Financial transaction

The FATF and its impact on the country’s economy – Opinion

Pakistan has gone through so many challenges and adversaries in its relatively short 75-year lifespan that it is not only remarkable, but it shows its resilience and determination to succeed against all odds.

Political instability has created cycles of economic chaos, resulting in a lack of FDI to upgrade its industrial base for higher value-added manufacturing and economic diversification.

The invasion/occupation of Afghanistan by the then Soviet Union in 1979-89 and later in the aftermath of 9/11, both events resulted in the influx of millions of Afghan refugees into Pakistan.

This has further exacerbated the fragility of the country’s economy and created a fertile environment for money laundering (ML) and terrorist financing (FT).

More importantly, Pakistan being a developing country, has also inherited the DNA of ML, corruption and FT, and these things have become more prevalent due to its fragile infrastructure for monitoring transactions, financial markets , underdeveloped capital and credit and weaker national institutions.

In the wake of the occupation of Afghanistan by the two superpowers, as economic aid began to flow into the country, ML and TF intensified.

And that was the start for Pakistan to step down the slippery slopes of ML and TF. Since then, Pakistan has repeatedly tried to climb out of the slippery slopes, but the battles have always been difficult for institutions, policymakers, regulators and politicians.

The FATF (Financial Action Task Force) was created in July 1989 at the G-7 summit in Paris with the aim of combating money laundering (ML).

However, following 9/11, its mandate was extended to also include combating the financing of terrorism. The FATF is a transnational organization that sets international standards to prevent international financial crimes and the financing of terrorist activities.

Since its creation in 1989, the FATF has played its major role in the identification and prevention of financial crimes (ML, FT, etc.) by creating standards and recommendations which are considered as law by its members and non-members alike. -members.

In other words, the FATF is a political organization that encourages the political will of countries to implement legislative and regulatory reforms to prevent ML and FT. The FATF monitors its compliance with the standards globally through its global network of nine FATF-like regional bodies (FSRBs) and FATF members.

Since its creation, it has been based in Paris, France, and currently more than 200 UN members have signed their commitments for the implementation of FATF standards in their jurisdictions to prevent organized crime, corruption, ML and terrorist activities.

There are three lists related to ML, corruption and FT activities that cover the whole country landscape. The black list (BL), the gray list (GL) and the white list (WL). On the BL, there are only two countries, namely North Korea and Iran.

BL countries are exposed to severe economic sanctions. The GL is made up of countries that are under the FATF’s vigilance for non-compliance mainly with ML and FT.

Currently, the FATF body is composed of a total of 39 members, including the EC (European Commission) and the GCC (Gulf Cooperation Council). India became a member of the FATF in 2010 and is also a member of its regional bodies, the Asia-Pacific Group (APG) and the Eurasia Group (EUG).

Most of the LG countries belong to developing economies, except one. Surprisingly, the United Arab Emirates, one of the richest countries and the world’s energy supplier and member of OPEC+ is also on the list! The reasons for being on the GL are that in the recent past, due to its liberal policies and a regional hub for financial and capital markets, the UAE has become a safe haven for ML fugitives .

However, recently, the UAE has taken its inclusion in the GL very seriously and is closing the gaps in its financial transactions regimes. Implementing the FATF recommendations, the UAE has begun apprehending and deporting fugitives to their countries of origin or countries issuing the warrants against them related to the alleged financial crimes. Recently, the United Arab Emirates deported people wanted by India and South Africa for alleged ML and other financial criminal activity.

The decision to add or remove a country from the GL does not depend on the recommendations of a single member, but is made collectively using majority consensus. In addition, it uses the opinions of independent observers and resident representatives of donors and monitoring bodies (IMF, WB, AfDB, Paris Club, etc.) affiliated or not to the FATF.

Pakistan has been on the GL several times and is among the other 23 countries that have been included on this list. It was first listed in 2008, but after implementing FATF recommendations and showing good progress, Pakistan was removed from the LG.

In the aftermath of 9/11, Pakistan was put back on the GL and remained there from 2012 to 2015. After a brief period of a few years off the list, it was put back on the list in 2018. And since then at this day it is on the GL.

The ousted government has made excellent progress in implementing and enforcing the recommendations and streamlining its policies and legislations to eliminate ML and FT from society. The strategy and commitments enabled 26 conditions to be met out of a total of 27 FATF recommendations.

This achievement was publicly applauded in March this year by FATF leadership. By being on the GL, the country can have drastic impacts on its economy, such as scaring off investors, creditors, causing currency devaluation, lower exports, lower tourism and higher costs for imports. It can also create a negative image for bilateral and multilateral donor agencies.

They can add more controls and conditions to unlock additional funds over previously negotiated favorable financing terms. Currently, Pakistan is experiencing protracted delays in the release of IMF-approved funds.

According to some estimates, since 2018, after listing in the GL, Pakistan’s economy has suffered greatly. According to “Tabadlab”, Pakistan has lost about $38 billion of its GDP, which has dealt a severe blow to its economy.

The current government, after taking office in April this year, has also realized the challenges and implications of being on the GL. After encountering resistance to funding from multilateral donors and lack of interest from investors and entrepreneurs, the government has redoubled its efforts to address all the shortcomings described by the FATF and its affiliated agencies.

Accordingly, all indications were to celebrate Pakistan’s withdrawal from the GL at the June 17, 2022 FATF meeting in Berlin, Germany.

In anticipation of victory, Pakistan sent a very high-level delegation led by Deputy Foreign Minister Ms. Hina Rabbani Khar to participate in discussions with the FATF team. After the meeting, FATF President Mr. Marcus Pleyer acknowledged that Pakistan had made excellent progress in complying with the recommendations, including the last condition.

But he postponed his final verdict of declaring Pakistan out of the GL until his physical visit to Pakistan to confirm that the necessary changes have been definitely implemented. However, it was very disappointing and went against all expectations of the entire Pakistani society, including politicians, policy makers, law enforcement agencies and military leaders, the force pivotal and incomparable in the fight against terrorism, AML and CFT.

Now, the entire Pakistani nation is impatiently awaiting October to return to the FATF “white list”. This will not only be a ceremonial victory for Pakistan, but it will be one of the major milestones in efforts to transform Pakistan once again into a robust and vibrant economy.

Exiting the GL will create a new landscape to attract FDI, better credit terms from foreign commercial banks, conducive environments for entrepreneurs, angel investors and crowdfunding that will retransmute Pakistan in its manufacturing, export growth higher, better paying jobs. opportunity, a robust wealth creation environment and widespread economic prosperity to share with everyone.

Copyright Business Recorder, 2022