Post 9/11 counter-terrorism efforts, and an increasing global desire to eliminate financing opportunities for sponsoring acts of terrorism, has made it crucial for countries across the globe through a centralized database, to keep track of any suspicious transfers of money.
The promulgation of an anti-money laundering law has been an agenda item at most government level meetings and Pakistan has been under tremendous pressure for the approval of this law from western governments, international financial institutions and other international forums such as the Financial Action Task Force (FATF) and the Asia Pacific Group (APG).
The United Nations Security Council Resolution 1617, passed under Chapter VII of the UN Charter binds all member countries, and has been 'Strongly urging all Member States to implement the comprehensive, international standards embodied in the FATF Forty Recommendations on Money Laundering and the FATF Nine Special Recommendations on Terrorist Financing'.
In the absence of legislation around this area in Pakistan, the main law enforcement bodies involved have been the State Bank of Pakistan (SBP), the Securities and Exchange Commission of Pakistan (SECP), the National Accountability Bureau (NAB), the Anti Narcotics Force (ANF), the Federal Investigative Agency (FIA), and the Customs Authorities. Their enforcement initiatives have necessitated the cooperation of financial institutions and most banks have already developed compliance departments with specific Anti-Money Laundering (AML) contact points within their compliance and risk departments.
Their main initiatives have included the enforcement of a detailed Know Your Customer (KYC) policy by the SBP and instructions on how banks should identify high risk customers. The SBP has also developed a structure of monitoring and reporting, whereby banks are required to have in place systems to highlight suspicious transactions, manned by individuals trained in AML, to the SBP which in turn refers such cases to NAB for necessary action.
Correspondent banks have been put under greater scrutiny and banks in Pakistan have been precluded from entering into transactions with shell banks and those highlighted under the "watch list" as commonly used for money laundering and terrorist financing operations.
A comprehensive AML law instituting an AML corporate governance structure within Pakistan, bringing together all relevant law proponents and enforcers has finally been promulgated earlier this year, in the form of the Anti-Money Laundering Act of 2010. The main objectives of this Act are to enforce proper legislation to ensure proper investigating, criminalizing and prosecuting of money laundering offences.
The Act pulls together necessary elements within the Pakistani legal structure, who were previously working, to a great extent, in isolation, to prevent money laundering in the country. The creation of the National Executive Committee has been a big step in the right direction, encouraging the meeting of representatives from the Ministry of Finance, the Ministry of Foreign Affairs, the SBP, and NAB, all key stakeholders in protecting Pakistan against money laundering and terrorist financing activities. The Act has also for the first time, created the framework for a centralized database for suspicious persons and transactions as a ready point of reference for flagging future activities.
LEGAL ANOMALIES
There are however, some anomalies that need to be considered before regulation is created for the enforcement of this Act.
The FATF Forty Recommendations on Money Laundering do not require setting up special anti-money laundering courts nor do other countries enforcing similar laws encourage this. There does not appear to be any need for Pakistan to set up a parallel judicial system for prosecuting AML offences.
Charges against individuals potentially involved in money laundering should be tried either in the current courts that try similar offences or in general courts as a stand-alone charge. Under international requirements, money laundering is prosecutable as an individual crime without first convicting an offender for the predicate offence. The proposed law does not comply with this obligation.
The nature and role of the Financial Monitoring Units (FMU) created under the Act are perhaps wider than necessary. They are in essence authorized to receive reports on suspicious transactions from banks in Pakistan as well as summon records if they see fit, along with carrying out preliminary investigations. This is a conflict of role and may have implications for banks and financial institutions in Pakistan from compliance and monitoring perspectives. Investigative powers should remain solely with NAB.
In a global market moving more and more towards paperless money, countries have become highly dependent on systems and a global information technology structure has evolved. Money laundering and terrorist financing activities have integrated with this system. The prevention of these transactions from entering normal financial activities requires the implementation of counter technology.
Although many banks in Pakistan have begun to implement AML software which is integrated with their core banking systems, such as Mantas, Norkom and Eudox, there is a need for this to be more pervasive. Not only does this act as a deterrent to potential activities, but gathering of data and monitoring becomes all the more efficient. Regulation around this Act will need to take this aspect into consideration.
Another aspect that will require mention while formulating regulation enforcing this Act is the benami transaction or hawala, which forms a sizable part of Pakistan's economic system. Although the primary reason for hawala transactions is cost effectiveness and efficiency, motives also include the lack of a paper trail and tax evasion.
Money derived from criminal activities may be introduced into the financial system. In many money laundering schemes, the biggest risk is handling cash. Current law in Pakistan precludes the exporting of cash greater that $10,000 and attempting to circumvent such reporting requirements by making smaller transactions is an offense.
Though the Act is a step in the right direction, the regulation being developed for enforcing this law needs to be carefully considered and formulated keeping local and international nuances in mind. The Asian Development Bank (ADB) is currently working closely with the SBP to create a structure and devise regulation for effective AML enforcement in Pakistan. The World Bank has recently completed a phase with the SECP on strengthening the AML environment in Pakistan.
Once regulation around this Act is formulated, challenges faced by implementers, regulators and operational stakeholders will be many and will need to be dealt with appropriately. These include a lack of training in the newly formulated regulation and awareness about the subject itself, both at a regulator and operational levels. Training and awareness sessions will become a must. Creating a centralized database for flagging suspicious transactions will entail operational, technical and completeness challenges, which will need to be managed carefully and proactively. Profiling of old customers not captured under the KYC regime which was only implemented in 2001, will especially be an arduous task. The cost to banks for setting up robust AML structures in line with regulation will need to be considered.
Initiatives such as the Act are very much needed in an environment of increasing potential of high risk terrorist activities, the brunt of which is being borne by Pakistan. We can only await formulation of the regulation around the Act and prepare for the challenges faced at the time of implementation.
The writer works as a Senior Manager in the Advisory department of Ernst & Young. She can be reached at [email protected]
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