In 1989, with the aim to combat drug and money laundering, the group of seven industrialized countries (G-7) decided to establish an organization. This organization was to help fight the problem of global drug and money laundering and after the 9/11 attacks in October 2001; the task to combat terrorism funding was also added in its purview. In April 2012, the organization’s jurisdiction was extended to eliminating the chains of financing weapons of mass destruction. This organization is called the Financial Action Task Force.
Any country that has not been effective in implementing the recommendations of FATF and is thus ‘Non-compliant’ is grey listed with special instructions and regulatory policies to be implemented within a specific time-frame. If the non-compliant state fails to achieve effective implementation of the recommended changes, it is placed on a black list with international isolation and sanctions. Today, Iran and North Korea are black-listed.
Pakistan has been evaluated multiple times in the past. In the 2009 evaluation, numerous gaps in the Pakistani financial policy making were identified. As a consequence the country was blacklisted in 2010-2012 for being non-compliant. But with subsequent changes like enactment of Anti-money laundering Bill and establishing a financial monitoring unit, Pakistan was removed from the black list and was required to fully implement the UNSC resolution 1267.From 2012-2015, Islamabad was on FATF’s watch list and was referred to a contemporary group for microscopic monitoring: The Asia Pacific Group, to develop Pakistan’s AML /CFT regime. With APG’s assistance, multiple initiatives were cultivated by the Government of Pakistan to curb the deficiencies through a mutual evaluation methodology. This led Pakistan to being removed from the watch-list in 2015.Another myth that needs to be busted is that with Pakistan being grey-listed, could have dire consequences on its ability to borrow from the IMF. In this regard, IMF’s deputy managing director in Pakistan, Tao Zhang asserted that, “FATF’s decision to grey-list a country does not directly impact its ability to borrow from the IMF”.
The ranking of Pakistan by Basel Anti Money Laundering index stands at 46 out of 146 countries in 2017 using 14 indicators dealing with financial corruption, standards, regulations, legislation and policies
Presently, the country is given a deadline of June 2020 to fully implement all actions that the force has recommended for it. This is the second four month extension given to Pakistan. There is no debate on the fact that this situation is a negative one but due to many factors at play it is hard to gauge how exactly the economy will be affected. Firstly; the country’s banking channel could take a hit as it is irrevocably linked to the international financial system. Secondly; some foreign institutions may completely avoid dealing with our financial system altogether while others might ask us more questions and subject us to more checks .Thirdly; there could be a wide ranging impact on the economy that touches all aspects of it including exports, imports, remittances and FDI.This would become an even bigger problem since our current account deficit stands at 6-7% of the GDP and would also lead to a fall in foreign exchange reserves given our higher external financing needs. Moreover, this would hamper Pakistan’s medium term debt sustainability.
Economic analysts argue that being on the grey-list Pakistan might get downgrades in its debt ratings which will render us less credit worthy in the eyes of international investors, borrowers, traders and speculators. In addition to this, there is direct impact on the remittances sent from abroadto consider. Amounts exceeding USD 100,000 will be marked by the State Bank of Pakistan making it hard on local Pakistanis to be financially inclusive.
Economically, FATF grey-listing impacts as predicted by many economists were in reality not as dire. Moreover, from 2012-2015, when Pakistan was previously grey-listed, it completed an IMF program and was successful in raising $5 billion from the international bond markets which showcases its economic strength. The imports and exports also remained fairly stable during this period.
Our exports during 2017(grey-listed) were 21938 million USD and in 2015 (delisted), 21972million USD. This manifested a 0.15% drop. Our imports increased 17%. This cumulatively proved that no significant barriers were faced in carrying out international trade while being grey-listed. The bond market’s reaction to the verdict was also subdued. This was validated when Pakistan issued 10 year bonds in 2017, even with being grey-listed the bonds showed a modest yield drop from 7.4% on February 2014 to 7.1% in February 2018. Contrary to economic predictions, the stock market cumulatively increased by 3%.
Presently , despite being grey listed, Pakistan has been extended GSP plus facility by the EU which is a facility that offers trading relief and rebates on exports especially to our textile sector. Another positive implication of this situation is that over time Pakistan has issued SUKUK (Islamic) bonds worth millions of dollars, credit facility and loans from international financial markets are being successfully negotiated; IMF, WB and ADB continue to give Pakistan a consistent flow of foreign aid.
If we look at Pakistan’s evaluation by other independent entities, the results will not be similar to that of the FATF. For example, the ranking of Pakistan by Basel Anti Money Laundering index stands at 46 out of 146 countries in 2017 using 14 indicators dealing with financial corruption, standards, regulations, legislation and policies. This puts us at a better ranking ahead of countries like Panama, Sierra Leone, Tajikistan, Mali and Kenya all of which are on the FATF’s monitoring list. Thus this shows that FATF decisions are based more on political considerations rather than independent analysis. Many also disagree with FATF on the basis that Pakistan, being one of the most affected countries from terrorism behind Iraq, Nigeria, Afghanistan and Syria, should be given relaxations by the task force. Inconclusion, the placement of Pakistan on the task forces’ list cannot be seen as an isolated event separate from western political motivations since the two countries currently blacklisted by them, Iran and North Korea, also happen to be the two countries the west loves to hate.
The writer is Research Associate at MSF