Structural reforms related to governance, AMLA: Delay could hamper external financing and investment: IMF

ISLAMABAD: The International Monetary Fund (IMF) has warned Pakistan that delays on structural reforms, especially related to governance and the Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) action plan with the Financial Action Task Force (FATF), could hamper external financing and investment and thus limit economic recovery.

The IMF in its report “2021 article IV consultation, sixth review under the extended arrangement under the extended fund facility, and requests for waivers of applicability and nonobservance of performance criteria and rephasing of access” has stated that enhancing the effectiveness of the AML/CFT framework remains an urgent priority to progress in completing Pakistan’s 2018 and 2021 action plans with the FATF.

The Fund’s financial sector policy recommendations focused on strengthening the sector’s resilience to ensure that undercapitalized banks are regulatory compliant and ensuring effective implementation of the regulatory and supervisory framework, including strengthening AML/CFT effectiveness to support exit from the FATF grey list.

The report noted that Pakistani authorities made substantial progress by satisfactorily completing 26 of the 27 items in their 2018 AML/CFT action plan (end-June 2021 SB; reset to end-March 2022). However, the Fund urged the authorities to: (i) complete the last remaining item in the 2018 AML/CFT action plan on effectiveness of terror financing (TF) investigations and prosecutions of senior leaders of UN-designated terrorist groups; (ii) promptly address the deficiencies identified in Pakistan’s Asia Pacific Group on Money Laundering (APG) Mutual Evaluation Report under the 2021 AML/CFT action plan; and (iii) review by end-June 2022 the implementation of AML/CFT controls by financial institutions with respect to the tax amnesty programme for the construction sector.

The report noted that the Pakistani authorities have leveraged the pandemic to advance fintech adoption as evidenced by: (i) an increase in internet and mobile banking users of 32 and 29 percent year on year (respectively) in fiscal year 2021, with e-banking transaction volumes growing by 31percent year on year; and (ii) the opening of more than 273,000 Roshan Digital Accounts (introduced in September 2020 to attract deposits from overseas Pakistanis) as of end-October 2021, with $2.6 billion received and more than half being invested in government securities.

Separately, the SBP launched the first instant payment system (Raast) in 2020 and introduced digital cheque clearing and a unified QR code for payments in August 2021.

While welcoming the authorities’ ongoing fintech efforts, staff flagged the need for enhanced supervisory and AML/CFT oversight (and capacity) as fintech grows (given the strong preference for cash in Pakistan and the potential benefits for financial inclusion).

Pakistan’s economy needs strong reforms that work in a challenging socio-political environment with substantial development needs and constrained capacity. To this end, action in five policy areas is needed: (i) reinforcing fiscal discipline by mobilizing revenues and controlling current spending to make space for more infrastructure and social spending; (ii) ensuring disinflation through a tighter monetary policy stance; (iii) maintaining the market-determined exchange rate and building external buffers; (iv) restoring the financial viability of the energy sector; and (v) advancing structural reforms, including by addressing deficiencies in the AML/CFT regime, SOE governance, and business climate, as well as stepping up to the challenges posed by climate change.

Pakistani authorities informed the Fund that they remain committed to the full completion of the AML/CFT Action Plans. To this end, several capacity development providers, including the IMF have been engaged, and the country has made significant progress towards completion of the 2018 Action Plan. Satisfactory progress has been made across 26 of the 27 action items, with the pending action item related to terrorist financing investigations and prosecutions of senior leaders of UN-designated terrorist groups. Given the continuing efforts to enhance capacity and the ongoing challenges presented by the COVID-19 pandemic, the country will continue to work on demonstrating substantial effectiveness in the last remaining item of the 2018 Action Plan (end-June 2021 SB, reset to end-March 2022).

The authorities further informed the Fund that in parallel, they continue to advance in addressing the strategic deficiencies identified by the 2019 Mutual Evaluation Report of the Asia Pacific Group on Money Laundering (APG). “We established a Secretariat to centralize and coordinate efforts across agencies to strengthen the AML/CFT regime. We are on track to meet the timelines for the implementation of our 2021 Action Plan, including on the mutual legal assistance framework, AML/CFT supervision, transparency of beneficial ownership information, and compliance with targeted financial sanctions for proliferation financing. In line with our commitments, we are targeting full completion of the 2021 Action Plan by end-January 2023”, the authorities added.

With respect to the tax amnesty programme for the construction sector, the SBP will conduct by end-June 2022 a thematic inspection of banks’ compliance with AML/CFT obligations (such as customer due diligence, recordkeeping, and suspicious transaction reporting) on funds received under the program through the designated bank accounts (including random sampling of beneficiaries). By end-September 2022, the key findings and recommendations of the thematic inspection will be shared with the banking sector through the compliance forum and relevant competent authorities through the General Committee under AML Act, and appropriate enforcement actions will be undertaken including changes in regulatory framework, as appropriate, the authorities added.

Copyright Business Recorder, 2022