LAHORE: Pakistan's inclusion in Financial Action Task Force (FATF) watch list will certainly lead to more vigil from regulators and financial institutions, which thus means that this action proposed by United States and its European allies will increase the business transaction costs and economic pains of a Nuclear power that has now been pinpointed as a jurisdiction with weak measures to curb money laundering and terrorist financing.
Pakistan has been accused by FATF of being lenient to militant outfits exploiting country's financial system to their advantage, although these groups have been banned and sanctioned by the United Nations.
(Reference: The February 16, 2018 report of FATF)
Likely economic fallout:
Having come under the global scanner now, Pakistan's efforts to improve its image have undoubtedly suffered a major setback, as resultant punitive actions could jack up the cost of doing international and domestic business here.
The FATF decision will hence make borrowing costlier for Pakistan, besides making it much harder for foreign investors and companies to do business in a country where legal risks are bound to be associated with trading activities from now onwards.
A likely decline in foreign transactions and foreign currency inflows may also force some banks international to pull out, as they have been retreating from high-risk countries in recent years after reassessing the risk-reward scenario.
As Pakistan's international banking links now stand endangered in all probability, foreign financial institutions may be wary of transacting with country's banks, and if a need ever arises to raise debt from the international markets in near future, loss of credibility will be the major hurdle for the $300 billion economy to recover and get back on track.
Even FATF was not expecting this decision:
Interestingly, the FATF itself had wrongly predicted on February 16, 2018 that the decision was expected to be given in Pakistan’s favour as the voting process required all members to vote in favour of the review for the resolution to be passed.
The FATF had maintained: "Even if one member opposes the decision, it will not be put into effect. Policy analysts and experts argue that Pakistan is not be dropped into ‘Grey List’ given that Pakistan’s allies are expected to vote against the decision. However, the welcome initiative is Pakistan taking a decision to act against the banned outfits and limit their exposure to financial markets."
Action against Pakistani money launderers is very much on the cards:
Research reveals that Pakistan will now have to step up efforts in pursuing launderers and confiscating their assets to mitigate the significant risks, as was required in January 2018 of Mexico, which faces a significant risk of money laundering, stemming principally from activities most often associated with organized crime, such as drug trafficking, extortion, corruption and tax evasion.
An FATF report of January 12, 2018 has already identified the most common methods of recruitment used by terrorist organizations and terrorist cells, and the costs associated with these different methods and techniques of terrorist recruitment.
Research further shows that till November 2017, the FATF had reviewed over 80 countries and publicly identified 64 of them. Of these 64 nations, not fewer than 52 have since made the necessary reforms required to address their weaknesses on money laundering and terrorist financing fronts and have thus been removed from the scrutiny process.
Since February 2016, countries like Algeria, Angola, Panama, Afghanistan, Bosnia and Herzegovina, Uganda and Haiti are no longer part of the FATF Grey List.
Pakistan has been added yet again in this infamous club after it was removed in 2015, but not before featuring in this notorious list for three years.
The FATF history:
In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering was established by the G-7 Summit that was held in Paris in 1989.
The FATF website states: "The Task Force was given the responsibility of examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering.
In April 1990, less than one year after its creation, the FATF issued a report containing a set of 40 Recommendations, which were intended to provide a comprehensive plan of action needed to fight against money laundering."
FATF Membership:
During 1991 and 1992, the FATF had expanded its membership from the original 16 to 28 members. In 2000, the FATF expanded to 31 members, and has since expanded to its current 37 members.
A few days ago, renowned British news agency "Reuters" had asserted: "The prospect of Pakistan being placed back on a global terrorist financing watch list could endanger its handful of remaining banking links to the outside world, causing real financial pain to the economy just as a general election looms.
Washington and its European allies have co-sponsored a motion calling for the nuclear-armed nation to be placed on a "gray list" of countries deemed to be doing too little to comply with anti-terrorist financing and anti-money laundering regulations, with a decision expected next week when member states of the Financial Action Task Force meet in Paris."
