Profound FATF challenge

The Federal Government and the SBP have been trying very hard to ensure that Pakistan's name is removed from the grey list of Financial Action Task Force (FATF). In order to expedite the process, the State Bank of Pakistan on the last day of 2019 issued a number of circulars to Banks, DFIs, Microfinance Banks (MFBs) and Exchange Companies (ECs), informing them of amendments in banking regulations to strengthen the controls related to Money Laundering (ML)/Terror Financing (TF) risks. According to its instructions, all Authorized Financial Institutions (AFIs) providing branchless banking services have been advised to streamline their existing operations/processes, where applicable as per revised Regulations and submit compliance report of the same to the SBP by 31st January, 2020. As per fresh directives, AFIs will not increase the limit of existing level-I accounts, which were operating without Biometric Verification (BV). AFIs have also been told to complete BV of all such level-I accounts latest by 31st March, 2020. In case BVs are not performed, all these accounts will be converted to level-0 with effect from 1st April, 2020. It has also been reiterated that MFBs must ensure strict observance of all applicable instructions including identification and verification of customers and their beneficial owners and accounts are consistent with the MFBs knowledge of their customer, business, risk profile and the sources of funds. Besides, MFBs have been asked to enhance their efforts to obtain relevant information and examine background and purpose of all complex and unusual patterns of transactions. It has also been made imperative that any persons linked to any criminal activities or affiliated to any terrorist organisations should not become part of MFBs. Any sponsor, shareholders/beneficial owners, directors, presidents and key executives will become disqualified if they are designated/proscribed or associated directly or indirectly with designated/proscribed entities/persons under the United Nations Security Council Resolutions or Anti-Terrorism Act, 1997. It has also been decided to amend AML/CFT related regulations in the Exchange Companies Manual, 2018 to further align their activities with the FATF recommendations.

In our view, it is not difficult to visualize the exact purpose of all these circulars issued by SBP in a single day and the degree of its seriousness to ensure their compliance as soon as possible. Seen closely, the inclusion of Pakistan in the grey list of FATF and its placement in either white or black list in the days ahead is an extremely serious matter for the country. While the inclusion of the country in the grey list is also problematic, its degradation into black list, for whatever reasons, will certainly add to the economic woes of Pakistan immensely. For instance, foreign investors would not like to invest in the country, foreign banks would shun any kind of relationship with the domestic banks, international trade would suffer, imports would be difficult to procure and money laundering and terrorist financing would have a new lease of life. Of course, the authorities cannot afford or would not like Pakistan to be included in the blacklist. The country was put in the grey list of FATF and since then has been making strenuous efforts to get rid of this stigma. In the latest meeting in October, 2019, Pakistan was asked by FATF to complete its full action plan by February, 2020 and SBP's present measures seem to be a part of these efforts to meet the FATF actin plan before the deadline. Any upgradation of the country in the next meeting and thereafter would help preserve the integrity, soundness and safety of the financial system and prevent the possible misuse of domestic banking channels for money laundering, terrorist financing, proliferation financing and other illicit activities. A closer look at the revised instructions would reveal that more emphasis has been laid on knowing the customers thoroughly for which optimal utilization of biometric technology and biometric identification and verification of all the existing and potential clients is required. Banks have been instructed to have full knowledge of their customers, their businesses, risk profiles and the sources of funds. AFIs are also supposed to have full knowledge about complex, large and unusual patterns of transactions. We feel that implementation of all these measures will be very difficult and time consuming for bankers. Consequently, their business could suffer and the economy may not be able to get the needed resources for its promotion. In case the officials of banks investigate too much into the affairs of their clients to get the information to be passed on to the SBP, the depositors or lenders may redirect their activities to the undocumented sector of the economy to escape the prying behaviour of the bankers. We know that FATF has to be fully satisfied to extricate the country from the grey list but it is equally important to preserve the vibrancy of the financial system and ensure that bankers are not under constant stress to meet the requirements of FATF.