Prelims Syllabus : Mains Syllabus : GS: 3: Security challenges and their management in border areas; linkages of organized crime with terrorism
- The international watchdog against money laundering and financing of terrorism, the Financial Action Task Force (FATF), has put Pakistan on a list of “jurisdictions with strategic deficiencies”, also known as the grey list.
- The Financial Action Task Force (FATF) has decided to keep Pakistan in the ‘grey list’ for now, despite New Delhi’s push to blacklist the neighbour over terror funding.
- The decision to keep Pakistan in the ‘grey list’ was taken at the end of week-long meetings by the FATF in Paris. In the aftermath of the Pulwama terror attack, India had made a strong case against Pakistan’s non-compliance in curbing terror funding.
- Pakistan is already in the grey list and has time till October to avoid being blacklisted, technically referred to as countries under ‘high-risk and other monitored jurisdiction.’ Iran and North Korea are currently blacklisted.
- India had underlined Pakistan’s complicity in the Pulwama terror attack, in which 40 CRPF jawans were killed. Jaish-e-Mohammad, a proscribed terror outfit that has claimed responsibility for the terror attack, operates out of Pakistan.
- India is believed to have shared details of the same, stressing how Pakistan has been unable to curb the activities or choke its funding.
- In June 2018, Pakistan made a high-level political commitment to work with the FATF and the Asia Pacific Group to address its strategic counter-terrorist financing-related deficiencies.
- To avoid being blacklisted in October this year, it had committed that “law enforcement agencies are identifying and investigating the widest range of terror funding activities and that terror funding investigations and prosecutions target designated persons and entities, and persons and entities acting on behalf of or at the direction of the designated persons or entities.”
- India had informed the FATF that Pakistan is falling short of its commitments drastically as the proscribed terror outfits and individuals continue to act from its territory and bleed India.
- When Pakistan was put under the grey list last year, its all-weather friend China and Saudi Arabia, which has an observer status at the FATF, refused to shield it.
- India is hoping that it can ultimately build enough pressure to push for Pakistan’s blacklisting later this year. The blacklisting will prevent institutions like IMF from financially supporting Pakistan that it can ill-afford at this time.
- In simple terms, money laundering pertains to disguising money earned from a crime as money earned through legitimate sources.
- The crime could be corruption, drug trafficking, fraud or tax evasion. Terrorist financing involves collection of funds to support acts of terror or terrorist organisations.
- A key difference between the two is that, in money laundering, the source of funds has to be a crime.
- In the financing of terrorism, funds may come from perfectly legitimate sources, such as donations from ordinary citizens, but the purpose has to be a crime.
What is FATF looking for in AML and CFT
- FATF has formulated a set of 40 recommendations which have become international standards on AML (Anti-Money Laundering) and CFT(Countering Financing of Terrorism)
- Over time, these recommendations have been and will continue to be updated. The recommendations list out the essential measures that countries should have in place to: Identify the risks, and develop policies and domestic coordination; pursue money laundering, terrorist financing and the financing of proliferation; apply preventive measures for the financial sector and other designated sectors;
- establish powers and responsibilities for the competent authorities (e.g., investigative, law enforcement and supervisory authorities) and other institutional measures;
- Enhance the transparency and availability of beneficial ownership information of legal persons and arrangements; and facilitate international cooperation.
- FATF evaluates a country’s performance based on its assessment methodology that covers: technical compliance, which is about legal and institutional framework and the powers and procedures of the competent authorities, and effectiveness assessment, which is about the extent to which the legal and institutional framework is producing the expected results.
- A lot of these recommendations and methodology are nothing but the dry financial jargon that is characteristic of multilateral bodies and compliance professionals, such as a “risk-based approach”, “structural deficiencies”, “materiality”, “customer due diligence”, “suspicious transaction report” etc.
What are the implications for Pakistan?
- FATF uses peer pressure through the age-old technique of name-and-shame. There are many factors at play and it remains unclear how negative Pakistan’s placement on the grey list will eventually turn out to be.
- There is, however, no debate that it is indeed a negative. Here are some of the ways in which grey listing could affect Pakistan.
- Pakistan’s banking channel could be adversely affected as it is inevitably linked with the international financial system.
- The impact on Pakistan’s economy could be relatively wide, touching imports, exports, remittances and access to international lending.
- Foreign financial institutions may carry out enhanced checking of transactions with Pakistan to avoid risk of violations pertaining to money laundering and financing of terrorism.
- They may ask more questions and apply more checks. Some such institutions may also avoid dealing with Pakistan’s financial system altogether.
- Another affectee is the sentiment of foreign investors. That Pakistan has been placed on the grey list has been covered in international news media and the fact will not go unnoticed by potential investors. Stock prices at Pakistan Stock Exchange appear to have already felt this impact.
- Perhaps the biggest threat from being placed on the grey list is Pakistan could be pushed further down to the black list.
- This black list comprises Iran and North Korea, the two countries West loves to hate. But placing Pakistan on the black list is probably a step too far to be on the cards at this stage. These potential implications of grey listing need to be balanced against past experience. Pakistan was on FATF grey list from 2012 to 2015, when it completed an IMF programme and also raised funds from international bond markets.
- The country has also survived far graver financial challenges, such as those posed by nuclear explosions in 1998.