New AML/CFT Authority

The series of challenges faced by Pakistan has no end. Besides political and economic hurdles, Pakistan’s most pressing problem is to align itself with global norms in combating money laundering and terrorist financing.

Since joining the Asia Pacific Group (APG) in 2000, a Regional Body of the Financial Action Task Force (FATF), Pakistan is committed to enhancing its Anti-Money Laundering/ Countering the Financing of Terrorism (AML/CFT) framework through dedicated legislation and implementation systems to counter illicit movement of funds.

As we know, Pakistan did not enact the fundamental AML/CFT legislation until 2007, in the wake of a warning for cancellation of its membership issued by APG.

Anti-Money Laundering Ordinance, of 2007 was the first piece of legislation. The FATF evaluated and concluded that it did not meet the Palermo convention requirements as some offences were not made part of the law.

Finally, Pakistan repealed the Anti-Money Laundering Ordinance of 2007 and introduced the Anti-Money Laundering Act, of 2010 [AML 2010] followed by amendments aimed at satisfying FATF. Despite these efforts Pakistan was placed on the list of jurisdictions under increased monitoring (commonly referred to as the Grey List) multiple times as it failed to address the apprehensions of the global financial watchdog.

Large-scale amendments were introduced in AML 2010 through Anti-Money Laundering (Second Amendment) Act, 2020, for alleviating FATF’s concerns about our AML/CFT regime, that only further complicated the entire AML/CFT framework. It was noted with concern that the legislature failed to comprehensively define various terms and provide procedures and treatment for all sectors using generic language to satisfy FATF.

We have highlighted in these columns [The FATF ordeal, Business Recorder, March 11, 2022, FATF: No respite for Pakistan, Business Recorder, November 5, 2021, FATF: challenges & solutions—I, Business Recorder, January 8, 2021 and FATF: challenges & solutions—II, Business Recorder, January 9, 2021] that even the substantially amended AML 2010 remained intricate and perplexing. It introduced various entities and committees with intersecting jurisdictions and ranges.

It was also pointed out in our various articles [FATF: upcoming challenges, Business Recorder, March 3, 2023, Exist from FATF ‘grey list’, Business Recorder, October 28, 2022] that third parties such as lawyers and accountants who were considered gateways for money laundering and terrorist financing were authorized to regulate their affairs. Additionally, the legislation conferred authority upon professional bodies to function as appellate authorities, a practice that contradicted the principles of impartiality and potentially led to conflicts of interest.

The AML 2010 established the National Executive Committee (NEC), General Committee (GE), and AML-CFT Regulatory Bodies. NEC was headed by the federal finance minister and comprised ministers holding various portfolios, including the Governor of the State Bank, the Director General of FATF Cell, and the Director General of the Financial Monitoring Unit.

This committee was to formulate policies and receive support from the General Committee, consisting of the Directors General of different departments. Similarly, the AML/CFT regulatory bodies including the autonomous institutions of Pakistan were to perform the functions of oversight bodies and self-regulatory bodies.

However, the Financial Monitoring Unit was to work under the General Committee to receive Suspicious Transaction Reports (STRs) and Cash Transaction Reports (CTRs).

The government of Pakistan Tehreek-I-Insaf (PTI) also established the National Financial Action Task Force Coordination Committee through a Prime Minister’s Office Order No. 3021/M/SPM/2019 of August 2, 2019, and formed the National Financial Action Task Force Cell via notification No. 4-1/2019-Min-I dated 30-12-2019.

However, their performance during PTI’s rule [August 18, 2018, to April 9, 2022] could not convince FATF to remove Pakistan from the grey list status that had been imposed in June 2018.

Subsequently, the Pakistan Democratic Movement’s (PDM’s) government assumed power on April 10, 2022 and started collaborating with FATF. Although their efforts in addressing FATF concerns were not different from the PTI government’s, however, they played well in seeking the international community’s cooperation to claim back its position on the global index in the fight against AML/CFT.

Pakistan’s adherence to FATF’s 40 recommendations was not exceptional. In terms of technical compliance, Pakistan was found to be fully compliant with 9 recommendations, largely compliant with 29, and partially compliant with 2 recommendations.

However, the effectiveness of compliance was rated as low for 10 immediate outcomes, with only 1 immediate outcome being rated as moderate. Pakistan did not manage to achieve substantial or high levels of effectiveness in its compliance with FATF standards.

In the last leg of the PDM government, a new legislation, namely the National Anti-Money Laundering and Counter Financing of Terrorism Agency Act, 2023, was passed by the National Assembly on August 3, 2023 with the prime stated objective “to have an overarching body to supervise and coordinate matters pertaining to anti-money laundering (AML), countering financing of terrorism (CFT) and targeted financial sanctions (TFS)” . This Act focuses on establishing ‘National Anti-Money Laundering and Counter Financing of Terrorism Authority Pakistan’ [the Authority].

The Authority [section 3 of the Act], outlined in section 4, will consist of members (Heads of various departments) and will be led by the Chairman. The Director General of the Authority will work under the Chairman’s leadership, and its members are the same as those listed for the General Committee.

Functions of this committee closely mirror those assigned to the National Executive Committee, General Committee, and Financial Monitoring Unit. Notably, section 22 of the Act revokes the existence of both the National Financial Action Task Force Coordination Committee and the National Financial Action Task Force Cell.

Existence of multiple committees comprising members, and additionally an already operational financial monitoring unit would not bring any discernible benefits. Instead, it would contribute to an augmented financial burden on the national treasury. Ensuring complete autonomy and neutrality is crucial when conducting investigations into financial crimes.

However, Pakistan’s current AML/CFT framework, even after the 2023 legislation, is vulnerable to various interventions. Notably, individuals designated as politically exposed persons, who are considered potential risks in AML/CFT affairs, wield significant control in the policy and administrative structure.

Additionally, bureaucrats from different departments, who should not play a direct role in the process but rather offer cooperation, are actively participating in the decision-making process. It is time to address the shortcomings and anomalies in our existing AML/CFT framework.

Since the Authority will soon be in place, it presents a golden opportunity to reexamine the current laws. This will involve bringing them in line with international standards and integrating the latest technological advancements and innovative methods for combating financial crimes. In order to address the complexity and overlapping jurisdictions of various committees and bodies, it is suggested that the responsibilities held by the National Executive Committee, General Committee, AML/CFT bodies, and the financial monitoring unit should be transferred to the Authority.

The Authority, rather than consisting of members from various government departments, should prioritize maintaining a neutral status, as is the case of UK’s National Crime Agency, conducting its tasks autonomously as highlighted in our book Pakistan Tackling FATF: Challenges and Solutions and in various articles written jointly and individually.

Moreover, the Authority should take on the role of providing recommendations to the relevant parliamentary committee rather than ministers with respect to introduction of new legislative measures and regulations. This would help us to streamline our AML/CFT framework for effective implementation.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the 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, 2023