Making Pakistan fall in line

Pakistan finds itself in the eye of yet another storm. It employed every diplomatic and fire-fighting trick in the book to keep itself off the list of defaulting countries maintained by the Financial Action Task Force (FATF) at the FATF Plenary held in February 2018.

Pakistan’s desperation underlines the increasing effectiveness of the organisation, which has become the spearhead against global efforts combating the financing of terrorism (CFT). This brief will analyse the basis for FATF’s growing effectiveness in the fight against terrorist finance and how this could enhance Pakistan’s CFT compliance over time.

The FATF has been at the forefront of international efforts to fight money laundering and CFT. Its efforts have been in conjunction with relevant resolutions of the United Nations Security Council (UNSC), especially in the aftermath of 9/11.

FATF is an inter-governmental body set up in 1989, with an aim to “set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system…” Over a period of time, since its inception, the FATF has gained perceptible credibility as a professional organisation, which has succeeded in not only increasing awareness regarding the challenges being faced by the global financial system, but also human security issues like terrorism.

It has gained considerable influence over the regulatory framework that deals with financial transactions, in an attempt to make it less liable to exploitation by both profiteers and terrorists…The FATF follows a consensus-based model of decision making within the plenary, the highest decision-making body that meets thrice a year…

FATF gains credibility by its ability to hurt a country where it hurts the most, its economic well-being. The body achieves this, as was the case with Pakistan until 2015, neither by applying or recommending sanctions. It does so by indicating to the financial world that a country is in violation of CFT and anti-money laundering (AML) guidelines.

For most correspondent banks, financial institutions, rating agencies and other countries, this raises a red flag that can only be ignored at their peril. It is for this reason that leaders and bureaucrats from Pakistan have been scurrying from one world capital to another to lobby for blocking its inclusion on the FATF list of countries in violation of fundamental guidelines. An illustration of the same is best made through concerns raised within Pakistan and empirical evidence that at least partly provides indicators in this direction…

The FATF and its subsidiary organisations like the Asia Policy Group (APG), a regional body with members from the Asia-Pacific region, undertake the evaluation of countries. Despite the fact that Pakistan was removed from the list of countries that had strategic deficiencies in its AML/CFT regime in 2015, the deficiencies were subject to an ongoing compliance process.

A specific issue highlighted was Pakistan’s inadequate compliance of UNSC Resolution 1267, which called for action against terrorism in Afghanistan in the immediate aftermath of 9/11.7 This was subsequently enlarged to include groups like the Lashkar-e-Taiba (LeT) and JuD. Despite this relief provided to Pakistan, a report of the FATF of February 13, 2015 indicated the following:

Some RRG members are concerned that Pakistan needs to take further actions to ensure more freezing and enforcement of prohibitions of financial transactions with particular terrorist organisations openly operating in Pakistan. The concerns mainly relate to the terrorist groups of Lashkar-e-Tayyiba (LeT) (and its co-listed entities, Falah-e-Insaniat Foundation (FIF), and Jamaat-ud-Dawa (JuD)). … Despite all these efforts, it is not clear that the freeze orders are being fully implemented given that the designated entities JuD and FIF appear to continue to operate openly in Pakistan.

UNSCR has listed Jamaat ud Dawa as an alias of Lashkar-e-Taiba. Supporting evidence has not been shared with Pakistan to establish such connection. Jamaat ud Dawa has been on observation orders under S.11 D of the Anti Terrorism Act since 15 November 2003. Their activities are mentioned by law enforcement agencies. If report of activity that fulfills requirements of S.11 B of the ATA is presented, the organisation shall be proscribed…

Pakistan’s concerns
Ahsan Iqbal, Pakistan’s Interior Minister speaking in the Senate in February 2018 voiced the fear that being placed on the list again at the FATF Plenary could make it “harder for foreign investors and companies to do business in the country.” The Dawn suggested that the possible implications of being placed on the list seemed to have already affected the stocks, with the “KSE-100 Index plunging 411 points to close at 42,942 on Thursday [February 15], as a bearish spell continued to prevail at the Pakistan Stock Exchange.”

Besides these indicators, an assessment of the period from 2012 till 2015 also provides useful data points as Pakistan was placed on a similar list in the past. Amongst other factors, the credit rating of a country is the basis for assessing its financial credibility. Moody’s credit rating for Pakistan was downgraded to ‘junk’ category during the three years that it was on the FATF listing. Pakistan enjoyed better ratings both prior to and after the listing, further reinforcing the impact of the action. While this may be influenced by more factors than one, yet, the listing by the FATF does provide a useful indicator.

The impact of such a rating is elaborated upon by a World Bank and South Africa Reserve Bank paper which is based on research data collected from 20 countries for the period from 1998 till 2015. The study suggests that “a downgrade of sovereign credit ratings to sub-investment or 'junk' status has a negative effect on public borrowing costs.”14 Further it could increase the Treasury bill rates by an average of 138 basis points.

Ali Khizar, head of research at Business Recorder, Pakistan, reinforces this point. He argues that the first casualty of the listing could be Pakistan’s credit rating. This will adversely impact its ability to raise loans from major international financial institutions to service existing debt. This will become even more difficult as compared with the previous listing, given the adversarial relationship with the US and the latter’s influence in major financial institutions.15

Going forward
The FATF statement at the end of the conference did not as yet include Pakistan on the list of countries subject to the compliance process. However, inputs from the conference suggest that a vote indeed took place and Pakistan will be placed on the list in June 2018. This is likely to ensure that Pakistan will remain under pressure to undertake urgent measures to improve the effectiveness of its CFT record. Further, its ability to merely employ symbolic measures as a substitute for combating terrorism is increasingly going to become a challenge in future.

A number of countries have been on the FATF list on account of procedural limitations or constraints on capacity. Pakistan however will again find itself identified as a state that has been complicit in the funding of terrorism, by its continued refusal to take necessary action against terrorist leaders and groups. The FATF listing will negate any pretentions of being a victim that Pakistan has employed to obfuscate its role in funding terrorism and employing it as state policy.

By: Vivek Chadha

(Excerpts from an article at idsa.in; Col Vivek Chadha (Retd) is a Research Fellow at the Institute for Defence Studies and Analyses, New Delhi)