Pakistan Institute for Parliamentary Services 2018

OPINION

Pakistan under Grey List of Financial Action Task Force (FATF)

Maria Irfan
PIPS Associate

The Financial Action Task Force (FATF) is an inter-governmental body established in 1989
by the Ministers of its Member jurisdictions. It was formed at G 7 summit meeting in
Paris. The objectives of the FATF are to set standards and promote effective implementation
of legal, regulatory and operational measures for combating money laundering, terrorist
financing and other related threats to the integrity of the international financial system. 1
FATF issues series of recommendations that, when followed, may help curb terror financing
through money laundering.

The FATF monitors financial transactions of countries worldwide, reviewing if they have
taken the required steps against curtailing the flow of funds to blacklisted organizations i.e.
mafias, terrorist outfits, banned groups who face economic sanctions from UN-member
countries. Based on these facts, FATF releases a list of countries after its review and sorts
them according to their performance against activities they have deemed illegal. 2 The FATF’s
decision making body, the FATF plenary body, meets three times a year.

History of Financial Action Task Force (FATF)

Recognizing the threat posed to the banking system and to financial institutions in Paris
(1989), the G-7 Heads of State or Government and President of the European Commission
convened the Task Force from the G-7 member States, the European Commission and eight
other countries. 3 The FATF currently comprises 35 member jurisdictions and 2 regional
organizations including China, India, United States, United Kingdom, and Japan. 4 The FATF
grey list is a short description of the Financial Action Task Force list of Non-Cooperative
Countries and Territories (NCCTs).5 This blacklist has been issued by Financial Action Task
Force FATF since 2000 and it lists countries which it finds to be non-cooperative in the
global fight against money laundering and terrorist financing, calling them non-
cooperative countries or territories. FATF and other organizations take an indirect route to
evaluate the sensitivity of a country to terror financing by tracking and evaluating their laws
and their implementations. Some countries included in this list are; Ethiopia, Iraq, Yemen,
Serbia, Syria, Srilanka, Trinidad and Tobago, Tunisia and Vanuatu. 6 Pakistan is placed again
in this list on 27 June, 2018.

1
http://www.fatf-gafi.org/countries/#FATF browsed Sept 25, 2018
2
Aitzaz,Hassan. “What is FATF and What Does Pakistan’s Inclusion in Its Grey List Mean.” ProPakistani.
Accessed July23,2018 https://propakistani.pk/2018/02/26/fatf-pakistans-inclusion-grey-list-list-mean/
3
“History of the FATF”. Fatf-gafi. Accessed July24,2018 http://www.fatf-gafi.org/about/historyofthefatf/
4
“FATF Members and Observers”. Fatf-gafi. Accessed July23,2018 http://www.fatf-
gafi.org/about/membersandobservers/
5
“About FATF”. Faf-gafi Accessed July24,2018 http://www.fatf-gafi.org/about/
6
Usman, Hayat. “Pakistan on FATF’s Grey List-What, Why and Why Now”. Dawn Accessed July24, 2018
https://www.dawn.com/news/1418143
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Pakistan as Member of Asia/Pacific Group on Money Laundering (APG)

The purpose of the Asia/Pacific Group on Money Laundering (APG) is to ensure the
adoption, implementation and enforcement of internationally accepted anti-money
laundering and counter-terrorist financing standards as set out in the FATF Forty
Recommendations and FATF Eight Special Recommendations. 7The effort includes assisting
countries and territories of the region in enacting laws to deal with the proceeds of crime,
mutual legal assistance, confiscation, forfeiture and extradition; providing guidance in setting
up systems for reporting and investigating suspicious transactions and helping in the
establishment of financial intelligence units. The APG also enables regional factors to be
taken into account in the implementation of anti-money laundering measures.

Origins of the APG go back to "awareness raising" activities by the FATF in early 1990s as
part of its strategy to encourage adoption of money laundering counter-measures throughout
the world. In order to achieve more concrete results, Australia agreed to set up a Secretariat
for the purpose of obtaining regional commitment and establishing a regional FATF-style
body with practical objectives. Subsequently, an agreement was reached in Bangkok in 1997
which created the APG. The first meeting was held in Tokyo in 1998 and then annually
thereafter. Following the events of 11 September 2001, the APG expanded its scope to
include the countering of terrorist financing. The APG conducts mutual evaluations of its
members and holds a periodic workshop on money laundering methods and trends. The
APG is supported by a Secretariat, which serves as the focal point for its activities. The APG
became an Associate Member of the FATF in 2006. Pakistan is one of the over 41 member
countries and 8 observer nations in the APG.

Pakistan and FATF Grey List, the History:

Pakistan was on grey list previously in 2008 and for three years between 2012 and 2015 but
due to its continuous efforts the Task Force removed Pakistan from the list in 2015 after the
country agreed to take actions against Hafiz Saeed’s Jamaat-ud-Dawa (JuD), Falah-e-
Insaniyat Foundation (FIF) and Lashkare Tayyba.8

Earlier in February 2018, some member countries including USA, UK joined by France and
Germany nominated Pakistan to be placed in FATF Grey list during the International
Country Risk Guide (ICRG) session which was held a day before the FATF plenary. 9 Upon
this the advisor to the then Prime Minister, Dr Miftah Ismail offered that Pakistan was ready
to submit a report on their concerns and FATF should take their decision based on that. At
that time Japan supported Pakistan. ICRG also agreed to that proposal that FATF should
take decision based on those measures. China also advised Pakistan that it should sign an
agreement with FATF based on its measures to be taken in upcoming three months. The
pre plenary meeting ended positively and this resulted in the tweet from the then Defence
Minister of Pakistan, Khawaja Asif in which he announced that FATF postponed the
decision. However to the surprise of Pakistani authorities FATF decided to place Pakistan on

7
http://www.fatf-gafi.org/pages/members/asiapacificgrouponmoneylaunderingapg.html
8
Shahbaz,Rana. “Pakistan to Go on FATF Terror Financing List in June”. The Express Tribune. Accessed
July27,2018 https://tribune.com.pk/story/1643185/1-pakistan-go-fatf-terror-financing-list-june/
9
Ibid.
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the Grey list due to continuous pressure from USA and on June, 27 Pakistan was placed in
this list due to “strategic deficiencies” in anti-money laundering and terrorism financing. 10

This decision was due to US allegations that Pakistan has not taken any actions against Hafiz
Saeed, the mastermind behind Mumbai attacks and Pakistan’s lack of action against terrorist
organizations likes Jamaat-ud-daawa, Jaish-e-Muhammad and other sectarian groups. The
decision highlighted a weakness that Pakistani courts during conviction were not awarding
penalties on charge of terrorism-financing also that Pakistan was unable to control cross
border smuggling of cash.

After the decision of placing Pakistan on the grey list in the first plenary meeting in February,
Pakistan represented a 26 point action plan to FATF prepared by ICRG. After this
negotiation Pakistan was formally placed on the grey list in June 2018. If failed to implement
this plan, Pakistan would be placed on the “Blacklist.” This ranking in grey list is making the
position of Pakistan worse in other indexes. For instance, Pakistan is ranked by the Basel
Anti-Money laundering Index, that currently ranks Pakistan 46 out of 146 countries which
place it in a better position than Tajikistan (4) Kenya (11) and Panama (30). All of these are
currently not in the grey list. Its ranking is also associated with FATF. Now that Pakistan is
placed in grey list it will also affect its ranking in Basel Anti-Money laundering Index.

The world must recognize Pakistan is a victim of terrorism as the Global Terrorism Index
2017 by Institute for Economics and Peace (an independent, non-partisan, non-profit think
tank) ranks Pakistan as the fifth most affected from terrorism behind Iraq, Afghanistan,
Nigeria, and Syria.11

Implications for Pakistan

This grey listing has a negative effect on the image of Pakistan internationally. There are a
number of ways in which this grey listing will implicate Pakistan.

i. Pakistan’s financial sector might take a direct hit as Standard Chartered, the largest
international bank in Pakistan as well as Citibank and Deutsche bank might decide to
pull out due to uncertainty of proper issuance of their funds.12
ii. A decline in foreign transactions and foreign currency inflows could lead to
worsening of Pakistan’s current account deficit (CAD).
iii. Financial Institutions such as the World Bank and IMF would hesitate in transactions
with Pakistani Banks or would avoid Pakistan altogether.
iv. It would be harder for foreign investors/companies to do business in Pakistan.
v. Accessing funds from international markets would be difficult for Pakistan.
Action Plan and Concerns of FATF

The 26 point action plan prepared by ICRG which Pakistan negotiated with FATF requires
Islamabad to remove all sources of financing to terrorist organizations. This list includes
Lashkar-e-Taiba (LeT), Jaish-e-Mohammad (JeM), Jamaatud Dawa (JuD) and its affiliates,

10
Ibid.
11
Usman, Hayat. “Pakistan on FATF’s Grey List-What, Why and Why Now”. Dawn Accessed July30, 2018
https://www.dawn.com/news/1418143
12
Ibid.
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the self-styled militant Islamic State (Daesh), the Haqqani Network, Pakistani Taliban and Al
Qaeda.13

The FATF said Pakistan will have to demonstrate that remedial actions are applied. The
Country will also demonstrate that authorities are identifying cash couriers and controlling
illegal movement of currency. Pakistan also has to improve inter-agency coordination
between provincial and federal authorities to counter terror financing risks. Law enforcement
agencies need to identify and investigate terror financing. In its last points the Task Force
suggested that Pakistan needs to demonstrate enforcements against TFS (Targeted Financial
Sanctions) violations. It includes administrative and criminal penalties and provincial and
federal authorities cooperating on enforcement cases.

Actions already taken

The ICRG report showed that Pakistan has already taken some action but they were not duly
acknowledged. “Banks in Pakistan are not providing any financial services to designated
entities and individuals and are continuously conducting ongoing transaction monitoring for
terrorism financing concerns,” according to the ICRG report. Since October 2017, Pakistan
has frozen 177 additional accounts in the amount of Rs48.2 million due to indirect linkages
and association of customers with the UNSC-listed persons and entities.14 Apart from all
these improvements Pakistan is still placed on the grey list.

Who supported Pakistan and then backed out?

After the first plenary meeting of FATF in February 2018 Pakistan was supported by China,
Turkey and Saudi Arabia but after intense pressure from USA, Saudi Arabia and China
backed out. USA negotiated with Saudi Arabia to give permanent membership in FATF and
China also withdrew its support on Pakistan after negotiations with India. The message from
Beijing is that if Islamabad chooses a policy that is not in line with Beijing’s economic or
security interests, it should not expect any support from China. Beijing is clearly not happy
with Pakistan’s lack of action against groups such as Jamaat-ud-daawa, Jaish-e- Muhammad
and other sectarian groups.15

Reforms taken by Pakistan

After the first plenary meeting Pakistan hurriedly took some steps. Pakistan changed the
terrorism legislation to keep it in line with that required by The United Nations. As a result
the Anti-Terrorism Act was amended through a presidential ordinance that simply added the
words "listed under the United Nations Security Council Act (1948)" into the section which
provides the legal basis for proscriptions. 16

13
Anwar, Iqbal. “Pakistan Made High-Level Political Commitment to End Terror Financing” Accessed July 3,
2018 https://www.dawn.com/news/1417204
14
Shahbaz, Rana. “Pakistan Formally Placed on Grey List”. The Express Tribune. Accessed. Aug 3, 2018.
https://tribune.com.pk/story/1746079/1-pakistan-formally-placed-fatf-grey-list/
15
Umair, Jamal. “Why Did China Pull Support For Pakistan at the Financial Action Task Force”.The Diplomat.
Accessed Aug 1,2018. https://thediplomat.com/2018/02/why-did-china-pull-support-for-pakistan-at-the-
financial-action-task-force/
16
“Pakistan Placed on Grey List by FATF”. FirstPost. Accessed Aug 4,2018.
https://www.firstpost.com/world/pakistan-placed-on-grey-list-by-fatf-support-for-hafiz-saeed-hurt-country-
as-did-prioritising-elections-over-fighting-terror-4628591.html
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Pakistan decided to upgrade its systems at border posts and ensure better coordination
among its agencies to comply with FATF concerns regarding smuggling of currency by
terrorist groups across the Afghan border. The cross border movement of currency by
terrorist groups like Haqqani Network and Talibans were among the concerns the FATF had
for putting Pakistan on grey list.

Securities and Exchange Commission of Pakistan (SECP) issued an Anti-Money laundering

and Countering Financing of Terrorism Regulations for all the securities brokers, insurance
companies, non-banking finance companies and modarabas with the aim to harmonize the
AML and CFT regime.17

FATF Implications for Non Profit International organizations

Civil Society includes NPOs (non-profit organizations) who contribute in society’s welfare.
According to FATF, the definition of NPO is: “A legal person or arrangement or organization that
primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural,
educational, social or fraternal purposes, or for the carrying out of other types of good work.” 18 It is
important for countries to take into account the objectives of Recommendation 8 which are
set out in paragraph 3 of its Interpretive Note as follows:

The objective of Recommendation 8 is to ensure that NPOs are not misused by

terrorist organizations: (i) to pose as legitimate entities; (ii) to exploit legitimate
entities as conduits for terrorist financing, including for the purpose of escaping
asset freezing measures; or (iii) to conceal or obscure the clandestine diversion of
funds intended for legitimate purposes, but diverted for terrorist purposes.

Within the FATF definition this recommendation concerns only those NPOs that are
involved in terrorist financing activities or money laundering. In some jurisdictions, this may
mean those NPOs that control a significant portion of the financial resources of the sector
and those NPOs that have a substantial share of the sectors international activities. Pakistan
government has gradually paused functioning of many international NPOs whose future is
hung in balance besides the fact that these NPOs are supporting civil society in numerous
welfare projects.

Conclusion and Way Forward

Pakistan was previously placed on this list in 2003 and from 2012-2015. This recent decision
of placing Pakistan on this list seems more due to intense pressure from USA and India
besides country’s legislative, policy and administrative measures to curb terror financing. It
seems Pakistan will be placed on this list till it convinces that it has shut down any financing
leads to terrorist organizations like Jammat-ud-Daawa led by Hafiz Saeed. ICRG prepared 26
point action plan for Pakistan which was presented to FATF. This action plan requires
Pakistan to take a lot of actions the most important of it is to erase all sources of financing to
Terrorist Organizations. In the first phase of plenary meetings Pakistan’s allies, China, Saudi

17
“SECP Rolls Out New Anti-Money Laundering Regulations In Line With FATF Recommendations”. The
Express Tribune. Accessed Aug 4, 2018 https://tribune.com.pk/story/1738512/2-secp-rolls-new-anti-money-
laundering-regulations-line-fatf-recommendations/
18
“Combating The Abuse of Non-Profit Organizations (Recommendation 8)”. FATF-gafi. http://www.fatf-
gafi.org/media/fatf/documents/reports/BPP-combating-abuse-non-profit-organisations.pdf
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Arabia and Turkey supported it but after facing intense pressure from USA they backed out
except Turkey.

Pakistan should continue following the action plan. The Parliament of Pakistan has
completed legislation for FATA Reforms which will markedly improve writ of state and rule
of law in the region previously vulnerable to infiltrators from Afghanistan border. Pakistan
has conducted around 12 operations against militant groups in FATA and Baluchistan that
shows its zero tolerance to any safe havens for terrorists. Fencing of Pak-Afghan border now
at an advance stage will diminish smuggling of currency, trade of terrorists and ammunition.
The agencies-backed mainstreaming of religious parties in the disguise of new political
parties have been defeated by the people’s resolve in the general elections 2018 as all such
parties couldn’t win a single seat no matter they proved not more than spoilers in 19
National Assembly seats, which could have seen a different winner according to recently
launched GALLUP Pakistan report in Sept., 2018. According to World Bank, less than 50%
of Pakistanis have bank accounts.

In order to control terror financing and money laundering we need to have a modern
banking system where everything is digitized. All individuals should have bank accounts for
transaction of their money. It is imperative that in order to implement the action plan and
improve country’s ranking at FATF, the newly elected civilian regime should guide and direct
armed forces and intelligence agencies to work in unison to halt any patronage or support to
banned outfits from any side.

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