“We are making good progress on FATF action plan," An interview with Hammad Azhar, Federal Minister for Economic Affairs Division

Hammad Azhar is a prominent member of the Khan government's economic team. Besides heading the Economic Affairs Division (EAD), the young minister is also the focal person for Pakistan's engagements with the Financial Action Task Force (FATF). A barrister by profession, Hammad Azhar has a postgraduate diploma in law from the BPP Law School, London, and a bachelor's degree in Development Economics from the SOAS, University of London. Following the latest FATF plenary in Paris earlier this month, BR Research sat down with Hammad Azhar in Islamabad last week to understand where things stand. Selected excerpts from that sit-down, which also touched upon the economy's documentation, are provided below:

BR Research: Let's start with FATF. Your recent statements that Pakistan will be able to comply with the FATF action plan sound optimistic. However, the general vibe following the latest Paris plenary is rather ominous. What is going on?

Hammad Azhar: First, there is a lot of speculation in the media. The FATF proceedings are confidential, but I can tell you that there is no need to worry. Unlike the media reports, the actual number of countries that supported us at FATF is far greater than the number that is reported. The support that we had this time was much greater than the last time. And the reason is that progress was greater. The support was based on the technical merits of our progress, which we will continue to improve.

BRR: What is the extent of the progress with the FATF agenda?

HA: Before I get into that, let me give your readers some essential background. Very few people know that Pakistan is complying with two different sets of oversight in parallel - this is something that is also new for FATF. One of the two monitoring processes is the action plan given to Pakistan by the International Co-operation Review Group (ICRG), which is the FATF body that analyses high-risk jurisdictions. We are confident that we will comply with the ICRG action plan by June 2020.

The second forum that has Pakistan under observation is the FATF's regional body, the Asia-Pacific Group on money laundering (APG). APG has made a set of recommendations, which it will monitor us on until October 2020. If there are any strategic deficiencies found at that time, we may get a year to three years' time, from October 2020, to implement the residual recommendations that may become part of a new action plan.

With that background in mind, the distinction is that the APG recommendations are not as challenging as the ICRG action plan, which is composed of items of greater priority. So, if we complete the ICRG action plan by June 2020, which I am very confident that we will, it should settle all nerves in Pakistan. This would send a strong signal that we are making progress that is being repeatedly acknowledged at all forums.

Now, to answer your question about the extent of the progress, it can be measured by the following facts. One, as of January 2019, the ICRG action plan had 22 items out of 27 that were marked as non-compliant- now there are just 5 non-compliant items. Among the rest, Pakistan is now largely compliant on 5 items and partially complaint on 17 items. This is tremendous progress, which also helps us fulfill some of the recommendations from the APG.

I would reassure people that the FATF action plan is on track and making good progress. The recent FATF statement published on their website mentions Pakistan's progress three times. And we will be making even more significant progress by the next plenary in February 2020.

BRR: Specifically, what progress has been made thus far?

HR: During the past 10 months, we have updated the terror-financing risk assessment framework. We did the same for money-laundering risk framework. We introduced a risk-based supervisory framework for the regulators. We also introduced a risk-based investigative framework and policy for the law enforcement agencies. We also established an inter-agency coordination mechanism.

As a result of taking these steps, about 700 terror-financing investigations have been initiated over the last 6 months alone. There has been a dramatic increase in the suspicious transaction reports (STRs). As a result, the STRs' generation, dissemination and analytics have improved. And these reports have fed into those 700 TF investigations. Additionally, more than 64,000 non-profit organizations (NPOs) have been successfully mapped. Those NPOs that were found to be lacking proper documentation, as well as 'ghost' entities, have been de-registered.

BRR: Is it out of the ordinary that Pakistan is subject to extra scrutiny and a limited timeline to achieve compliance?

HA: The normal process of mutual evaluation for placing a country on the so-called grey-list is rather longer. In our case, it was cut short. We have studied data from recent years and it shows that grey-listed countries take two and a half years on average to graduate out of it. The time Pakistan has received thus far is one year and four months, since the action plan was received in June 2018. We have been given a very ambitious action plan. Our compliance threshold and action items are more stringent because of our risk profile.

BRR: What are the main unaddressed issues that Pakistan has to comply with?

HA: There are three broad areas. Firstly, FATF feels that we need to have a better understanding of "trans-national" risks related to terror financing. And we are on it.

Secondly, we need to crack down on cash couriers who physically transport and smuggle cash to and from Pakistan and even within. And we are working to get a better grip on that.

And third, we need to improve the capacity of the law enforcement agencies (LEAs) related to investigation and prosecution of cases linked to terror-financing. Traditionally, LEAs were not trained to address the financial angles relating to crimes. And this is also something we are focusing on through better training.

February 2020 is when the next FATF plenary takes place. FATF, in general, expects to see substantial progress in each plenary from all jurisdictions under observation. That is what they expect from Pakistan too, and that is exactly what we will do as well.

We have been showing solid progress in FATF plenaries and APG forums lately. Of course, they wish to see the progress to continue at an even faster pace. They want us to work on the ICRG's partially-completed items and take them to the largely-completed or completed items. And we will certainly do that.

BRR: When can Pakistan expect to get out of the grey list?

HA: As I mentioned, there are two parallel observations going on. Once we complete the ICRG action plan by June 2020, then we shall focus on the APG's mutual evaluation report that has made some recommendations to comply with until October 2020. If there are any strategic deficiencies found in the residual recommendations, they may give us an action plan. That action plan may give us a year to three years' time. During that time, we may or may not be in the grey list.

What is more important for Pakistan at this time is the ICRG grey list. The mutual evaluation reports on APG recommendations have a slightly longer timeline and action items are rather easy to execute. We should be focusing first on getting out of the ICRG.

Given our progress, we hope that Pakistan will come out of the grey list in 2020 as the action plan given to us by ICRG should be completed next year. The APG's monitoring may still remain and that may or may not translate into another action plan. But that would be less challenging to execute and we will have ample time for it.

BRR: A number of federal government bodies and provincial authorities are working to get out of this jam. Is the government considering a more formal organizational structure to achieve substantial progress on the pending action plan and recommendations?

HA: Since July 2019, the efforts have been concentrated under a FATF coordination committee, which I am heading. The committee composes of heads of all relevant government departments and institutions affected by FATF compliance issues. The people working on this committee are all exceptional, hard-working individuals with a sense of mission.

To further streamline our efforts, the Prime Minister has decided to form a dedicated FATF secretariat that will have its own secretary, stand-alone officers, and director general, all of whom will be taken from an array of government divisions. A minister will head the FATF secretariat. For the time being, it has been decided that I will lead this body. In every single government division or provincial government departments, we have now made separate FATF cells that deal primarily with FATF.

BRR: How do you plan to tackle the problems associated with securing convictions, which is apparently a major sore point with FATF?

HA: All such investigations against money-laundering and terrorism-financing have only started recently. Like any other law-abiding country in the world, Pakistan also has a due legal process that needs to be followed. Everybody has a right to free and fair trial. The government, on its own, will not be able to expedite convictions. The FATF members also recognize that the due legal process has to be followed.

BRR: Let's pivot to economic reforms. What is the progress on the documentation of the economy?

HA: Let me first underscore the point that the FATF compliance is also helping us to document the economy and make our financial system more secure. Now, on to the documentation drive, there are two separate transactions that we are focusing on. One is the B2B (business-to-business) transaction and the other is B2C (business-to-consumer) transaction.

As far as the B2C transaction is concerned, traders' demands stand addressed. They demanded a fixed-tax system in lieu of soliciting customer's CNIC on purchases above Rs50,000. This fixed-tax scheme is for small traders - not large traders. So, this scheme is on the table for them.

Moving on to the real issue, the B2B transactions, there has been an impasse. When the wholesaler or the manufacturer supplies the materials or goods to the retailer, we have demanded that the seller should demand the CNIC of the retailer. Unfortunately, some retailers are trying to mix the B2B and B2C transactions in the public eye. They are trying to scare off the consumers by saying that it is the consumers that will have to provide their CNICs on buying goods. That is not true at all, given the fact that the B2C issue has been resolved.

BRR: How long do you think it will take to resolve the B2B CNIC requirement from retailers? The issue is affecting the economic activity.

HA: The retail sector is about 20 percent of GDP but its tax contribution is in decimals. I think the government must stick to its decision on this issue. This may cause short-term economic pain but it will be good for the economy in the long run.

BRR: On the fiscal front, how realistic do you think are the revenue and deficit projections?

HA: We are doing fine on the fiscal side as well. It helps that we have about Rs400 billion collected through non-tax revenues in the first quarter. We will most likely exceed the Rs1.2 trillion full year target for non-tax revenues. This will be thanks to higher SBP profits, privatization of two RLNG plants, and remaining payments from telecom license renewal. So, I think the deficit will remain in control at least during this fiscal.

BRR: Before concluding, we have a question about your ministerial portfolio. After Pakistan entered the IMF program, has there been an up tick in financial assistance from the overseas development partners through the EAD?

HA: Certainly, the foreign assistance inflows through the EAD during the first quarter of this fiscal year were at the highest level in 10 years. We are now going to have budgetary support from the Asian Development Bank that was suspended in 2017. We have asked World Bank as well and they are also working on their program loans and budgetary support.

In terms of development cooperation, our country plans by the Asian Development Bank has been upgraded. The country plan for the World Bank is being upgraded as well. We at EAD are now taking active part in the formulation of our partners' country plans. We want their priorities to be more in tune with tangible, realistic and simple solutions for the government.

What has also changed at the EAD is that now we are constantly reviewing foreign-funded projects. We feel that federal and provincial-level administrative bottlenecks, which cause delays during various stages of a project's execution, have locked up foreign inflows. Over time, this will help in channeling more foreign financing through the government.