What is the loss due to being on the FATF's grey list? Though some economic loss estimates are floating, it is not clear how much reliance can be placed on these estimates and the methodology used to estimate. We have not heard much evidence to suggest that an importer or an exporter has faced some difficulty in seeking or executing a contract due to Pakistan being on the grey list. We have also not heard that a foreign investor wanting to invest in Pakistan has refrained, due to the country grey. The practical consequence of being grey is the potential of turning black. With compliance on 24 out of 27 conditions, this danger is practically over.
Apparently, the success hinges on convincing the world powers that be, that we are doing enough to counter-terrorism. The remaining three non-compliant action points are about terrorist financing. Two of the conditions require that we effectively persecute terrorists (persons designated as terrorists by the international forums) and the third one asks us to implement financial sanctions against persons designated as terrorists in the UN resolutions 1267 & 1373.
Geopolitics and foreign relations apart, the technical standards of the FATF are not only difficult to meet but are somewhat subjective as well. The recent FATF-related legislation in Pakistan, the arrest/detention of certain people, different checks on banking transactions, and foreign currency dealings are an attempt to meet the laid down conditions. Purely, on merit there seems to be a lot of progress. However, still, the diplomatic overtures underpinned by national interests of member countries will have the final say. Compliance or no compliance, we cannot expect India to support our exit. Opinions also cite the apparent thaw in our relations with France as a contributing factor. The casting vote, as always, has to come from the United States. Thus winning over the Biden administration becomes crucial to the exit from the grey list.
FATF’s conditions originally laid down in 1990, to combat the laundering of drug money were expanded after 9/11 to combat terrorist financing as well. The FATF mandate says:
“Countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action to……ensuring that the risks are mitigated effectively… Countries should apply a risk-based approach to ensure that measures to prevent……money laundering and terrorist financing are commensurate with the risks identified”
The wording of the mandate implies that countries have to identify themselves, their risk profile vis-à-vis money laundering and terrorist financing, and put in place measures to mitigate the risks. However, the judge, jury, and executioner over the risk assessment and the combat measures taken by a country, is the FATF. With the subjective nature; of the risk assessment and the combat measures suggested, it is not too difficult to change the goal post, asking a country to ‘do more’ if the geopolitical dynamics so demand.
We owe some of this trouble to ourselves. If we receive billions through wire transfer in the account of a very poor person and these transfers make headlines as well, then this will not help Pakistan’s cause at the FATF. Such transfers imply that the country’s financial systems are quite weak. However, for any penny laundered into Pakistan or out of the country, there has to be a sender or a recipient country – one wonders whether such sender or recipient countries are also on the grey list?
The weakness of financial systems, reflected in unworthy transfers is making banking transactions difficult for an ordinary Pakistani. Know Your Customer (KYC) requirements are now more stringent for banks and insufficient digitisation adds to the woes of the customers. Rather than asking clients to run helter-skelter for providing a copy of the national ID card, the banks must link with the NADRA database to allow direct verification of a client’s particulars from the certified database. This will kill the potential of submitting someone else's ID card to support a transaction without his/her express consent – will also make us more compliant with the FATF.
The countries under the increased watch of FATF include Pakistan and also Panama – famous for the Panama Leaks. The British Virgin Islands, which also earned fame during the leak’s time, is not on the watch list. Could this be due to the special nature of its jurisdiction, ‘overseas British territory’, or there is something else to it? Britain of course is a member of the FATF.
Getting out of the grey list, as we have seen, is time-consuming and difficult. However, being sent-in is rather easy. Any of the 39 member countries of the FATF can report another country needing to be watched more closely, and this can start proceedings for a greater watch – this is why we have been on the grey list thrice during the last decade or so. The solution lies in making ourselves economically strong enough, that twisting our arm hurts the interest of the powers that be. This will take time and effort.