Baba’s Explainer – FATF & Pakistan

• The FATF sets standards or recommendations for countries to achieve in order to plug the holes in their financial systems and make them less vulnerable to illegal financial activities.
• It conducts regular peer-reviewed evaluations called Mutual Evaluations (ME) of countries to check their performance on standards prescribed by it.
• The reviews are carried out by FATF and FATF-Style Regional Bodies (FSRBs), which then release Mutual Evaluation Reports (MERs).
• For the countries that don’t perform well on certain standards, time-bound action plans are drawn up.
• Recommendations for countries range from assessing risks of crimes to setting up legislative, investigative and judicial mechanisms to pursue cases of money laundering and terror funding.

• While the words ‘grey’ and ‘black’ list do not exist in the official FATF lexicon, they designate countries that need to work on complying with FATF directives and those who are non-compliant, respectively.
• Grey List: Countries that are considered safe haven for supporting terror funding and money laundering are put in the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist.
  • For such countries, the watchdog does not tell other members to carry out due-diligence measures vis-a-vis the listed country but does tell them to consider the risks such countries possess.
  • As of March 2022, there are 23 countries on the FATF’s increased monitoring list — officially referred to as “jurisdictions with strategic deficiencies” — that include Pakistan, Syria, Turkey, Myanmar, Philippines, South Sudan, Uganda, and Yemen.
  • Some of these countries are known tax havens while others have faced trouble with terrorism. In all cases, they are on the ‘grey list’ because it is deemed that their financial structures are susceptible to being exploited for prohibited dealings.
• Black List: Tt means countries designated as ‘high-risk jurisdictions subject to call for action’. Countries knowns as Non-Cooperative Countries or Territories (NCCTs) are put in the blacklist.
  • These countries support terror funding and money laundering activities. The FATF revises the blacklist regularly, adding or deleting entries.
  • In this case, the countries have considerable deficiencies in their AML/CFT (anti-money laundering and counter terrorist financing) regimens and the body calls on members and non-members to apply enhanced due diligence.
  • In the most serious cases, members are told to apply counter-measures such as sanctions on the listed countries.
  • Currently, North Korea and Iran are on the black list.
• Consequence of being listen in FATF Lists:
  • Being listed under the FATF’s lists makes it hard for countries to get aid from organisations like the International Monetary Fund (IMF), Asian Development Bank (ADB), and the European Union.
  • It may also affect capital inflows, foreign direct investments, and portfolio flows.
  • What suffers is also the perception regarding such a country among the international community.

• To be pulled out of the grey list, a country has to fulfill the tasks recommended by the FATF, for instance, confiscating properties of individuals associated with terrorist groups.
• If the FATF is satisfied with the progress, it removes the country from the list.
• The FATF most recently took Zimbabwe, and before that Botswana and Mauritius, off the grey list.
• Zimbabwe has strengthened the effectiveness of its AML/CFT regime and addressed related technical deficiencies to meet the commitments in its action plan regarding the strategic deficiencies that the FATF identified in October 2019.
  • AML/CFT refers to “Anti-Money Laundering/Combating the Financing of Terrorism”.

• Weakness in fighting terror financing: Pakistan has found itself on the grey list frequently since 2008, for weaknesses in fighting terror financing and money laundering. In 2009, the country began to cooperate with the FATF-like regional body, Asia Pacific Group (APG), for a ME process.
• Lack of adequate Action on Terrorist groups: Pakistan was retained on the grey list in March 2022 as it was yet to address concerns on the front of terror financing investigations and prosecutions targeting senior leaders and commanders of UN designated terrorist groups.
• Suspicion on permanence of Pakistani action: Diplomatic sources in Pakistan told The Hindu that steps had been taken in this direction such as the sentencing of terror outfit chief Hafiz Saeed, prosecution of Masood Azhar, arrest of about 300 other designated terrorists, and the seizure of more than 1,100 properties owned by terror groups. India meanwhile, a member of FATF, ​​suspects the efficacy and permanence of Pakistani action.

• Signal of increased risk of transactions: If a country is on grey list, it signals to the global financial and banking system about increased risks in transactions with the country in question.
• Challenges in dealing with International Financial Institutions: Also, given that major financial institutions like the IMF and World Bank are affiliated with FATF as observers, a grey-listed country faces complications in accessing international lending instruments.
  • One instance is of a USD 6 billion IMF loan contract from July 2019 that emphasized the need for Pakistan to comply with the FATF’s action.
  • Pakistan’s economy is in poor shape, and it is staring at low reserves of foreign exchanges, despite loan assistance from Saudi Arabia and China
• Loss in GDP: Pakistan’s grey-listing by the FATF from 2008 to 2019 may have resulted in a cumulative GDP loss of USD 38 billion. This is because, although being added to the grey list does not imply any economic sanctions (unlike the black list), it signals to the global financial and banking system about increased risks in transactions with the country in question

• Since it was added to grey list in 2008, it was given an action plan which required demonstrating adequate criminalisation of money laundering and terrorist financing as well as showing adequate measures to identify, freeze and confiscate terrorist assets.
• It was taken off the list in 2015 owing to its progress but was put back on it in 2018.
• Pakistan was given a 27-point action plan to restrict terror financing activities and on combating money laundering.
• Subsequent meetings of the body noted Pakistan’s progress on the action points although the country was kept on the list as FATF found that there were three areas in which the country had yet to make satisfactory progress.
• The three red flags that FATF concluded still needed work were:
  • (1) demonstrating that terrorist financing investigations and prosecutions target persons and entities acting on behalf or at the direction of the designated persons or entities;
  • (2) demonstrating that terrorist financing prosecutions result in effective, proportionate and dissuasive sanctions; and
  • (3) demonstrating effective implementation of targeted financial sanctions against all 1,267 and 1,373 designated terrorists, specifically those acting for or on their behalf.”
• In its Feb 2021 meeting, FATF had noted that while Pakistan had made “significant progress”, there are nonetheless “serious deficiencies” in mechanisms to check terror financing.

• Progress on action items: In March 2022, Pakistan informed FATF that it had completed 32 of the total 34 action items in the two plans but was retained on the list. The FATF gave it time till January 2023 to complete the 2021 plan.
  • The FATF encouraged Pakistan to address the remaining items by continuing terror financing investigations and prosecutions of senior leaders and commanders of UN-designated terrorist groups.
• Need for IMF bailout: Pakistan is currently banking on its potential exclusion from the grey list to help improve the status of tough negotiations with the International Monetary Fund to get bailout money, that is required by the country to tide over its difficult economic situation.

China, Malaysia, and some other allies of Pakistan were “quietly working” to get the country off the grey list.

• The US terror report said that progress by Islamabad “remains unfulfilled” on “the most difficult aspects of its 2015 National Action Plan to counter terrorism”.
• The report specifically notes that while Pakistan has indicted Lashkar-e Taiba (LeT) co-founder Hafiz Saeed and some of his associates, “they have made no effort to use domestic authorities to prosecute other terrorist leaders such as JeM founder Masood Azhar and Sajid Mir, the mastermind of LeT’s 2008 Mumbai attacks”.
• India had at the time said “it has become routine for Pakistan to come up with such non-serious actions prior to important meetings so as to evade intense scrutiny by the body”.
• India has deep misgivings about Pakistan’s commitment to discourage terror actors from using its territory to launch attacks in India.
• India widely believes that terrorist groups in Pakistan have access to support at the official level inside the country.
• Because of all these reasons, India puts pressure on international community to continue to keep Pakistan in FATF list.