Where there's smoke, there's (usually) fire. But the alarmism over Pakistan's FATF's compliance is a bit unwarranted at this stage. About a week before FATF meets in Paris to review, among other things, Pakistan's case, its regional affiliate (APG), has released an evaluation report on Pakistan's compliance vis-à-vis the immediate outcomes and recommendations outlined by FATF a year and half ago. That report has been causing eager ones to jump to conclusions.
Although speculation is rife as to what will transpire in Paris, the APG's evaluation report provides some useful context as to what to expect. Though, it needs to be mentioned that the said report covers progress made by Pakistan until October 2018 and verified on-site by APG. Besides this report's contents, the FATF review is expected to review a year's worth of progress made by Pakistan a year since then.
The APG report details what keeps Pakistan from achieving full compliance with FATF demands. Though some progress is mentioned as evident, many of the issues are recurring in nature. For instance, the report, on various places, highlights that Pakistani authorities, in general, do not have a comprehensive understanding of risks posed by money-laundering (ML) and terrorist-financing (TF) activities, besides hazards caused by legal persons, trans-national risks, new technologies, and terrorist groups.
As a result, the inter-agency coordination on policy and operational levels is limited. The authorities do not follow a risk-based approach in implementing countervailing measures that could be commensurate with the ML and TF risks. In addition, sharing of financial intelligence (under FMU umbrella) with provincial authorities is minimal and subject to courts granting permissions. This has the effect of enforcing a level of investigations, prosecutions, and convictions that isn't at part with the risks faced.
The report comes down hard on the regulators. For instance, SBP is following a risk-based approach to counter ML and TF risks, but it doesn't have “clear understanding" of those risks affecting its regulated sectors. The report takes fault with “limited understanding" of the SECP's regulatory supervision for those risks. As a result, most of the financial sector and the entire non-banking financial sector are unable to identify beneficial owners and do not apply targeted financial sanctions.
The report also states that organizations like Pakistan Post and National Savings have no enforcement requirements against ML and TF risks. The non-profit sector is also exposed as there is no oversight framework to monitor ML and TF activities that may be taking place through trusts and waqfs (charitable endowments). In addition,
The report identifies a number of priority actions. These include having better understanding of ML and TF risks, inter-agency dissemination and use of financial intelligence to counter those risks, improving the law enforcement and judicial capacity to catch ML and TF crimes, implementing targeted financial sanctions for TF, monitoring and investigating ‘at-risk' non-profits, and extending supervisory framework to Pakistan Post, National Savings, lawyers, accountants and real-estate agents, among others.
Even discounting the fact that the report doesn't evaluate current year's progress, the document doesn't portray Pakistan's case as a lost cause. The report itself mentions that Pakistan had a “mixed level of technical compliance" on a majority of FATF's 40 recommendations and “minor" or “moderate" technical shortcomings for the remaining. On a majority of recommendations, Pakistan is showing a varying degree of compliance (partially-compliant: 26, largely-compliant: 9), with only four areas that were non-compliant.
At this juncture, it isn't about Pakistan falling short of full compliance on each of those recommendations. What must be noted, instead, is the trajectory of improvements since grey-listing first surfaced in February 2018. Pakistan has repeatedly given high-level political commitments for remedial actions. Regulators are adapting to risk-based approach and enforcement agencies are improving capacity. An 18-month timeframe wasn't enough to show full compliance. The positive trend towards domestic AML/CFT reforms and multilateral facilitation may help Pakistan remain on the grey list until clouds disappear.