Photo Courtesy: Pakistan Today

CPSD - Commentary

FATF’s Grey List: Implications for Pakistan?

The Financial Action Task Force, established in 1989 by the Ministers of its Member jurisdictions is an inter-governmental body. In an effort to combat money laundering, along with any other threats to the financial system, the FATF has devised legal and regulatory mechanisms. In essence, the FATF thus serves as a policy making body, which puts forth recommendations to prevent the proliferation of international terrorist financing. The financial body also collaborates with international stakeholders to prevent the international financial system from being misused.

On February 28th, the FATF placed Pakistan on its Grey List. This proposal, led by the US and its allies sought to imperil the country’s international position. The reasoning behind this decision quoted “structural deficiencies” in anti-money laundering and combating the financing of terrorism. This new position provides the country with a 15 month timeline to devise a plan to negotiate its exit from the list. Money laundering refers to the disguising of money earned from crime as money earned legitimately, while terrorist financing involves the collection of funds to sponsor acts of terror. In the former, the source of funds has to be a crime, while in the latter, the purpose is a crime. Measuring these crimes proves to be a difficult task, primarily since these transgressions go unreported. The FATF thus assesses the crimes by evaluating a country’s laws and their subsequent implementation.

While it is apparent that this placement casts a negative light on Pakistan, however the actual extent of its impact is unclear. Undoubtedly, this places Pakistan’s banking channels and economy in a conundrum, since they are linked to the international financial system. Additionally, imports and remittances may be adversely affected, along with potential damage to the credibility of transactions with Pakistan by foreign institutions. Potential foreign investors may also be affected by this decision, as is already being witnessed by the stock prices at the Pakistan Stock Exchange. Some experts however, continue to remain positive citing the country’s previous placement on the list from 2012-2015 and its subsequent successful removal through the completion of an IMF program.

This decision by the FATF proves to be an unfortunate one, with regards to its timing, since Pakistan is currently being governed by an interim government, which does not have the mandate to implement a long term reform program. While China praised Pakistan for its efforts in counter terrorism, diplomatic efforts by Pakistan must strengthen its alliance with China and allies such as Saudi Arabia to prevent political arm twisting by its rivals on international fora. The government, however, must take responsibility despite the unfortunate timing, since the state is currently looking to attract investment under the banner of CPEC. In the likelihood of investor confidence shattering, the FDI and balance of payments maybe adversely affected.

In collaboration with the Foreign Office of Pakistan, the FATF has highlighted some measures which Pakistan must adopt in order to exit the list, particularly in terms of “addressing counter terrorist financing related deficiencies.” These actions include the initial identification of financing risks, along with the application of remedial actions and sanctions. The FATF has also stressed the employment of competent authorities for the enforcement of action, along with placing controls on the illegal movement of currency for terrorist financing. Existing cases of terrorist financing and the people involved also need to be examined, along with improving inter agency coordination between provincial and federal authorities. Furthermore, the authorities called for an enforcement of anti-terrorist policies against designated terrorists, who had to be penalized accordingly.

While Pakistan concedes its structural weaknesses, the country’s robust efforts against eradicating international terrorism remain unrivalled – the country having lost approximately 68,000-70,000 civilians and security personnel in the War on Terror, while successfully cracking down on an estimated 20,000 terrorists through various intelligence/security operations. However international efforts targeting terrorism must realign their focus towards operational safe havens based in Afghanistan that inevitably provide sanctuary to terrorists and their networks driven out of the country through military operations. It would bode well for the international community to pursue a two-pronged front to eliminate terrorism regionally and to strengthen its support for Pakistan’s continued efforts against eradicating terrorism in the region.

What is also debatable is whether Pakistan’s placement on the grey list is diplomatic coercion by Washington to discipline its traditional ally into a more ‘submissive’ posture rather than a genuine attempt to alleviate international terrorist financing globally. The move at large can also be viewed as a shift in American policy towards Pakistan to pursue a more hard line approach against the country as Pakistan prepares to reorient its foreign policy towards the East. Political analysts are of the view that since the US is a major financier of the FATF – the potential bias in the financial watchdog’s hasty conclusion therefore must not be completely dismissed. However, Pakistan must pay careful heed to the proposal of the FATF, while strengthening its international diplomatic efforts to prevent the country’s inclusion in these lists in the future due to political pressure.