• header EFSAS

EFSAS Commentary

Despite scathing indictment by Asia Pacific Group, Pakistan likely to remain on FATF’s grey list


The days leading up to the Paris meeting of the Financial Action Task Force (FATF) from 13 to 18 October have been tense and anxiety-laden for the Pakistani leadership, as it is at this meeting that a decision on the fate of the country’s status in the eyes of the terror financing watchdog would be taken. Given that Pakistan is in the throes of one of its worst ever financial crises, with the Pakistani government having accumulated an unsustainable record public debt of Pakistani Rupees 7,509 billion ($47.5 billion) from August 2018 to August 2019, the ramifications consequent to a further adverse designation by FATF are potentially severe and could induce a crippling effect on Pakistan’s distressed economy. Pakistan has not helped its own cause though, and if the tone and content of the Bangkok meeting last month of the FATF’s regional body, the Asia Pacific Group (APG) on Money Laundering, are any indication, fireworks await Pakistan in Paris on account of its dismal adherence to the steps spelt out for it. Recent reports of Pakistan continuing to misuse its diplomatic representations abroad to clandestinely disburse copious quantities of fake Indian currency to terrorists and other unscrupulous elements would also, in all likelihood, have been taken note of by the FATF.  

Pakistani media reports claimed that at the 9 September meeting in Bangkok with the APG, Pakistan submitted detailed answers to 125 questions posed by FATF on moves taken by it to combat money laundering and terror financing. Pakistani officials also apprised the APG of the measures they claimed to have taken to prevent suspicious transactions and to restrict illegal activities and freeze the assets of proscribed organizations and groups. That they had little success in convincing the APG was evident from the scathing criticism that Pakistan came in for in the Mutual Evaluation Report (MER) that the APG released on 2 October. The 228 page MER was based on information provided by Pakistan, as well as the field visit by an APG assessment team in October last year. The six-member team comprised experts from the United States (US), the Maldives, China, Turkey, Indonesia and the United Kingdom (UK). At the time of the team’s visit, there were 66 organizations and over 7,600 individuals in Pakistan that were proscribed under the United Nations Security Council (UNSC) Resolution 1373.

The MER will play a key part at the Paris meeting in determining whether Pakistan would be retained on the grey list that it currently is on, be removed from the list, or indeed downgraded to the blacklist along with North Korea and Iran. According to FATF guidelines, the parameters for the assessment are ‘Effectiveness and Technical Compliance Rankings’, comprising 10 and 40 parameters respectively. The scale on which a country’s technical compliance levels are rated ranges from ‘Compliant’, ‘Partially Compliant’, ‘Largely Compliant’, and ‘Non-Compliant’. In the MER, Pakistan was rated ‘Non-Compliant’ on 5 of the 40 FATF recommendations, ‘Partially Compliant’ on 25 others and ‘Largely Compliant’ on 9. The only recommendation on which it was fully complaint related to financial institution secrecy laws. Similarly, on the 10 parameters for effectiveness, Pakistan was judged ‘low’ in 9 and ‘moderate’ in one.

Among the serious shortcomings brought out in the report were the “gaps” in the 2017 National Risk Assessment (NRA) in which Pakistan had assessed itself to be at ‘medium’ risk from terrorist financing and money laundering. The MER observed that Pakistan was “not able to explain fully how it arrived at those ratings and what the rating system means. For instance, when asked what the difference between medium and high were, the authorities provided no cogent explanation”. In effect, Pakistan was clueless on even the basics. Tearing apart Pakistan’s self-evaluation, the report underlined that the country faced “significant risks” of terror financing, including “weak or no” regulation of hawala, non-profit organizations, and Designated Non-Financial Businesses and Professions. It added “Also, terrorist groups operating in Pakistan are reported to include, but are not limited to, ISIS-Khorasan, Tehrik-e Taliban Pakistan, Quetta Shura Taliban, Haqqani Network, and Lashkar-e-Taiba (including its affiliates Jamaat-ud-Dawa and Falah-i-Insaniat Foundation), which raise funds through a variety of means including direct support, public fundraising, abuse of non-profit organisations, and though criminal activities”. The report stressed that Pakistan had “not taken sufficient measures to fully implement UNSCR 1267 obligations against all listed individuals and entities – especially those associated with Lashkar-e-Tayyiba/Jamaat-ud-Dawa, and Falah-i-Insaniat Foundation, as well as the groups’ leader Hafiz Saeed”. It highlighted that “Despite being listed by the UNSCR 1267 Committee in 2008 (JuD) and 2012 (FIF), before February 2018, JuD/FIF openly operated in Pakistan, including holding public rallies and fundraising events”. It drew attention to Pakistani media reports on Falah-i-Insaniat Foundation raising funds for relief aid and operating ambulances, “which calls into question whether the prohibition on providing funds and financial services was being fully implemented”.

On the specific issue of terrorist financing cases, Pakistan informed the APG team that it had frozen 36 bank accounts worth $69,492 belonging to UNSC 1267 designated individuals and entities, including that of Falah-i-Insaniat Foundation and Jamaat-ud-Dawa. It also provided a list of properties and assets seized from these groups. The MER observed that the value and number of accounts frozen was “not fully consistent with Pakistan’s TF (terrorist financing) risk profile, particularly in recent years”. On Pakistan’s claims of seizure of Falah-i-Insaniat Foundation and Jamaat-ud-Dawa property, the report noted that “Pakistan provided no information on the prosecution of individuals and entities associated with the frozen property relating to TF, and continued freezing actions against Falah-i-Insaniat Foundation, Jamaat-ud-Dawa and other regional terrorist networks”. It also questioned the “major technical shortcomings” in Pakistan’s legal framework and called for “fundamental improvements” to reduce the risks of money laundering and terror financing.

Experts and analysts are convinced that Pakistan has not done enough in the 15 months granted to it by the FATF to prove and improve upon its anti-terror credentials. They believe that blacklisting of the country is fully justified. James Schwemlein, an expert on South Asia at the Carnegie Endowment for International Peace, averred that “So far, it appears the (Pakistani) authorities have taken modest steps to meet FATF requirements, such as freezing banking accounts and seizing properties, but are far from full compliance. At this point, it does not appear that Pakistan has taken any irreversible step to improve its anti-money laundering and counter terror-financing regime”. Schwemlein also highlighted the close ties that the Pakistani intelligence agency, the Inter-Services Intelligence (ISI) continues to maintain with terrorist groups. He said, “Pakistani authorities argue they have limited ability to constrain terror groups that operate with the support of the Pakistani intelligence services inside Pakistan, though Prime Minister Khan has pledged to gradually constrain and eliminate these militant proxy groups”. Schwemlein argued that “If Pakistan is deemed as not having made sufficient progress against its action plan, the FATF ministerial in October could choose to issue a call to action to international banks and financial institutions to sever ties with Pakistani entities”.

Similarly, Nadeem ul Haque, a former senior resident representative of the International Monetary Fund (IMF), pointed out that Pakistan had not even acted against those terrorist outfits that were operating openly within the country, such as the Lashkar-e-Taibah and the Jaish-e-Mohammad. He said, “Pakistan is failing in catching the visible terrorists the world wants to catch. That seems to be the main problem”. Haque felt that in the event of FATF taking an adverse view, Pakistan’s $6 billion loan program with the IMF could take a hit. He said, “FATF blacklisting Pakistan would cause a big hiccup. They (the IMF) will remain engaged with the country but can stop or slow the pace of funds if conditions are not met by Pakistan. The economy is at a point where stoppage of flows will be very hurtful ...  it will slow international transactions to the point of scaring away investors and even remittances”.

The view expressed by these experts implies that the biting criticism by the APG should, ordinarily, suggest that Pakistan’s blacklisting at the Paris meeting is a foregone conclusion. However, despite the MER coming across as a serious indictment of Pakistan’s seriousness in going after UNSC indicted terrorists, a quirk in the system by which listing is decided at the FATF could provide Pakistan a narrow escape route. As per the charter of the 39-member FATF, Pakistan would require the votes of only 3 FATF members to dodge blacklisting. As brought out in EFSAS Commentary of 30-08-2019, China, Turkey and Malaysia are the three countries that Pakistan is banking on to bail it out. No surprise, then, that a Pakistani technical team visited China and Malaysia recently and also held talks with Turkish officials in this connection. Also in Pakistan’s favour is the fact that Xiangmin Liu of China, the country that has the dubious distinction of being Pakistan’s eternal savior on the terrorism front, has recently taken over the rotating Presidency of FATF from Marshall Billingslea of the US.

Amidst the din about the FATF meeting in Paris and the potentially debilitating impact that it could unleash on Pakistan’s economy, the IMF will also be holdingits annual meetings from 14 to 20 October. The IMF is slated to initiate a review of the first quarter of Pakistan’s output under the $6 billion loan. In the run-up to the IMF meet, the Jubilee Debt Campaign along with 33 other civil society organizations have this week questioned the issuing of loans by the IMF to high debt countries like Pakistan without any debt restructuring taking place. This, they believe, is effectively bailing out previous lenders, incentivizing them to act recklessly and creating moral hazard. On Pakistan, they expressed reservations about the IMF agreeing in July 2019 to a $6 billion loan to the country with no debt restructuring. They also pointed out that the IMF at the same time had predicted that in 2020 the government of Pakistan’s external debt payments would be 54 per cent of exports. They have urged the IMF to implement its policy of only lending to highly indebted countries if there is a debt restructuring which makes the debt sustainable.

Meanwhile, media reports this week have drawn attention to Pakistan’s renewed production, smuggling and circulation of high quality fake Indian currency notes (FICN) to finance illicit activities and terrorist groups, including the Lashkar-e-Taibah and its affiliates, and the Jaish-e-Mohammed. As per these reports, Pakistan has been misusing its diplomatic missions in Nepal, Bangladesh and other countries to distribute large consignments of FICN. The FATF, meanwhile, is no stranger to Pakistan’s involvement in the fake currency racket. FATF’s report on ‘Money Laundering and Terrorist Financing Related to Counterfeiting of Currency’ identified money laundering and terror financing as aspects associated with counterfeit currency. The report noted that “India has also reported large scale use of counterfeit currency, by both State and non-State actors, to assist/fund terrorist acts. The case studies in this regard furnished by India, expose the scale and intensity of the problem. In particular, there is evidence of multiple bases being used to flood the country with counterfeit notes, thereby attempting to attack the 'economic security' of the country, besides using it to fund/assist specific terrorist acts”. The report highlighted that high-quality counterfeit Indian notes were printed in Pakistan and then smuggled into India through the India-Pakistan, India-Bangladesh and India-Nepal borders. The FATF would have taken note of these media reports and may have some additional unpleasant queries to address to Pakistan in Paris.

There is little doubt that Pakistan is not really serious about its adherence to the FATF’s requirements. The country has been allowed to get away so often with blatantly untruthful claims to the international community about having stopped sponsoring terrorism that it has honed this skill into an art. It is, accordingly, attempting to project superfluous and temporary actions as demonstrations of sincere and substantial efforts to the FATF.

While Pakistan may well succeed in averting the FATF blacklist by the skin of its teeth this time around, it will almost certainly remain on the grey list as it has little chance of securing the 15 votes required to get itself out of the list. That will bring its own set of serious challenges for the country’s economy.

Eventually though, if Pakistan continues on its merry path of supporting terrorism and funding it through its fake currency factories and networks, the noose is bound to tighten.