Volume 22 Issue 4, April 2018


The Financial Action Task Force on Money Laundering was formed at the G7 meeting in Paris in 1989. Its formation reflected the increasing concern among the world's rich countries that terrorist activities were being supported by large flows of funds, mostly from the Arab world and also from the Diaspora formed in developing countries in Europe and North America. The money was being provided by private individuals who believed in the causes being pursued by various terrorist organizations. The FATF was given a wide mandate to cleanse the system of international finance.

In 1990, the FATF issued "Forty Recommendations on Money Laundering and Special Recommendations on Terrorism Financing." These set the international standard for anti-money laundering and combating the financing of terrorism and terrorist attacks. These were significantly revised twice, in 1996 and again in 2003. After the 2001 terrorist attacks on the United States, the FATF issued Special Recommendation VIII (SR VIII) that specially targeted non-profit organizations, thus enlarging the scope of the activities being followed.

Before the adoption of the SR VIII, countries were expected to implement relevant international conventions, criminalize money laundering and authorize the confiscation of the proceeds of money laundering. A number of recommendations were targeted at the financial institutions such as commercial and investment banks and brokerage accounts. They were required to implement due diligence by becoming well-acquainted with the customers on their books. This requirement meant that financial institutions had to keep records that would be made available for inspection by both national and international regulators. They were also required to report on suspicious transactions. Meeting this requirement meant establishing financial intelligence units within the financial industry.

Recommendations are intended to be implemented at the national level and through appropriate legislation and other legally binding measures. The Task Force issues two lists of countries that have taken some measures but not enough to meet its requirements and those that have done little to enhance its objectives. The first is called the "grey list;" the second the "blacklist". By being named in the grey list is to give the opportunity to those who are on it to take the actions needed to meet the FATF requirements. As a result of its most recent review, the Task Force placed Pakistan on the "grey list." It will make it to the blacklist in June unless the authorities take actions that would satisfy the international watchdog. It appears from the statements issued by senior officials in Pakistan, including the Foreign Minister, that the authorities were not carefully watching the situation and were surprised by the review's outcome.

What is expected from Pakistan in order not to be included in the black list? Before answering this question, we should ask another: What would be the effect on Pakistan if it is unable to keep itself off the blacklist? The action by the FATF has come at a very delicate moment in Pakistan's economic history. The country was beginning to emerge from the prolonged slowdown largely as a result of the foreign support it was able to muster to finance the recovery. There was expectation that the rate of growth in the country's GDP will begin to edge towards 6 percent a year beginning in the current financial year. It could go as high as 8 percent in half a decade, if the full promise of the China-financed China-Pakistan Economic Corridor is achieved. There was also well-founded expectation of increased foreign direct investment. This was to come not only from China under the CPEC programme but from Western sources as well. There were reports of companies from Europe and the United States interested in investing in a number of sectors, including energy, telecommunications and information technology. But that was before the FATF struck.

It should be understood that the only power the FATF possesses is the influence it can have on those who lend to or invest in the targeted countries. If the blacklist is not avoided it will become very expensive for Pakistan to borrow abroad. It is not unusual for recovering economies to incur large foreign deficits. This is occurring in Pakistan at this time. The Ministry of Finance has revised its estimate of gross financing requirement to $24 billion as against the earlier estimates of $17 billion. The current estimate is based on the assumption of possible $7 billion current account deficit and $2.5 billion debt servicing cost. With some of the multilateral institutions holding back on disbursements, Pakistan is exploring other sources of finance. But the FATF action has begun to work and it is becoming more expensive for the country to borrow. There are newspaper reports that the Ministry of Finance is negotiating a $1 billion loan from the Industrial and Commercial Bank of China. This will be at three to six month Libor plus 2.7 percent to 3.02 percent. That is fairly expensive money.

However, there should not be too much reliance on short-term fixes. What is needed is action on two fronts. The first would mean the country's regulatory system, in particular the State Bank of Pakistan, will need to ensure full and total compliance to the FATF requirements. That this was not happening became apparent when the United States authorities moved against the New York branch of Habib Bank. The second would mean moving against some of the organizations that have been operating in the country, marrying their social work with support provided to extremist organizations. This will require exercise of serious political will as some of these bodies have successfully penetrated mainstream politics.

My final word on the subject is to emphasize that Pakistan's many difficulties are not always the consequence of foreign conspiracies. As I have said in many of my writings, Pakistan has an impressive economic future but to fully realize it, it would require considerable political will and a political consensus among different representative groups.

Shahid Javed Burki is a professional economist who has served as a Vice President of the World Bank and as caretaker Finance Minister.

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