What is FATF? Why is Pakistan on FATF “Grey List”?
Lately, Pakistan being on FATF’s grey list was considered to be a fiasco. The Dawn News reported Financial Action Task Force (FATF) declared that “Pakistan will continue to remain on the watchdogs” and will stay under the status of the grey list.
In 2020, #FATFPakistan was made a trend on Twitter. Pakistan consistency on the grey list was shocking but intrigued many about the role of FATF. It is a global money laundering and terrorist financing watchdog. It is an inter-governmental body that has established international standards to eradicate and prevent illegal activities. FATF is a policy-making body that strives to generate necessary political actions to bring forward national legislative and regulatory reforms in these areas.
Countries have to follow the FATF recommendation or you might call them FATF standard which ensure coordinated global response towards the prevention of organized crime, corruption and terrorism.
The COVID-19 pandemic halted the FATF operations. However, they recommenced operations and identified countries with strategic AML/CFT deficiencies. Furthermore, they prioritized reviewing the list of countries with expiring deadlines of an action plan.
In February 2021, FATF reviewed the progress of multiple countries: Albania, Barbados, Botswana, Cambodia, Cayman Islands, Ghana, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Uganda, and Zimbabwe.
Timeline of Pakistan’s Status in FATF
The first time Pakistan was added to the grey list was in February 2008. Pakistan’s recent progress Pakistan progress in adopting anti-money laundering legislation were noted. However, the financial institutions were exposed to strategic deficiencies which demoted the country to the Grey list for the very first time. Pakistan was considered to be the vulnerability to the international financial system. However, the Grey list was soon lifted in 2009.
Considering the situation, Pakistan was demonstrated with the high-level commitment in June 2010 and dragged them back to Greylist. The watchdog FATF and Asia Pacific Group strived to sort out these differences. But, unfortunately, the country continued to demonstrate insufficient progress to be taken out of the grey list even in October 2011.
Furthermore, FATF public statement was announced in February 2012. The country stayed on the Greylist status and was declared to be those jurisdictions with significant strategic AML/CFT deficiencies. Moreover, the countries stayed incapable of making sufficient progress in addressing the deficiencies. There was another case in that Pakistan didn’t commit to an action plan developed by the FATF to address the deficiencies. Thus, the Federal ministers of Pakistan considered this step as a “Black List”.
The major concern of FATF towards Pakistan was its inappropriate legislation to identify terror financing and confiscation of terrorist assets.
However, the country made significant progress in June 2014 and FATF declared that the jurisdiction is “Improving public compliance”. Fortunately, within the next nine-month, Pakistan was considered to be no longer a subject to monitor under the watchdog for its ongoing global AML/CFT compliance process”.
From 2015 to 2107, Pakistan did not stay under the critical monitoring of FATF and that opened many opportunities for the country to progress and bring in foreign investments.
After three years of consistent success, Pakistan got dragged back onto the grey list in the year 2018. The Press release by FATF indicated focusing on taking strict action onto the terror financing and activities of UN-designated terrorists at a larger scale.
At that time, the action plan submitted by Pakistan had 27 points which included
“Full implementation of that targeted financial sanctions against all UN-designated terrorists.”
Pakistan stayed on the grey list till it addresses the single remaining item of the standard action plan decided in June 2018. Later on, in 2019, FATF and its regional partner the Asia Pacific Group (APG) handed out a new action plan for having control of terrorist and illegal activities.
The regional partner Asia Pacific Group (APG) identified several issues during the assessment of Pakistan’s performance in 2019. Pakistan’s entire anti-money laundering and counter-terrorist financing system were assessed. They mentioned that although Pakistan has made substantial improvement, yet they need major efforts to raise awareness in private sector to money laundering risks and to develop and use financial intelligence to build cases.
“Pakistan is still failing to effectively implement the global FATF standards across several areas”, APG added.
So what action plan was proposed by FATF for 2021?
FATF encouraged Pakistan to make progress and address the remaining CFT-related item by demonstrating the TF investigations and prosecutions target senior leaders and commanders of UN-designated terrorist groups. In response to deficiencies found in Pakistan’s 2019 APG Mutual Report (MER), Pakistan was provided with a list of recommended action plans and asked for a high-level commitment in June 2021.
The extended time duration was to address these strategic deficiencies according to a new action plan that emphasizes combating money laundering.
FATF Recommended Action Plan
Pakistan is supposed to put efforts into the following strategically important AML/CFT deficiencies:
(1) Improvement in international cooperation by the amendment of MLA Law.
(2) Assistance to be sought from foreign countries in implementing UNSCR 1373 designations.
(3) The demonstration of conducting on-site and off-site supervision commensurate with particular risks associated with DNFBPs. It’s supposed to be collaborated with applying appropriate sanctions where necessary
(4) Proportionate and dissuasive sanctions are applied consistently to all legal persons and legal arrangements for non-compliance with beneficial ownership requirements
(5) Increase in ML investigations and prosecutions and that proceeds of crime continue to be restrained and confiscated in line with Pakistan’s risk profile, including working with foreign counterparts to trace, freeze, and confiscate assets
(6) DNFBPs are being monitored for compliance with proliferation financing requirements and that sanctions are being imposed for non-compliance.
Thus, insufficient compliance with recommended action plan dragged Pakistan to the Grey List. But what particularly describe a Grey-list of FATF.
What makes Jurisdiction fall into Grey List or Black List?
The major role of FATF is to address the existing strategic deficiencies in combatting money laundering, terrorist financing, and proliferation financing.
“At the time when FATF places jurisdiction under improved monitoring, it indicates that country has committed to resolving the identified strategic deficiencies. These deficiencies are supposed to be resolved under a given timeframe and are subject to be under increased monitoring. This list is externally known to be the Grey List.”
Furthermore, FATF and FATF-style regional bodies (FSRBs) continue to monitor such jurisdictions. Moreover, these jurisdictions are supposed to make efforts in addressing their existing strategic deficiencies. The main role of FATF here is to make sure that they complete their action plan within the agreed time frame.
However, there exist some high-risk jurisdictions which hold significant strategic deficiencies to combat money laundering, terrorist financing, and financing of proliferation. FATF take critical measures in those countries which are enlisted as “Black List”. FATF defines them as,
“For all countries identified as high-risk, the FATF calls on all members and urges all jurisdictions to apply enhanced due diligence, and, in the most serious cases, countries are called upon to apply counter-measures to protect the international financial system from the money laundering, terrorist financing, and proliferation financing (ML/TF/PF) risks emanating from the country. This list is often externally referred to as the black list. ”
Although the COVID-19 pandemic paused the operations, yet FATF started working after safety measures eased up. The review process of the countries which were enlisted to be in the High-risk Jurisdiction started again in February 2020. Those countries were subject to Call to Action and FATF’s call for countermeasures.
Currently, the countries at High-Risk are Iran and the Democratic People’s Republic of Korea which is also known to be North Korea. These statuses were adopted in 2020 and the FATF’s call for action on these high-risk jurisdictions remains in effect.
Consequences of being placed in FATF grey list
Countries that are placed in the FATF grey list have to face:
- IMF, World Bank, and ADB Economic sanctions
- Trouble in getting loans from IMF, World Bank, ADB and other countries
- Significant reduction in international trade
- International boycott (in some cases)
Pakistan experienced a $38 billion loss because of the FATF grey list
According to the latest research by Dr Nafay Sardar, Pakistan has experienced a substantial loss of GDP worth $38 billion, since Financial Action Task Force’s (FATF) has kept the country on the grey list since 2008. It was indicated that 58% of this response by driven by the reduction in consumption expenditures by both household and government. For this decline in GDP, exports and inward foreign direct investments are also responsible and have added their part in the cumulative losses of $4.5 billion and $3.6 billion respectively.
All this happened because of Pakistan status as greylisted. The negative implications of FATF greylisting are significant and have immensely affected Pakistan. These outcomes point to the significant negative consequences associated with FATF grey-listing. It is the time when Policymakers of the country are required to comply with FATF by the adoption of AML/CFT legislation to avoid possible future economic losses.
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