Daily Times

The Financial Action Task Force’s (FATF) recent decision to ‘grey list’ Pakistan for its failure to take satisfactory preventative measures against terror financing has added to the country’s woes. Pakistan may suffer a risk downgrade by multilateral lenders such as the International Monetary Fund (IMF), World Bank the Asian Development Bank (ADB) and also a reduction in risk-rating by Moody’s, S&P and Fitch. As a consequence, the Pakistani stock market is expected to fall significantly. As long as the country remains grey-listed, it will be tougher for Islamabad to access funds from international markets.

Pakistan was removed from FATF in 2015 after three years but its inaction put it back in the grey list. Furthermore, there is also the danger of being put on the black list in June. Some global financial institutions would be wary of transacting with Pakistani banks and some might want to even avoid Pakistan altogether, viewing the legal risks associated with doing business there far outweigh economic benefits, if any.

A decline in foreign transactions and foreign currency inflows could lead to further widening of Pakistan’s already large current account deficit (CAD). Pakistani economy already had to be bailed out by the IMF in 2013. The financial sector might take a hit as Standard Chartered, the largest international bank in Pakistan with 116 branches — as well as Citibank and Deutsche Bank, which mostly deal with corporate clients-might decide to pull out.

The financial wizards in Pakistan are burning the midnight oil to ensure that Pakistan does not slide into the blacklist, but one must take a look at neighbouring India too. India is trying to ensure that Pakistan ends up in the dog house by planting fake news. A news item captioned “Pak Places Hafiz Saeed’s outfits list-India considers an eyewash” was published in New Delhi based “A Publication of Bureau of political Research and Analysis” on February 22, 2018. It alleged that Pakistan’s action against terror groups was an activity devoid of any groundwork and was meant to hoodwink the International Community.

According to a recent Indian Central Bureau of Investigation report, Indians have stashed more than $500 billion in foreign banks in terms of black money

India itself appears to be a safe haven for robbers and looters of the National exchequer who collect their black money abroad. Take for example, the Punjab National Bank (PNB) fraud case, currently being touted as the biggest-ever fraud in the Indian banking sector. Nirav Modi Company and the Gitanjali group of companies have been identified for fraudulently robbing the bank of $1.8 billion. According to a recent Indian Central Bureau of Investigation (CBI) report, Indians had stashed more than $500 billion in foreign banks in terms of black money. India ranks fifth in the list of countries with the worst non-performing asset ratios. This is ample evidence to put India on the FATF watch list.

That a fraud of this scale occurred at the government-owned PNB demonstrates the failure of various kinds of audits in the bank, including the RBI’s inspection. According to the PNB, the alleged fraud was carried out by two staffers by not entering the transactions in the bank’s core banking solution but in SWIFT signalling another bank’s overseas branch that the transaction is valid.

The other alleged accomplice in the crime is designer and jeweller Nirav Modi, against whom a complaint has been filed with the CBI. While the initial complaint speaks of an amount of Rs 2,800 million being involved in the alleged fraud. Further internal investigations conducted by the bank showed that the amounts involved were actually much larger. This led the bank to issue a revised statement saying that fraudulent transactions worth $1.77 billion had been detected.

Three firms – M/s Diamonds R US, M/s Solar Exports, M/s Stellar Diamonds – approached the bank for ‘buyer’s credit’ to make payments to overseas suppliers. According to the complaint, Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi were partners in these firms. Buyers credit is short term credit (90-180 days) provided by international banks (or international branches of Indian banks) to an importer. This credit is typically provided based on a ‘letter of comfort’ issued by the importer’s local bank.

The complaint adds that preliminary investigations have shown that two officials of the bank had in the past fraudulently issued Letters of Undertaking (LoU) to the said firms without following due process. These fraudulent LoUs were then transmitted across the SWIFT messaging system, based on which credit was offered to the said firms. In its original complaint, PNB specifies that 5 LoUs were issued in favour of Allahabad Bank in Hong Kong and 3 LoUs were issued in favour of Axis Bank, also in Hong Kong.

PNB shares fell by 9.8 percent in trade following the lender’s disclosure. India’s aspersions against Pakistan appear to be a case of the pot calling the kettle black. India should be in the FATF dock with us.

The writer is a retired Group Captain of PAF. He is a columnist, analyst and TV talk show host, who has authored six books on current affairs, including three on China

Published in Daily Times, April 21^st 2018.