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The FATF challenge

The official version is out. Pakistan is set to be put on the ‘grey list’ of the Financial Action Task Force (FATF) in June. “Pakistan will be assigned to the ‘grey list’ in June, once an Action Plan has been mutually negotiated. The FATF demarcates the countries in ‘black’ list, as those who are non-cooperative. “The deliberations within FATF are confidential, so I will not be able to share details,” the government spokesman told the media. He admitted that FATF has highlighted certain deficiencies in the Anti-Money Laundering and Countering of Terrorist Financing (AML/CFT) framework of Pakistan.

“The government of Pakistan, over the last few years, has taken a number of measures to address these issues, including through enactment of legislation, issuance of regulations and guidelines by SBP and SECP to the financial sector, establishment of the Financial Monitoring Unit and implementation of UNSC 1267 sanctions on the entities of concern (JuD/FIF). We will take further actions for addressing any remaining deficiencies,” the spokesman added.

However, the spokesman vigorously denied any chance of Pakistan making it to the ‘black list’ of FATF. “There is no question of inclusion of Pakistan in the black list as this is meant for countries not cooperating while Pakistan is actively cooperating with the Task Force,” the spokesman told the weekly media briefing. The ‘black list’, according to FATF, is for countries which it judges to be non-co-operative in the global fight against money laundering and terrorist financing, calling them “Non-Co-operative Countries or Territories” (NCCTs). It’s, however, business as usual. The sluggish real estate market is picking up while the stock exchange has staged a comeback.

All compliance regulations exercised and advocated by FATF are legitimate and essential to stiffen cash inflow which sustain terrorism, money laundering, tax evasion and all similar financial irregularities. But, FATF application on countries is selective. There are two parties seamlessly looped in the financial irregularities and both are severely and jointly partners in this regime of irregularities. The primary respondent is the country where the act is perpetuated and the secondary respondent is the country which is its main beneficiary. In the primary category are politically weaker countries while the secondary category hosts the effluent countries with political and economic might.

The British and the Arabian Gulf real estate sectors will collapse if FATF is sincerely applied on money laundering and tax evasion and so will the financial industry of many of these effluent countries. To make FATF sincerely workable it has to be equally applied on both perpetuators and beneficiaries.

Same is the case with the global ranking of Transparency International where the poorer counties are ranked as the most corrupt ones while the effluent countries, where the ill-gotten money is parked in banks and real estate investments, are condoned.

But, perhaps the true and sincere application of FATF is not the intention of the world powers. The reality on ground makes it apparent that it is more of an arm-twisting exercise by bigger powers for political gains. It is not a coincidence that Pakistan was roped into FAFT soon after it refused to act on the US policies on Afghanistan. Unless there is a fair world order, schemes such as FATF, are not expected to yield the required results as intentions are suspicious.

The silver-lining emerging out of Pakistan being put on grey list is that it will compel the regulators in Pakistan to enforce the much-needed financial surveillance and controls on money transactions in Pakistan and overseas. The fear however remains that it will stiffen the legitimate business and transaction for the law-abiding citizen while the mighty ones will still find loopholes and influence their way out.

The second advantage Pakistan could derive from the situation is that it works towards becoming self-sufficient insofar as in its defence and commercial needs are concerned. There are worries that Pakistan may face the risks of downgrade from multilateral lenders such as the IMF, the World Bank, ADB and a reduction in risk-rating by Moody’s, S&P and Fitch. The situation, therefore, requires Pakistan to enforce good governance as its lack or absence is far more threatening to the economy and sovereignty of the country than FATF’s adverse actions.

There are some positive indicators to capitalize on. US credit rating agency Moody’s Investors Service on Wednesday maintained B3 stable rating of Pakistan’s banking system considering steady fund inflows and growing economy, but it said high exposure to government securities poses ‘the biggest challenge’ to the sector.

“The outlook for banks in Pakistan (B3 stable) is stable over the next 12-18 months… driven by an accelerating economy and stable funding, while also taking into account the banks’ large holdings of low-rated government bonds, modest capital levels and high asset risks,” Moody’s said in a statement.

Moody’s has been maintaining a stable outlook on the banking system since November 2015. Constantinos Kypreos, a Moody’s senior vice president, said the economic growth – boosted by domestic demand and China-funded infrastructure projects – will stimulate lending and support a slight improvement in asset quality over the next 12-18 months. “And, despite margin pressure, the banks’ profitability should remain flat. Stable funding from customer deposits and high liquidity levels represent further strengths,” Kypreos said.

The credit rating agency projected real GDP growth at 5.5 percent for the fiscal year of 2017/18 and 5.6 percent for FY2019.

“Infrastructure investment and solid domestic demand will prove to be the main drivers of economic growth and will fuel lending growth of 12-15 percent for 2018,” it said. “The economy, however, remains susceptible to political instability and a deterioration in domestic security,” according to the rating agency.

There are also some negative indicators to look at. Pakistan’s economic woes have worsened five months before national polls, according to a report by Bloomberg. China will likely be willing to offer more assistance to help its neighbour improve economic conditions, but the question is how to find an effective way, reports Global Times on Wednesday.

Pakistan’s trade deficits are hitting records while its foreign exchange reserves continue to fall, Bloomberg reported. Pakistan’s economy is facing chronic problems for many reasons, but the fact that Pakistan’s GDP grew 5.3 percent in fiscal 2017 – the fastest pace in a decade – can’t be ignored.

The most significant aspect is that Pakistan must not slack its focus on the China Pakistan Economic Corridor (CPEC), a driving force for Pakistan’s economic growth. The first phase of the CPEC concentrated on infrastructure projects, the second part should focus on setting up special economic zones and establishing mutual connectivity to support economic integration.

Pakistan’s strategic location is a major attraction for companies to invest in.

Improvements in Pakistan’s trade-related sectors, such as warehousing, logistics, integrated services and e-commerce, can turn the nation into a new transshipment point for exports to China. Efforts to upgrade a bilateral free trade agreement will also help realize economic potential.

The way forward for Pakistan in these challenging times is that it must sincerely program and implement FAFT for its own good, keep a focus on the economic opportunities, enforce good governance and should not succumb to international pressures which are not in line with Pakistan’s interests. More importantly, Pakistan must keep itself out of wars which are not its wars.

Farhat Ali, "The FATF challenge," Business Recorder. 2018-03-03.
Keywords: Terrorist financing , Financial sector , Tax evasion , Legitimate business , Growing economy , Liquidity levels , Pakistan , China , IMF , GDP , ADB , FAFT , CFT , CPEC , AML