The Financial Action Task Force (FATF) is an intergovernmental body that promulgates financial standards to combat money laundering and terrorist financing. When FATF member nations are non-compliant, they are labeled as high risk and can be placed on a ‘Grey or Black’ list, which leads to severe economic consequences as a result of reduced foreign direct investments and limited access to international financial institutions. The FATF Grey-listed Pakistan in June 2018 and mandated a significant list of corrective actions. Media reports claim that Pakistan has now addressed 14 out of 27 FATF action items so far.
Pakistan was criticized for weak anti-money laundering (AML) and the ‘combating the financing of terrorism’ (CFT) regulations. The Federal Board of Revenue (FBR) is implementing compliance rules to control the movement of illicit proceeds in real estate, gems and jewelry (luxury items) transactions. These transactions are attractive to criminals because few anti-money laundering rules, policies or procedures exist governing these assets worldwide.
An Accuity report states that money laundering through real estate, estimated at $1.6 trillion a year, is becoming a challenge for the entire world. In most jurisdictions, real estate buyers are exempt from due diligence and regulatory reporting. For example in the UK, any foreign company can purchase property without having a domestic presence in the country. Australia also exempts real estate agents and lawyers from reporting requirements. Similarly in Canada, watchdog Transparency International reported that companies with no known beneficial ownership bought more than 50,000 houses in greater Toronto. In Canada, more than $20 billion has been used to purchase real estate assets that were not subject to pre-screening for money laundering.
Furthermore, it has become common practice for influential politicians, bureaucrats, army officials and organized crimes syndicates to own foreign properties through overseas tax havens and shell companies. The release of the ‘Panama Papers’ in 2016 disclosed billions of dollars of properties secretly owned by wealthy individuals through offshore companies around the world. Schemes and names uncovered in the Panama Papers literally shocked the world and proved that existing rules and regulation were inadequate to combat international money laundering.
Part of the problem lies in non-existent or minimal reporting requirements for suspicious transactions
Part of the problem lies in non-existent or minimal reporting requirements for suspicious transactions. According to a National Crimes Agency report 2018, 4,639,380 Suspicious Activity Reports were received, while only 710 of these reports were received from real estate agents; representing0.15% of all reports for 2018.In 2016, the United States took the lead by issuing a Geographic Targeting Order that discouraging any property purchases over$300,000 if cash or crypto currency is used and further restricted real estate purchases by shell companies. These step shave reduced cash purchases by up to 70 percent so far. The United Kingdom has also enacted regulations requiring real estate agents to perform ‘know your customer’ (KYC) due diligence on their customers. Canada now also requires real estate brokers to report all cash transactions over $10,000 Canadian dollars. Many other countries are introducing strict regulations to monitor these types of transactions, while Pakistan’s efforts are still a work in progress.
In October 2019, the FATF’s regional compliance body, the Asia Pacific Group, issued a Mutual Evaluation Report about Pakistan. The Report states that: illicit funds in Pakistan are generally laundered through domestic real estate, precious gems, jewelry or the financial sector. While explaining real estate transactions, Pakistani authorities informed the assessment team that some provinces sought to regulate the real estate sector but they could not provide accurate details regarding the size or composition of real estate transactions. Another interesting fact highlighted in the Report was that the Federation of Realtors of Pakistan is a Self-Regulating Body (SRB) and real estate agents are not required to join the Federation or report their transactions. Finally, the Report notes that the lack of specific information about Pakistan’s 50,000 precious metals and stones dealers, who represent annual trade volumes of $22.1million USD. Currently, there are no licensing requirements to engage in this business. This Report concludes that supervisory and regulatory frameworks are needed to govern these sectors. These short comings are very serious and demonstrate the challenges we face to fully implement FATF, AML and CFT regulations in Pakistan.
Our country continues to suffer as a result of these deficiencies. While Pakistan did introduce guidelines for real estate agents in 2018, they were not comprehensive or in line with International standards and therefore cannot be enforced or effective. At this stage, we are still debating whether to form a real estate regulatory authority with sufficient power and resources to effectively regulate the real estate industry.
How can we conform to FATF standards and unlock our economy and local markets for international financial transactions to benefit all Pakistani citizens if:
1. We still don’t have sufficient checks and balances to regulate financial transactions for luxury items including gems and jewelry?
2. There are no ‘best practice’ compliance reporting requirements for real estate professionals or lawyers?
3. We haven’t enacted sufficient controls and pre-screening requirements to regulate ‘political persons’ who buy real estate or other luxury items?
Furthermore, Pakistan’s overall number of suspicious transaction reports is too low. In 2018, the total number reported by financial institutions was 8,708. By the end of September 2019, this number had risen to 14,545. However, these suspicious transactions only include those reported by financial institutions. Since luxury item businesses operate without active regulations, their activities remain unchecked. The FATF’s Mutual Evaluation Report has also challenged Imran Khan’s high profile policy claims about success against corruption. The Report noted the lack of evidence in targeting money laundering associated with corruption.
How can we convince the FATF to remove Pakistan’s harmful Grey list status? We still have time for corrective actions but the only way forward for us to implement the FATF recommendations in letter and spirit. Furthermore, we need a skilled workforce with focused training for our Financial Monitoring Unit as well as other law enforcement agency personnel who are engaged in Financial Crimes Investigations. A U.S State Department report highlighted Pakistan’s lack of skilled human resources. At various international forums, Pakistan’s Prime Minster has confessed that we lack skilled staff to investigate white-collar crimes. It is a fact that without a skilled workforce we cannot eradicate this curse from Pakistan.
Unrestricted access to international financial institutions and markets is the lifeblood of our economy. But can Pakistan conform to international standards to combat illicit flows of criminal proceeds and money laundering? It’s a critical challenge for the welfare of our nation. We need strong, ethical leaders to combat corruption, modernize compliance regulations, and train financial professionals and regulators. We must achieve FATF standards and elevate our institutions to gain full access to global capital flows that will unleash our economy to improve the lives of all Pakistanis.
The writer is a corporate lawyer based in USA who is a subject matter expert in AML-CFT and Sanctions Compliances