Banking system: negative implications of 'grey list'

The continued designation of Pakistan in the grey list by the Financial Action Task Force (FATF) is, to say the least, quite disturbing. According to Moody's Investor Service, a top credit rating agency in the world, "Pakistan's continued presence on the list of jurisdictions - commonly known as grey list is credit negative for its banks". The decision is credit negative for banks because such a designation would raise questions about potential additional restrictions relating to banks' foreign currency clearing services, as well as their foreign operations. Banks' profitability risks would also increase due to increased compliance and operational costs. Unfortunately, however, the FATF has also warned in its latest report that it urges its member countries to increase their attention when conducting business transactions with Pakistan if the government of Pakistan, its regulatory body and other stakeholders of the financial system, fail to complete the action plan to combat terrorist financing by June, 2020. Moody's has also added that should the authorities "fail to do so, international financial institutions could curtail their interactions with Pakistani banks and other financial companies, including terminating corresponding banking relationships. This in turn would further constrain banks' ability to generate business and result in higher compliance costs."

The announcement by FATF on 21st February, 2020 that Pakistan would remain on the grey list under increased monitoring, along with 17 other countries if it fails to complete the necessary action plan by June, 2020 and the present warning by Moody's about the risks involved is alarming indeed and calls for the implementation of a very tough action plan in about four months if the country is to avoid the ignominy of being degraded to the FATF black list that would result in spiteful sanctions on the country's banks. It may be recalled that FATF had readmitted Pakistan to its list of "jurisdictions under increased monitoring" in June, 2018 when its government had committed to an action plan based on FATF's recommendations. The plan contained 27 action points aimed at eliminating anti-money-laundering/counter terror financing deficiencies at the financial system level as well as at the legal and law enforcement deficiencies at provincial and federal levels. As of now, Pakistan has increased its compliance with 14 out of the 27 identified areas. Compliance with the remaining 13 action points has also progressed at varying degrees but urgent efforts are needed to be made to combat money laundering and terror financing by accomplishing the remaining actionable items on an immediate basis because time is too short and we may not get another chance to clear our name and be promoted to the category of countries included in the white list. Some of the institutions have, nonetheless, started work on this crucial project. For instance, Securities and Exchange Commission of Pakistan (SECP) has advised the financial institutions to use technological solutions for effective screening of designated and proscribed persons and warned that penalties for violations and carelessness have been increased but such efforts need to be expedited and undertaken by all the stakeholders and concerned authorities so that Pakistan could meet the deadline fixed by FATF.

It may be noted that continued presence of Pakistan on the grey list of FATF would not only negatively affect the health of Pakistani banks but would also be very harmful for trade, industry, home remittances and overall foreign sector of the country. It may be mentioned here that two leading Pakistani banks have had to close down their branches in New York City and cease US operations as a result of adverse findings upon scrutiny by the banking regulator in the recent past. The enormity of the problem is not difficult to visualise if the country is placed on the black list and censured internationally. Keeping in view the importance of the issue, it may be better for the Prime Minister to take the matter in his own hands and direct the concerned organisations to work on maximum speed to deliver the necessary outcome by the stipulated date.