Having failed twice to meet the milestones set by the Financial Action Task Force (FATF), the prospects of blacklisting loom large over an economically stressed Pakistan.
The Financial Action Task Force (FATF) is an inter-governmental body formed in 1989 at the G7 Summit in Paris. The initial objective was to examine and develop measures to combat money laundering, which later expanded to combatting terror financing. Initially formed with 16 members initially, FATF has now grown to include 39 nations.
FATF recommendations are recognised as the international norm for the combating of money laundering and terror funding. It forms the basis for a coordinated response to threats to the integrity of the international financial system. FATF also plays a central role in implementing financial provisions of the United Nations Security Council resolution on terrorism and evaluating the ability of countries to prevent, detect, investigate and prosecute the financing of terrorism.
IMF and various other global bodies, as observers, use FATF listings as benchmarks for disbursement of loans. Countries on the FATF blacklist, like Iran and North Korea, can have their economies severely crippled and be financially isolated. Their credit ratings will be internationally downgraded, denying them IMF loans and development assistance.
In the era of terrorism of all hues--religious, ethnic and right-wing/ left-wing extremist--the international community was compelled to evolve a mechanism to curb terror financing of all kinds.
To comply with the standards required by the IMF, Pakistan made the commitment to work with the Asia Pacific Group and FATF on Money Laundering. Pakistan was placed on FATF’s grey list in June 2018, on a proposal moved by the US, UK, Germany and France. FATF required Pakistan to enforce controls on illicit movement of currencies, improve interagency coordination, identify and freeze assets of designated terrorists and those acting on their behalf and so on. Pakistan failed to meet the action plan items in January and May 2019.
To avoid being put on the blacklist, Pakistan claimed that it had seized properties associated with terror groups in and sealed 771 educational institutions run by them.
However, Asia Pacific Group of FATF (APG) has observed that Pakistan had not implemented 35 of its 40 point agenda and shown extremely poor performance over the 27 point action plan given by APG.
Being grey listed has already cost Pakistan $10 billion a year. The situation can worsen with blacklisting because Pakistan has already taken 21 loans from IMF out of which 12 are bailouts. Bailout packages from Middle Eastern countries and China weren’t sufficient to stabilize the economy and stop the mounting financial crisis.
Pakistan’s economy is controlled primarily by multinational banks. After the 2017 debacle in the US when Habib Bank had to settle out of court with the Department of Financial Services (DFS) of New York State by agreeing to pay a fine of $225 million against various violations of the state’s regulatory provisions and also stop operations in US, the investors moved to other multinational banks for surety and payments. After being blacklisted, these international financial institutions are likely to pull out from Pakistan. The cascading effect will also affect investors who are dependent on these banks. To move on for better investment options they may prematurely liquidate their investments.
As a consequence of blacklisting, all the transactions with Pakistan will involve more and more levels of scrutiny. As a result, the foreign remittance will decrease and the financial institutions will avoid transacting in highly transferable currency (USD, Euro etc).
Pakistan has been garnering support from Turkey, China and Malaysia against being placed on the blacklist. Furthermore, since India is an active member of the Asia Pacific Group (APG), it has called to question the impartiality and fairness of APG to question and has demanded that FATF process be fair, unbiased and objective. China was recently elected to the vice-presidential position of the APG forum which can offer Pakistan the much needed time and support to implement some of the policies of the forum.
- The flow of illegal funds does not recognise frontiers. In some instances, nationally designated organisations are also caught up in providing resources through corrupted methods. International watchdogs like FATF are hard-pressed to pin down defaulting countries due to state involvement.
- Blacklisting will impact foreign investor sentiments along with downgrading of the country by multilateral lenders. If investors pull out, the Pakistan stock market will fall drastically and result in high rates of inflation and civil unrest.
- However, FATF is not a panacea to kill all terrorist funding. Terror funding has multiple sources and myriad channels of transfer- conventional and non-conventional – which are almost impossible to track and hard to detect and intercept. More so when the state is itself an active participant.
- Even after the blacklisting of rogue countries, the threats to the integrity of the international financial system will remain. Activities of terrorist groups and their related non-profit organisations like ISIS, Jamaat-ud-Dawah (JuD), Al-Qaeda, Falah-i-Insaniat (FIF),Jaish-e- Muhammad, Lashkar-e-Taiba (LeT), Taliban and Haqqani network are intentionally left unchecked at the provincial, district and grassroots level, and they can still raise funds and hold meetings and rallies.
- Donations from charities are also a source of terrorist funding.
- Experts still maintain that Lashkar-e-Taiba ‘army of the righteous’ is heavily funded by Pakistani expatriates, mainly from communities in the Gulf States and the United Kingdom, by businessmen and tycoons, Indian mafia and other terror groups. These sources of funding are likely to be unaffected by the FATF blacklisting.
- Drug production and trafficking network is a major source of terror funding not targeted by FATF. Every link in the drug chain pays the terror organizations.
- The greatest difficulty is that terrorist networks have stayed ahead of governments’ efforts to stymie their activities and adjust their operations accordingly.
Image Courtesy: cryptopolitan.com