FATF’s appraisal of technical compliance

For Pakistan, the outcome of the Financial Action Task Force’s (FATF) meeting, held in Berlin on June 17, 2022, was not different from the earlier ones—it continues to be among jurisdictions under increased monitoring [commonly known as grey list].

The action of placing Pakistan on the grey list means that strategic deficiencies in our legal framework for anti-money laundering, combatting terrorist financing, and proliferation financing have yet to be addressed.

Pakistan was grey-listed in 2018, and since then FATF and Asia Pacific Group (AGP) continue to monitor our progress in addressing the strategic deficiencies and in close liaison with us to help complete the action plan expeditiously to meet the stipulated timelines.

In June 2022 meeting, the watchdog, while reviewing Pakistan’s progress on its action plans, acknowledged that it had substantially addressed the technical side of its two action plans, covering 34 action items.

FATF further indicated a plan for an on-site visit to verify the effective implementation of anti-money laundering (AML) and combatting terrorist financing (CFT) reforms. The purpose of this exercise is to ensure sustainability of our actions against AML/CFT, along with the necessity for political commitment for execution of the same and room for improvement in the future.

No doubt Pakistan has covered a lot of ground for the implementation of FATF’s action plan. However, the effectiveness of FATF’s Standards remains low. Pakistan’s effective rating warrants considerable improvement as 10 immediate outcomes are rated as “Low level of effectiveness (LE)” whereas 01 outcome is marked as “Moderate level of effectiveness (ME).

All the designated authorities, institutions and regulators must work in cohesion to identify, assess, and manage money laundering (ML) and terrorist financing (TF) risks for various sectors operating in the economy, based on which they can adopt AML/CFT measures proportionate to corresponding risks.

The first step is to promote and ensure documentation of economy as these are fundamental for any transparent, stable, and progressive economic system, reducing vulnerabilities to the risk of money laundering and terror financing.

Unfortunately, Pakistan has a below-par track record of ensuring and enforcing anti-money laundering and terrorist financing related convictions. This indicates the poor standard of legal and prosecution framework. To be at par with global best practices, we must work relentlessly and professionally to train our investigative and prosecution teams and build their institutional capacity and capability—see all the necessary details and complete road-map in our joint book, Pakistan Tackling FATF: Challenges and Solutions.

Since FATF team is expected to visit Pakistan soon, before the forthcoming review in October 2022, to check the effectiveness level of our compliance with their action plan, we should keep in mind that so for 82% of the FATF member countries have achieved substantial ratings. However, the most challenging task that majority jurisdictions are facing pertains to applying a risk-based approach according to their risk profile.

The report on the ‘State of Effectiveness and Compliance with the FATF Standards’ states that 81% of the FATF-styled regional bodies (FSRBs) achieved a low or moderate rating for effectiveness for immediate outcome 1 that pertains to Risk, Policy, and Coordination. However, 19% achieved a substantial or higher rating while only 3% achieved a high rating.

Since Pakistan falls in the category of 81% of countries that achieved low or moderate ratings, therefore, we need to strengthen our risk mitigation policies to address the gaps identified in risk assessment.

The same report further states that in respect of immediate outcome pertaining to international cooperation, 80% of FATF-assessed jurisdictions are effective in implementing this measure to ensure international cooperation.

However, this ratio declined to 60% when it came to the assessment of FSRB’s jurisdictions. Since Pakistan is a member of APG, known as FSRB, rated as moderate on this immediate outcome, it falls in the category of 60%. In the upcoming onsite visit by the FATF team, Pakistan will be assessed on formal and informal cooperation. However, as per the report these countries got 59% of the positive views on the level of informal cooperation.

Overall, the report states that International Mutual Legal Assistance by Law Enforcement Agencies pertaining to seek information shows 34% positive, 15% neutral, 41% negative whereas 10% shows not enough information. Similarly, the ratio pertaining to providing information in response to mutual legal assistance shows 61% positive, 7% neutral, 10% negative and 22% requests got a reply of not enough information.

Pakistan should focus on expanding the overall level of international cooperation with strategically valuable countries and should establish liaison offices overseas to facilitate exchanges and joint investigations in matters about money laundering and terrorist financing.

The result of the 4th round of mutual evaluations shows that though countries make progress in complying with the technical aspect of compliance, yet when it comes to their effectiveness, only 10% of them have implemented the supervisory measures related to immediate outcome 3.

The report states that 68% of the FSRBs countries are rated as compliant or largely compliant on supervision and regulation of financial institutions (recommendation 26), similarly, 42% are rated as compliant or largely compliant for recommendation 28 related to Designated Non-financial Businesses and Professions (DNFBPs).

90% of the countries comply with recommendation 27 for assigning adequate powers to supervisors that are either fully or largely compliant. The report highlights that the majority of the jurisdictions are compliant or largely compliant when it comes to supervision of the technical side of compliance.

However, it stands in contrast to the effectiveness rating as majority of the countries are rated as moderate. Unfortunately, so far Pakistan’s rating on this immediate outcome is not moderate but ranked as low. Therefore, Pakistan should improve its regulatory framework to effectively monitor the non-financial sector as well.

We have repeatedly highlighted in these columns that Pakistan’s current regulatory framework does not meet international standards and creates conflict of interests at many levels resulting in the need for strong grounds to convince the FATF team regarding effectiveness of our current AML-CFT regime vis-à-vis the following:

• Ineffective role of Self-Regulatory Bodies (SRBs);

• Presence of politically exposed persons, named in corruption cases, in national committee over sighting AML/CFT regulatory framework;

• Lack of independence of financial monitoring unit; and

• Questionable understanding of law enforcement agencies’ officials and judges regarding issues related to anti-money laundering and combating financing of terrorism.

Pakistan is also rated low on other immediate outcomes, like preventive measures which show that 97% of countries failed to achieve a high level of effectiveness. Most countries got a moderate level of effectiveness in implementing preventive measures.

Effectiveness rating for immediate outcome 5 that relates to source of beneficial ownership information shows that multiple sources of beneficial ownership information got 100% substantial rating, whereas 69% got medium and 52% ranked as low. While single source of beneficial ownership information got a zero percent substantial rating, 31% got medium and 48% low level of effectiveness rating for the immediate outcome.

The report highlights that the effectiveness level for immediate outcome 6, pertaining to financial intelligence for both FATF and FSRBs members’ jurisdiction, shows lack of effective prosecution, conviction, and confiscation that is particularly acute in the members of FSRBs. However, when in it comes to immediate outcome 7 which pertains to money laundering investigation and prosecution, the report suggests that only 1% of all FSRBs reviewed are effectively prosecuting and convicting money laundering offenses.

The immediate outcome 8 pertains to the confiscation. Analysis of the mutual evaluation report of 59 countries shows that 100% jurisdictions have different measures and tools for criminal confiscations, whereas 98% jurisdictions have tools for confiscation of instrumentalities and 93% of jurisdictions have the availability of tools for value-based confiscations. The report further suggests that the ratio of non-conviction-based confiscation measures and tools is 64%, compensation/restitution is 43% and tax levies are rated as 37% for both FATF and FSRBs members.

Similarly, immediate outcomes 9, 10, and 11 pertain to terrorist financing investigation and prosecution, terrorist financing preventive measures and financial sanctions, and proliferation of financial sanctions.

The effectiveness rate of 120 assessed jurisdictions shows that 71% of FATF member jurisdictions are rated for having a high/substantive level of effectiveness for terrorist financing investigation and prosecution whereas 29% are rated for having a moderate and low level of effectiveness. Whereas the rating assigned to members of FSRBs seems poor as 25% of the member countries got a high or substantive level of effectiveness whereas 75% were rated as moderate to low level of effectiveness.

The rating for immediate outcome 10 which deals with terrorist financing preventive measures & financial sanctions for FATF members’ jurisdictions shows that 32% of the member countries have a high or substantive level of effectiveness whereas 68% have moderate and low levels, whereas 9% of FSRBs members are ranked as high or at substantive level of effectiveness. 91% are still struggling to upgrade their ranking from moderate or low level to high or substantive level.

Apart from the first 10 immediate outcomes, the rating assigned to immediate 11 that pertains to the proliferation of financial sanctions is largely unsatisfactory. The report shows that 52% of FATF members and 82% of FSRBs members were rated either low or moderate. However, only 34% of the 59 assessed jurisdictions transposed United Nations Security Council designations without delay.

The overall assessment shows that although countries having better ranking in technical compliance are rated low for their effectiveness therefore Pakistan needs to review its current regulatory framework and address the anomalies in laws and regulations. Moreover, Pakistan should strengthen its law enforcement agencies so that they can address potential threats of money laundering and terrorist financing.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2022