Why is Pakistan on the FATF Gray list?

The Financial Action Task Force (FATF), the international watchdog monitoring money laundering, terror financing, and other threats to global financial networks, is expected to decide whether to take Pakistan off the ‘grey’ list at the end of its ongoing plenary session in Berlin.

The four-day FATF plenary will close on June 17. Pakistan has been on the FATF gray list continuously since June 2018, working to comply with the requirements of the watchdog to combat money laundering and terror financing.

What is the FATF?

The FATF is an inter-governmental body that sets international standards seeking to prevent international financial crimes that aid terrorism. It is a policymaking body that works to generate political will in national jurisdictions for regulatory and regulatory reforms in these areas.

The FATF was established in July 1989 by a G-7 Summit in Paris, initially to examine and develop measures to combat money laundering. After the 9/11 attacks, the FATF in October 2001 expanded its mandate to incorporate efforts to combat terrorist financing, and in April 2012, it added efforts to counter the financing of the proliferation of weapons of mass destruction.

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The FATF currently comprises 37 member jurisdictions and two regional organizations (European Commission and Gulf Cooperation Council), representing most major financial centers in all parts of the globe. The FATF has developed the FATF Recommendations, or FATF Standards, which ensure a co-ordinated global response to prevent organised crime, corruption and terrorism. Over 200 jurisdictions around the world have committed to the FATF Recommendations through the global network of nine FATF-Style Regional Bodies (FSRBs) and FATF memberships.

India has been a member of the FATF since 2010. It is also a member of its regional partners, the Asia Pacific Group (APG) and the Eurasian Group (EAG). Pakistan has argued unsuccessfully that India is biased and motivated against it.

What is the gray list, and why is Pakistan on it?

Gray listing means FATF has placed a country under increased monitoring to check its progress on measures against money laundering and terrorism financing. The “grey list” is also known as the “increased monitoring list”.

As of March 2022, there are 23 countries on the FATF’s increased monitoring list — officially referred to as “jurisdictions with strategic deficiencies” — that include, apart from Pakistan, Syria, Turkey, Myanmar, Philippines, South Sudan, Uganda, and Yemen.

In essence, in the assessment of the FATF, all these countries have failed to prevent international money laundering and terrorist financing, and are, therefore, on a global watchlist.

To be pulled out of the gray list, a country has to fulfill the tasks recommended by the FATF, for instance, confiscating properties of individuals associated with terrorist groups. If the FATF is satisfied with the progress, it removes the country from the list.

The FATF most recently took Zimbabwe, and before that Botswana and Mauritius, off the gray list. “Zimbabwe has strengthened the effectiveness of its AML/CFT regime and addressed related technical deficiencies to meet the commitments in its action plan regarding the strategic deficiencies that the FATF identified in October 2019,” the FATF said. AML/CFT refers to “Anti-Money Laundering/Combating the Financing of Terrorism”.

In the case of Pakistan, it first entered the list in 2008, left it, and then was on it from 2012 to 2015. Since 2018, it has not left the list.

How does gray-listing impact a country?

Pakistan’s gray-listing by the FATF from 2008 to 2019 may have resulted in a cumulative GDP loss of USD 38 billion as per a working paper by Tabadlab, an Islamad-based advisory firm.

This is because, although being added to the gray list does not imply any economic sanctions (unlike the black list), it signals to the global financial and banking system about increased risks in transactions with the country in question, according to The Economist Intelligence Unit .

Also, given that major financial institutions like the IMF and World Bank are affiliated with FATF as observers, a gray-listed country “faces complications in accessing international lending instruments,” the Tabadlab paper said. One instance is of a USD 6 billion IMF loan contract from July 2019 that emphasized the need for Pakistan to comply with the FATF’s action.

Pakistan’s economy is in poor shapeand it is staring at low reserves of foreign exchanges, despite loan assistance from Saudi Arabia and China.

What is the road ahead for Pakistan?

After the plenary session of June 2021, FATF had said Pakistan needed to “investigate and prosecute” senior leaders and commanders of UN-designated terror groups, including Jaish-e-Mohammed chief Masood Azhar, Lashkar-e-Taiba founder Hafiz Saeed, and its ‘operational commander’ Zakiur Rehman Lakhvi. The FATF gave Pakistan until October 2021 to meet the remaining conditions of compliance.

At the end of the October plenary, however, the president of the task force announced that the country would remain on the gray list until it had addressed all issues flagged by the June 2018 action plan, as well as the one drawn up by the FATF’s regional partner, the Asia Pacific Group (APG), in 2019.

Pakistan’s progress was appreciated in March this year by the global body, which noted that it had “completed 26 of the 27 action items in its 2018 action plan”. The FATF encouraged Pakistan to address the one remaining item by continuing terror financing investigations and prosecutions of senior leaders and commanders of UN-designated terrorist groups.

Quoting unnamed diplomatic sources, the Pakistani daily Dawn reported that China, Malaysia, and some other allies of Pakistan were “quietly working” to get the country off the gray list. Dawn also reported Pakistan Stock Exchange’s (PSX) benchmark KSE-100 index opened in the green on Wednesday (June 15), and one reason for investors’ regained confidence was hopes of Pakistan exiting the gray list.

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