The grey zone

It appears there are many miles to go before Pakistan can get a clean chit from Financial Action Task Force (FATF), which is the global watchdog monitoring countries’ anti-money laundering (AML) and counter-financing of terrorism (CFT) regimes. It’s been almost four years since Pakistan was placed under increased FATF surveillance (also known as the ‘grey list’) due to weaknesses in its AML and CFT regimes. Two action plans, one for AML and the other for CFT, were asked by FATF to be implemented.

Since then, Pakistan has been working on meeting dozens of identified deficiencies. Thankfully, there was high-level of commitment from the political and security quarters to meet FATF demands. And ever since, there has been a mix of hope and despair every four to six months about Pakistan finally getting off this list. After all, what happens at FATF platform has implications for an under-scrutiny country’s financial system, especially in terms of costs, time and due diligence requirements its banks have to absorb.

The latest FATF plenary, which was held last month, offers qualified optimism for Pakistan. On the positive side, FATF has acknowledged significant progress and swift steps that have been undertaken by authorities in Pakistan in curbing both terrorism financing and money laundering. The tone of the FATF communiques in these past four years has oscillated between appreciation and warnings over the pace of Pakistan’s corrective actions, but this time the FATF statement appeared to be softer than expected.

As per the FATF, only one thing is left to do on the 27-point CFT action plan: Pakistan must continue to “demonstrate that TF (terrorism financing) investigations and prosecutions target senior leaders and commanders of UN designated terrorist groups”. And on the AML action plan, too, just one item is left to tackle: Pakistan must demonstrate “a positive and sustained trend of pursuing complex ML (money laundering) investigations and prosecutions”. Those statements suggest Pakistan is approaching the exit of the grey-list boulevard.

Is it, though? It may very well be that what FATF now wants from Pakistani law enforcement authorities (LEAs) is to demonstrate greater consistency and growing pace in pursuing offenses related to money laundering and terrorism financing. The LEAs meeting that kind of an expectation, however, is a function of time – the track-record and credibility of AML/CFT-related legal actions (which are intricate matters requiring strong prosecutorial and judicial experience) cannot be sustainably built in short amount of time.

That begs the question: what exactly is FATF’s time-horizon to assess Pakistan’s performance on the two remaining demands around investigations and prosecutions? Is it a few months? Or will it be further years-long evaluations that FATF is looking at for Pakistan? Besides, what would be the objective criteria (for example: number of successful prosecutions, amount of fines collected, and benchmarks linked with AML/CFT-related capacity-building of LEAs) through which performance will be assessed?

Arbitrariness, be it witting or unwitting, may leave room for geopolitical maneuvering, which can affect appraisal of Pakistan’s technical progress. Nevertheless, the onus is on Islamabad to: a) facilitate the development a risk-based system that proactively flags all AML/CFT-related violations (especially ones that are deemed high-risk), and b) provide sufficient autonomy to trained officers-of-the-law to pursue flagged cases till the end. More reforms may be required for a systemic change that meets best practices.

Undertaking more reforms in those areas is not only helpful for Pakistan’s FATF case, but it can also provide added comfort to foreign investors and development partners. Besides, significant progress on FATF’s remaining concerns can also shield Pakistan’s economy in an increasingly difficult geopolitical environment where financial sanctions are now increasingly being used as coercive diplomatic tools among major powers. The next FATF plenary is in October, so let’s wait and see how things develop.