With Pakistan set to be placed on the inter-governmental Financial Action Task Force’s “grey” list this June, following a round of farcical diplomacy in Paris last month, the country appears to be edging toward global banking isolation.
Pakistan temporarily avoided being put on the grey list after failing, at the Paris meeting, to present its proposal to counter terror financing and money laundering. But Islamabad’s proposal will be scrutinized in a June meeting, and failing to satisfy the FATF could in fact result in Pakistan being put on the black list, alongside only two other offenders: Iran and North Korea.
Pakistan hasn’t taken the necessary measures, as per the FATF’s instructions, to curb money laundering or combat financing for terrorism – the two domains that the watchdog reviews.
The FATF has “40 plus 9” recommendations for all states – 40 pre-date 9/11; nine came after it. Pakistan falls short on many of those.
“These are crystal clear instructions sent out to all the countries. Pakistan has been failing to fulfill its requirements,” says economist and columnist Farrukh Saleem, who is executive director of the Center for Research and Security Studies (CRSS) in Islamabad.
The FATF judges states on three levels: legislation, institutional capacity and conviction. Speaking to Asia Times, Saleem said Pakistan hasn’t been doing enough of any of those fronts.
“As far as the repercussions [for being put on the FATF grey list] are concerned, no country in the world can live in isolation – it’s a global village now,” he said. “Our imports are worth approximately US$55 billion, exports worth US$20 billion, with around US$20 billion worth of remittances. So roughly there’s US$100 billion worth of business that involves Pakistan – and all of this is through banking channels.
“Once a country is on the grey list, all banking channels are put under scrutiny. This would result in constant delays in transactions. And there is a chance that many banks would simply refuse to do business in Pakistan.”
Last year, Pakistan’s Habib Bank was ordered out of the US, and fined US$225 million, after flaws were found in its systems that “opened the door to the financing of terror.”
The US Department of Financial Services said the bank had failed to take corrective measures against flaws that had been identified “more than a decade ago.” It was also found to have engaged in transactions with the al-Qaeda linked Saudi bank Al Rajhi.
“There were payments originating in Saudi Arabia that came to Pakistan, but there was no proper documentation,” Pakistan’s former Caretaker Finance Minister, Salman Shah, told Asia Times. “The current banking mechanisms in place in Pakistan are enabling their usage for terrorists, money-laundering [and] narcotics smuggling, which has prompted the FATF grey-listing.”
Pakistan was last put on the grey list from 2012 to 2015. The renewed scrutiny of its banks has largely come from the US, with the Trump regime having regularly called Islamabad out for “providing safe havens” to terrorist groups.
Farrukh Saleem says the financial backlash following an FATF grey-listing this time round would be a lot different. “It’s not the same world as it was 2012-2015,” he maintains. “Considering the penalty given to HBL, many financial institutions would be wary of investing in Pakistan. They won’t be able to bare the economic backlash of similar penalties, if all they’re making is up to US$10-20 million in the country.”
Salman Shah says the banking flaws in Pakistan have been well-exposed by the FATF report.
“The FATF has underscored the flaws in our banking system that need to be addressed – that should be the dominant feature of the proposal [that Pakistan submits in June]. We need to make our banking system robust enough so that money laundering and undocumented transactions are curtailed,” he said.
“We need initiatives like Know Your Customer, wherein the banks are completely aware of all transactions that go on through it, and make sure they are all legitimate.”
“These are crystal clear instructions sent out to all the countries. Pakistan has been failing to fulfill its requirements”
However, one major stumbling block in taking action against financing for terror groups remains: the Pakistan Army’s backing of jihadist groups as proxies. Indeed, the military establishment currently is orchestrating the ‘mainstreaming’ of many militant groups as it strives to keep a check on the civilian leadership.
Ayesha Siddiqa, a military scientist and the author of ‘Military Inc.: Inside Pakistan’s Military Economy,’ says the FATF’s actions mightn’t suffice in leading the Army to reconsider its support for militant groups.
“They should, but the sanctions never seem to work [on them],” she told Asia Times. “If these policies persist Pakistan can easily be blacklisted, and the sanctions that follow would be worse than those against North Korea and Iran.”
Siddiqa says that US threatening to curtain military aid mightn’t work either. “Pakistan doesn’t really depend on US equipment now. The main issue is economic funding from multilateral aid donors.”
Ahead of the FATF meeting last month, Pakistan labelled as “terrorist” all groups sanctioned as such by the UN.
Salman Shah says it should completely eliminate their presence and clamp down on their economic activities to make the label credible. “The terror groups that have bank accounts, and are raising funds through banking transactions as well, need to be strictly dealt with,” he said.
“If these actions aren’t taken, then the international banking system will boycott Pakistan and that would mean that trade transactions and investment transactions will be jeopardized.”