Pakistan is on an FATF grey list of nations prone to terror financing and money laundering. Image: Facebook

PESHAWAR  Pakistan’s failure to tackle terror financing and money laundering has cost the nation an estimated US$38 billion since 2008, new independent research reveals. The losses have mounted while the country was on an international finance watchdog’s “grey” list.

The Paris-based Financial Action Task Force (FATF) sets standards and promotes legal, regulatory and operational measures to fight money laundering, terrorist financing and other threats to the international financial system.

Countries on the list may face economic sanctions from institutions like the International Monetary Fund (IMF) and World Bank and suffer sanctions and other adverse effects on trade.

Pakistan’s losses are set to mount at a time the cash-strapped nation can least afford it, with public debt high and rising at 87% of GDP in 2019-20 and external debt servicing charges alone of $11.9 billion over the same period.

The country’s total external debt and liabilities rose to $113.8 billion in fiscal year 2020 from $106.3 billion in 2019, a debt load that has Islamabad seeking debt relief from China and G20 nations. 

Last week, FATF decided to keep Pakistan on its grey list pending the watchdog’s next session in June.

Pakistan’s compliance on three of 27 points was found unsatisfactory by the watchdog’s virtual session in Paris, though the country had improved over last year when it was deficient on six points.

The FATF website points first to Pakistan’s inability to investigate and prosecute target persons and entities acting on behalf of designated persons or entities under terrorism financing laws.

Secondly, terror financing prosecutions did not show effective, proportionate and dissuasive sanctions. Thirdly was Pakistan’s judged failure to implement targeted financial sanctions against terrorists and their collaborators as designated under UN Security Council resolutions 1267 and 1373.

Founder of Lashkar-e-Taiba (LeT), Hafiz Saeed addresses a rally during a protest in Lahore on May 25, 2012, against the Pakistani government’s plan to reopen NATO supply routes to Afghanistan. Photo: Arif Ali/AFP

Pakistan took some drastic actions after June 2018 when the FATF first grey-listed it. These included amendments to the Anti-Terrorism Act, Limited Liability Partnership Bill, Anti-Money Laundering Bills, freezing of funds and prosecution of declared terrorist financers including Lashkar-e-Taiba’s founder Hafiz Saeed and his aides.

Several non-governmental organizations (NGOs) and non-profit organizations (NPOs) suspected of having links with terror organizations have also been shut down.

However, FATF’s powerful members, including France, the US, India and several European countries, remain skeptical of Pakistan’s efforts, particularly on its perceived as half-hearted restrictions on declared terrorists and those aiding and abating terrorism and facilitating terrorist finances.

These FATF members have voiced their misgivings on several occasions about Pakistan’s intent to cut off terror financing and remove gaps in its Anti-Terrorist Financing (ATF) and Anti-Money Laundering (AML) legislation.

The cost of this perceived negligence has now been quantified in a study conducted by Naafey Sardar, a senior research associate and faculty member at Texas A&M University-San Antonio. Sardar’s research has changed the FATF-related discourse in Pakistan.

His research claims that the country has suffered billions in losses by landing on the FATF’s grey list three times since 2008. The Islamabad-based independent think-tank, Tabadlab published the research paper “Bearing the Cost of Global Politics” on its website last week.

Sardar told Asia Times the report’s findings were “indisputable.”

“As for the analysis, I can confirm it is authentic, and in fact relies on a robust econometric methodology that has been used abundantly in the economics literature to evaluate the impact of different kinds of interventions,” he said.

“The cumulative loss to GDP between 2008 and 2019 is approximately $38 billion… The variables like GDP, FDI, consumption and exports are the ones that are most likely to be affected by FATF, which is why they’ve been considered.”

A money changer counts Pakistani Rupee notes in Karachi in a file photo. Photo: Agencies

However, Sardar doubted that the designation had much impact on other economic variables such as overall taxes, savings, local investment, imports and aggregate price levels, all of which could amplify the quantum of economic losses if impacted.

“I don’t see the tax base or price level being affected by FATF, which is why they haven’t been covered in the paper,” he said.

The preamble of the report says it leveraged the “synthetic control method” used in the famous research work “the Economic Costs of Conflict: A Case Study of the Basque Country” published in 2003 by Alberto Abadie and Javier Gardeazabal.

Sardar says he used this method to trace the economic effects of Pakistan’s placement on the FATF grey list and to quantify how Pakistan’s economy would have likely performed in the absence of FATF interventions.

The results suggest that FATF grey-listing from 2008 to 2019 likely caused cumulative real GDP losses of about $38 billion.

The paper shows that the biggest hit came in household and government consumption expenditures, which experienced a drop of 58%.

The research paper also shows that when Pakistan is theoretically removed from the grey list, the economy starts to revive. This is evident from the rise in GDP in 2017 and 2018, a period when the country was not on the FATF’s list.

“Exports and inward foreign direct investment are also partially responsible for this decline in GDP with associated cumulative losses of $4.5 billion and $3.6 billion respectively. These results point to the significant negative consequences associated with FATF grey-listing,” he said.

Sardar said successive Pakistan governments have realized the economic implications of FATF listing.

Pakistan’s Foreign Minister Shah Mahmood Qureshi at a protest against India’s move to scrap the semi-autonomous status of Kashmir on August 05, 2020, in Islamabad, Pakistan. Photo: AFP/Muhammed Semih Ugurlu/Anadolu Agency

“Based on Foreign Minister Shah Mahmood Qureshi’s interview with Khaleej Times, it seems that the Foreign Office has evaluated the impact of FATF grey-listing on the macroeconomy, so it hasn’t been ignored.”

Qureshi’s statement, made in 2019, indicated that the government knew that FATF designation hits various macroeconomic variables.

Qureshi had claimed that the South Asian country could suffer $10 billion in losses annually if it remained on the grey list. The foreign minister also disclosed that the Foreign Office was even calculating the annual losses in case the FATF fully blacklists the country, as rival India is currently lobbying for.

Over the years, though, government officials have downplayed FATF designation, counting instead on diplomatic allies like China, Malaysia and Turkey for support against India’s diplomatic maneuvering on the issue. But this strategy has done little to none to get Pakistan removed from the list.

The FATF currently blacklists only North Korea and Iran and has recently added Senegal, Morocco, Burkina Faso and Caymans to its grey list, which has increased to 19 countries. Pakistan has been on the FATF’s grey list since June 2018 and it’s not clear to most it will be removed anytime soon.

Meanwhile, the multi-billion-dollar losses to the Pakistani economy and people continue to mount.