In the global fight against financial crime, Pakistan faces complex challenges. It is not the first time that Pakistan has been placed on the grey list. In 2008 and thereafter from 2012 to 2015 Pakistan has been grey listed. In June 2018, Pakistan was again placed under the watch-list due to the gaps in its Anti Money Laundering (AML)/Counter Terrorist Financing (CTF) compliance regimes. Pakistan – as a member of the Asia Pacific Group on money laundering (APG) – has demonstrated that it takes financial crime seriously and is committed to implementing the Financial Action Task Force (FATF) 27-point plan.
Money laundering, financing of terrorism and the financing of proliferation of Weapons of Mass Destruction (WMD) are grave menaces to world’s security and the integrity of the financial institutions. To manage the growing concerns of money laundering, the G-7 summit established the Financial Action Task Force in 1989. FATF is an inter-governmental and independent body with key responsibility for developing worldwide standards to combat money laundering, financing of terrorism and financing of proliferation of WMD. The mandate of the FATF is to devise standards and ensure effective implementation of legal, regulatory and operational measures for the above-mentioned financial perils and to safeguard the integrity of the international financial channels and systems.
FATF has formulated a group of 40 recommendations, which became international standards on AML and CFT. Over time, these recommendations have been and will continue to be updated. The recommendations enumerate the essential measures that countries should take to:
- Identify the risks and develop policies and domestic coordination;
- Pursue money laundering, terrorist financing and the financing of proliferation;
- Apply preventive measures for the financial sector and other designated sectors;
- Establish powers and responsibilities for the competent authorities (e.g., investigative, law enforcement and supervisory authorities/including National Accountability Bureau, Financial Intelligence Unit, National Counter Terrorism Authority, etc.) and other institutional measures;
- Enhance the transparency and availability of beneficial ownership information of legal persons and arrangements and facilitate international cooperation.
FATF evaluates a country’s performance supported by its assessment methodology that covers:
- Technical compliance, which is about legal and institutional framework and the powers and procedures of the competent authorities, and
- Effectiveness assessment, which is about the extent to which the legal and institutional framework is producing the expected results.
It is essential that banks should consider three things — effectiveness, efficiency and explainability. The questions that these institutions should ask themselves are as follows: Firstly, do they have effective and proven capabilities in stopping the organization from processing an illegal transaction or onboarding a customer/counterparty it shouldn’t? Secondly, are they efficient in stopping financial crime without compromising the customer experience? False positive reduction (FPR) is one of the biggest challenges we see in the industry today. Organizations must be careful not to implement and configure a solution on day one and then simply leave it to run. Just like a musical instrument needs tuning, any financial crime screening engine must be continuously fine-tuned to suit the organization’s specific regulatory obligations, risk appetite, local cultural nuances and constant regulatory changes.
Pakistan’s journey has been challenging, but the dedication of the community to implement change driven by persistent regulator should certainly help in moving the direction for getting off the FATF monitored list. Having said that, State Bank of Pakistan (SBP) has been very proactive and has been at the forefront of setting international guidelines and regulations to make sure its member banks are adhering to prescribed compliance standards. Pakistan, being an export hub, the banking relations must be maintained globally and multiple big regional banks have established international operations, making it mandatory for them to suit both domestic and international regulations.