whole can be far more serious. Being placed on FATF’s blacklist can affect capital inflows and lower investment to Pakistan, thus hurt the ongoing IMF programme. Raising funds from global capital markets will be difficult, which will undermine our ability to pay foreign debt.
Deficiencies in our banking system got us here, but this is not the first time we have been on the FATF’s grey list. We were removed from the grey list in February 2015 and placed on its white list, the one with no risk of sanctions. It, however, put us on the blacklist again in June 2018 because of deficiencies in our AML and CFT regulations, which threaten the international financial system.
For example, Pakistan’s largest bank – Habib Bank Limited – was kicked out of New York with a fine of $225 million after it failed to comply with anti-money laundering regulations. “The Department of Financial Services (DFS) will not tolerate inadequate risk and compliance functions that open the door to financing of terrorist activities that pose a grave threat to the people of this State [New York] and the financial system as a whole,” the American regulator had said.
FATF is a global watchdog for illicit financial activities and comprises experts from Indonesia, China, the UK, Maldives, US, and Turkey. Since Pakistan is a member of the Asia Pacific Group on money laundering, which falls under the FATF’s purview, it has to ensure technical compliance with the AML and CFT standards.
Money laundering and terrorist financing is a crime in Pakistan, but the country has not been able to enforce this law effectively. Despite making progress on the global AML and CFT index, Pakistan remains in the list of countries with significant risk.
Pakistan’s rank dropped to 23 in the global AML Index 2019, two levels below the previous year’s position. The country improved its score by 0.04 points to 6.45 points in 2019 on the Basel AML Index, an independent annual ranking that assesses the risk of money laundering and terrorist financing around the world.
Among 125 countries assessed for the 2019 report, Pakistan was among the 74 countries with a risk score of 5.0 or above. These were the countries that could be loosely classified as having a significant risk of money laundering and terrorist financing, the report said. With 2.68 points, Estonia has the lowest level of risk, while Mozambique faces the highest risk with 8.22 points.
Money laundering and terrorist financing continue to cripple economies, distort international finances and harm citizens around the globe, says Basel AML Index Report 2018. It estimates the amount of money laundered worldwide ranges from $500 billion to a staggering $1 trillion.
If Pakistan doesn’t improve its AML and CFT regulations, it faces the risk of being put on FATF’s black list. If the ongoing consultations between the FATF and the Pakistani government are successful, we will be taken off the grey list and placed on the white list.