PERSPECTIVES

Handling FATF
As far as the FATF timeframe is concerned, the government must take immediate innovative and
disruptive steps for integrating institutions
Dr Muhammad Babar Chohan & Dr Suresh Kumar
OCTOBER 27, 2018
The Asia Pacific Group (APG) inspectors, during their recent visit to Pakistan, have underlined
several ‘insufficiencies’ in the country’s institutional arrangements and legal framework
governing financial transactions. The group members, according to media reports, observed that
the current institutional set up was not robust enough and that Pakistan needed to take more steps
before it could be excluded from the Paris-based Financial Action Task Force (FATF) grey list.
The FATF placed Pakistan on the grey list with effect from June this year asking the government
to further improve the regulation concerning dubious transactions through more robust methods
and procedures.

For this purpose, the biggest threat facing Pakistan is lack of coordination and data sharing
among the relevant institutions. This aspect is not just required to fulfill the requirements of the
FATF but is also crucial for improving Pakistan’s ‘doing business indicators’. In this regard, our
earlier article, ‘Revamping business regulation’ published in Daily Times on October 8, 2018,
suggests three broad interventions for improving business indicators in Pakistan: economic
interventions, legal interventions and business interventions. The innovative reforms on these
three fronts will equally be helpful for handling the requirements of the FATF methodology and
recommendations. The FATF and APG officials have reportedly provided their 26 point
recommendations to the government requiring immediate necessary action, by September 2019,
before Pakistan can be dragged out of the grey list.

As far as the FATF timeframe is concerned, the government must take immediate innovative and
disruptive steps for integrating institutions such as Federal Board of Revenue (FBR), Federal
Investigation Agency (FIA), State Bank of Pakistan (SBP), Anti-Narcotics Force, Securities and
Exchange Commission of Pakistan, Financial Monitoring Unit, National Accountability Bureau,
banks, National Counter Terrorism Authority, and other relevant federal, provincial and local
institutions. Many people confuse the integration of institutions as something requiring physical
and administrative integration. Here the scope of institutional integration is limited to specific
purposes such as data sharing and linking the transaction chains to the variables of the disruptive
methodology applied. It may be termed as ‘e-integration’ of institutions that can be further
expanded or improved for other similar purposes such as revamping the ease of doing business.

Using the BCT, the establishment of NFTS appears to be a strong response against the
objections raised by the FATF and the APG. The solution provided by the BCT, as a robust
integrated check against anti-money laundering activities, is more promising and trustworthy.
While devising the NFTS, the CNIC can be used as a base for the proposed BCT project
That means Pakistan’s regulatory regime requires drastic amendments, through robust IT
interventions at par with international standards, in next few months with a view to checking and
curbing money laundering and terror financing transactions. Building further upon the earlier
suggested three broad interventions, we argue that the ‘blockchain technology’ (BCT) is one of
the innovative methodologies for bringing about necessary innovative integration among the
institutions and capable of handling the FATF requirements.

Before discussing the core functioning of the BCT, the first basic step is to prepare a brief list of
the areas, as per the FATF methodology, such as ‘non-compliance areas’, ‘partial compliance
areas’ and ‘full compliance areas’. Here the areas of non-compliance and partial compliance
require focused attention. As far as ‘non-compliance areas’ are concerned, the APG has
reportedly underlined some businesses which include, but not limited to, precious metals/stones
dealers, real estate agents, notaries and lawyers putting them in the category of medium to high
risk areas.

The FATF and APG team have reportedly shown their concerns on many weak areas such as
‘deficient legal assistance system’, ‘absence of the criterion to new technology risks’ and
‘identification of transaction originators by the financial institutions’. These areas may be given
top priority in preparing the above mentioned list and identifying the e-variants for linking the
financial institutions.

On the front of ‘partial compliance areas’, as per media reports, the APG marked several
institutions and businesses as ‘medium risk areas’ such as the insurance sector, banking, asset
management, and, securities market. Many sectors and institutions such as national directorate of
national savings, the accountants, non-bank financial institutions, modarbas, the Pakistan Post
and development financial institutions have been declared as low risk areas. Based on the high,
medium and low risk areas, the first challenging job is to prepare an exhaustive priority list of
areas requiring necessary legal and IT interventions.

Such interventions may be grouped into long term and short term reforms. The short term
reforms should primarily focus on taking necessary steps for pulling Pakistan out of the grey list
before September, 2019. The long term intervention, as a continuous process, must follow a
strategic framework in line with Pakistan’s economic, legal, and business priorities. The long
term dimension must rely on developing case studies from all over the country rather than
following other countries’ models. Different white collar crimes, irregular financial transactions,
huge tax evasions, tax frauds,and, huge investments in real estate,being investigated by the FIA,
FBR and other financial institutions must be treated as case studies for bringing about innovative
interventions on the economic, legal and business fronts. These case studies carry rich data with
them that can be used for identifying the inter-institutional e-variants which can be used for
developing inter linkages through IT interventions such as the BCT.

The BCT, in simple words, is a kind of ‘distributed public ledger’ capable of holding immutable
data in such an encrypted way that the transactions can never be changed. Some examples of the
BCT applications are Bitcoin and other crypto-currencies. The BCT, as a distributed ledger,is ten
times more powerful than internet itself and it does suit everything that has value. One can take
advantage from the core attributes of the BCT such as immutability, consensus, distribution and
provenance, which together establish financial reliability by making all ledger entries permanent
and fraud free. The BCT is simple to develop, test, and deploy. It has recently been demonstrated
by the Sukkur IBA University Blockchain Innovation Center (SBIC). The SBIC has recently
developed, tested, and deployed the BCT Degree Verification System and the BCT Land Record
Mutation and Entries System. The SBIC has also successfully embarked upon further developing
Know Your Customer (KYC) projects such as the BCT Digital ID System that integrates CNIC
and FBR’s income tax/sales taxe-system. The Center is also working towards developing Agro
Blockchain Project aimed at devising the Digital IDs for the farmers that can help them get
agricultural investments and loans from the banks.

One can safely believe that if the BCT interventions, based on the financial crimes case studies,
could be made by using rightly identified e-variants, it is not a big task to devise a state-of-the-art
National Financial Transactions System (NFTS) capable of sharing and linking financial data
with the ability to identify the transaction originators, the technology risks, and the concerned
legal/administrative lacunas. It can create such data interfaces that keep identifying the legal and
IT loopholes alongside integrating and interpreting the financial data thus establishing an
irretrievable information chain regarding the financial transactions. In line with the FATF
recommendations, the BCT can effectively be used for data storage and financial transactions of
the high risk areas such as metals/stones dealers, real estate agents, notaries and lawyers.

It is argued that the BCT can provide a permanent and most promising solution to the money
laundering issue. Application of the BCT does not mean to start everything from scratch; we can
directly integrate this technology with currently running IT systems and start building the BCT
database. The immutability attribute assures that all the transactions done via BCT are
unalterable and they will remain on the network chain till the end. Therefore, the BCT data can
be used in a court of law as strong and undeniable evidence. The decentralized nature of the BCT
requires all nodes to validate every transaction (consensus required of at least 51 percent of the
nodes), thus making it very secure. Smart contract can function like oversight boards for
identifying fraudulent entries making it incredibly secure and accurate by raising red flags for
illegal processes.

Using the BCT, the establishment of NFTS appears to be a strong response against the objections
raised by the FATF and the APG. The solution provided by the BCT, as a robust integrated
check against anti-money laundering activities, is more promising and trustworthy. While
devising the NFTS, the Computerized National Identity Card (CNIC) can be used as a base for
the proposed BCT project. The project should primarily focus on integrating all important
financial institutions exploited by the money launderers due to their weak and inefficient systems
in place. The philosophy behind using the CNIC as a base for the proposed BCT intervention is
its multipurpose utility for authentication of transactions in everyday life. Another plus point is
that the CNIC is linked with the National Database and Registration Authority (NADRA) which
is further disseminating data to many other institutions. This is a kind of haphazard quasi
integration requiring systematic interventions so that the databank connected with the CNIC
could be disseminated to other financial institutions as per the requirements of the predefined e-
variants. Such institutions may also include, but not limited to, NADRA, FBR, Revenue Boards
(land mutations and entries), SECP, Police, Immigration (FIA), Customs and border security,
and, Excise and Taxation responsible for registering and issuing licenses for motor vehicles.

Using the BCT, once the NFTS is in place, there will be only one digital ID that would be used
for multiple financial purposes such as opening bank accounts, borrowing and lending,
mortgages, financing, capital market clearing, company incorporation, tracking money
movements, and tracing the financial transaction originators. This means the PTI government has
to enact new laws for adaptation of this new technology for financial oversight and bind all the
concerned institutions to facilitate the formation of NFTS. The government may also consider
establishing NFTS Authority for this purpose.

Apparently, it may look as a daunting task but, as a matter of fact, a simple and serious
government intervention can make this miracle happen. Subject to right identification of weak
areas, through case study analyses, the system will have the potential not only to meet the FATF
requirements but also make BCT based advancements better than the Western countries.

Dr Muhammad Babar Chohan(babarchohan21@gmail.com) is Additional Commissioner, FBR,

holding PhD in Economic Planning from Massey University, New Zealand. Dr Suresh Kumar
(suresh_kumar@iba-suk.edu.pk) is Assistant Professor/Head of SBIC, IBA, Sukhur, holding PhD
in Finance from Massey University, New Zealand

Published in Daily Times, October 27th 2018.