Screening of NSS deposits

Pakistan seems to be doing everything possible to exit the grey list of Financial Action Task Force (FATF) and join the group of countries enjoying the benefits of white list. The latest initiative in this connection was the screening of Rs 4.038 trillion investments in National Saving Schemes (NSS) of more than seven million investors to stop any ill-gotten money from becoming part of the financial system and safeguard investors from the menace of money laundering and terror financing. It may be mentioned that Asia Pacific Group had highlighted a number of deficiencies on the part of Central Directorate of National Savings (CDNS) which had negatively affected the overall grading of the country and the present decision was a part of compliance with the FATF recommendations. The Finance Division had also decided to engage an AML-CFT-compliant bank, through competitive bidding, to put in place the requirement as well as the necessary training of employees of CDNS. As it is, FATF wants Islamabad to trace and identify the owners of investments in the NSS and has already given a deadline of February, 2020 to act upon a set of recommendations to Pakistan for implementation. It may be pointed out that CDNS is committed to mitigating all such deficiencies to improve customer service delivery and comply with FATF recommendations. All the scheduled banks in Pakistan have already put in place all the required systems and "know your customer (KYC)" processes to comply with FATF recommendations.

The decision to screen the NSS deposits at this juncture, when the FATF meeting to determine the status of Pakistan is going to be held soon, was neither unexpected nor without a valid reason. It needs to be highlighted that deposits of over four trillion rupees under the NSS form a major part of the overall financial system of Pakistan, with deposits equal to 28 percent of the deposit liabilities of scheduled banks and contributing 19 percent of total domestic debt. The NSS provides a risk-free and competitive avenue of investment to all segments of society specially those who are most vulnerable including senior citizens, pensioners, widows, physically challenged persons and family members of Shuhadas. While this segment of the financial structure was very important for the government as well as the citizens of Pakistan, the CDNS looked the other way or never cared about the source of investment in its various schemes although it has tried hard to improve the technology in the organisation, including swift data reporting, reconciliation with other departments, customer data base and provision of more convenience to the investors. To take an example, 223 National Saving Centres, i.e., (60 percent out of total 376) have been successfully automated and the automation of the remaining 153 was in active process with the support of Department for International Development, the UK. Meanwhile, CDNS has upgraded its core business solution from decentralised to centralised architecture. As many as 114 branches have already been shifted to upgrade solution where customer transaction time has been reduced significantly. However, while such improvements are welcome, the CDNS staff is not in a position to identify and pinpoint the depositors in its schemes who could fall into the category of money launderers or financiers of terrorism, leaving a big loophole in the financial system for the FATF to cite it as a reason to keep Pakistan on the grey list. The present effort of the government to screen investment in Saving Schemes could, therefore, help Pakistan to be placed in the white list of FATF. However, it needs to be mentioned that the new process would entail certain side-effects. For instance, the screening could scare away investors who may be unable to explain the sources of their investment. Presently, any person with a bag full of money could walk into a saving centre and invest in a scheme of his choice. After the screening process was introduced, this luxury would no longer be available, investors would prefer to keep their funds in cash and the authorities will be constrained to finance fiscal deficit more from the banking system and foreign sources, depriving the government of a non-inflationary and cost-effective source of finance. Also, experience suggests that the existing CDNS staff not have the time or training or the capabilities for KYC processes. Visit any NSC and you will find the staff extremely busy and only capable of dealing with the routine stuff. As such, the government has to improve the quality of staff in the NSC before undertaking this rigorous exercise meant to distinguish between clean and unclean investors.