Getting out of the grey list

The Anti-Money Laundering Act 2010 and its supporting regulations provide a solid foundation to curb money laundering and terrorist financing activities in the country. Under this law, a high-powered National Executive Committee, comprising four ministers, Governor of the State Bank of Pakistan and Chairman of the Securities and Exchange Commission of Pakistan amongst others, are fully empowered to develop an anti-money laundering and counter-terrorism financing (AML/CTF) strategy. Another ‘general committee’ with senior most civil servants as members is there to assist the National Committee, whereas the statutory Financial Monitoring Unit (FMU) is supposed to drive this regulatory regime. Furthermore, according to FMU’s website, there are 20+ relevant laws, three sets of regulations and 10 types of reporting formats and guidance notes to control and prevent money laundering and terrorism financing.

And yet, while navigating through this complex web of institutions, committees, rules and regulations, we somehow managed to end up on the grey list. How has Pakistan ended up here and what needs to be done to get the country out of this mess?

In layman’s terms, an effective AML/CTF regime entails three sets of actions. The first relates to undertaking diagnostics to identify and assess relevant AML/CTF risks and recommend required mitigating actions. It should then lead to developing a regulatory and institutional regime to address these risks. This is where we seemed to have mostly focused in the past.

The second set pertains to actions by financial institutions. The State Bank of Pakistan’s AML/CTF regulations for banks and DFIs prescribe a number of robust controls and customer due diligence requirements. The financial institutions need to validate credentials of their account holders and source of their earnings, monitor their accounts and wire transfers, and report any unusual or suspicious transactions.

This also is a comparatively better performing area for Pakistan since the private financial institutions and banks have sufficient capacity to implement these regulations. The currency exchange companies however are a different story and need some serious oversight.

But our major weakness lies in the third and the most important area, which relates to implementing rules and regulations on ground by the government itself. This is where information received from financial institutions need to be analysed and investigated. Those involved in money laundering and terrorist financing activities then need to be duly prosecuted and subjected to effective sanctions, including confiscation of proceeds of crime.

While we are quite good in promulgating laws, drafting regulations and notifying guidance notes, all these efforts lose steam when it comes to enforcing them. The FATF review also highlighted that cross-border smuggling of cash in Pakistan remains one of the major areas where there has been no progress at all. Illicit funds may come from a variety of sources but at some point they have to change hands. That is where they need to be stopped and those involved need to be apprehended. And this is exactly where our failing has been.

Effective enforcement requires well- functioning institutions and a capable judicial system, which in turn depend on overall rule of law and state of governance. World Justice Project’s Rule of Law Index ranks Pakistan at 105 amongst 113 countries and lowest in South Asia, with the exception of Afghanistan. Unfortunately, there is no shortcut to fix this quickly.

Pakistan has been given 15 months by the FATF to improve and if we are serious about meeting this deadline, we need a strong political will, translated into concrete actions. The starting point should be some serious soul searching by the National Executive Committee members, broadening the committee membership to include stakeholders from the judiciary and developing and rolling out a plan on a war footing. Or else, the complex regulations will offer little comfort, till the time an ordinary citizen can send money abroad any time through informal channels with no questions asked.

Published in The Express Tribune, July 10th, 2018.

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