Pakistan seems to have reached a dead-end in geo-economic terms. With the sword of FATF continuing to hang over our heads, the International Monetary Fund (IMF) is clearly dragging its feet on the matter of finalising a programme that we need urgently as our foreign exchange reserves mobilized through short-term loans from friendly countries (Saudi Arabia, UAE and China) of around $ 9 billion in total are depleting fast.
The most intimidating aspect of the current confrontation with India in the wake of Pulwama is its cost in terms of dollars, if the situation is not de-escalated soon. The estimate of such a cost is an enormous $9-12 billion per month (Source: Geo Economics of Pulwama incident and FATF challenges by Dr. Shazia Ghani —SASSI Strategy Paper No. 2). This is definitely an unsustainable cost as our net foreign exchange reserves with the State Bank of Pakistan (SBP) are no more than $ 9. 7 billion and that too not earned but borrowed.
The situation becomes all the more critical when seen in the context of the country’s current economic data: Exports-$23 billion, Imports-$42 billion, Remittances-$19 billion, Fiscal deficit 6% of GDP, Tax-to-GDP ratio-12%, Inflation-8%.
And if this data is analysed against the projections of GDP growth rate by the three major multilateral aid agencies, we seem to be falling off the cliff sooner than later. According to World Economic Outlook report of IMF, Pakistan’s GDP will grow at 2.9% in FY 19 and 2.8% in FY20. Similarly, the World Bank has also projected lower growth trajectory in coming years with GDP growth for FY19 at the rate of 3.4%. Similar projections have been made by the Asian Development Bank and according to its estimates growth would decline to 3.9% in FY19.
This would mean Pakistan’s GDP currently estimated at $320 billion would shrink by 2020 to around $280 billion which would mean our revenue collection ability would decline further even with accelerated efforts to expand the tax base ending next financial year with a fiscal deficit much larger than the current estimate of an unsustainable 6%.
In the meanwhile, the indirect costs like increase in inflation, increase in the discount rates, decline in industrial productivity, decline in exports, deterioration in currency etc. and stagnant inflow of Foreign Direct Investments (FDI) will soon impact adversely on the overall economy as well as economy of the man in the street with possible social upheavals not ruled out as a result.
This is not all. The FATF challenge looks even more ominous. Currently we are ‘grey listed’ and face the imminent danger of getting ‘black listed’ if we do not comply with a long list of almost impossible looking conditions.
Of course, it is not the first time that we find ourselves in the ‘grey list’. We have also been in the ‘black list’. We have come out of these lists in the past as well. But the nature of the challenges today appears to be much more menacing than in the past.
The very governing structure is truly unfriendly. A very hostile United States is the president of FATF represented by Mr. Marshall Billingslea, a serving Assistant Secretary of US Treasury who also heads the office of Terrorist Financing Crimes. Australia which is part of the anti-China (read Pakistan as well) Indo-Pacific alliance is the president of Asia-Pacific Group (APG) and India which has already vowed to isolate Pakistan economically and just a few weeks back had violated our physical sovereignty by sending across the international borders jet fighters and bombed Pakistani territory is the Co-chair of the APG. With such a formidable combination of hostile forces sitting on the judgment one cannot rule out the possibility of getting short shrift—a rigged judgment. The only saving grace in the administrative set up is China which sits on the FATF as its Vice- President represented by Mr. Xiangmin, Director General of the Legal Department at the People’s Bank of China.
Equally worrisome is the fact that the European Commission (EC) has already placed Pakistan in its list of inadequate jurisdiction on Anti-Money Laundering and Counter Terror Financing regimes. If in such a situation we are pushed into the ‘black list’ by the FATF for no genuine fault of us it will unleash serious economic and financial impact down the stream causing immense damage to Pakistan’s economy.
The most obvious result would be cost of doing a financial transaction through established banking/ financial system, increased premium on Pakistani instruments in the international capital markets, and the multilateral financing organisations would add risk premiums on any money borrowed. Black listing will squeeze Pakistan’s economy further and make it harder for the country to meet its mounting foreign financing needs, including potential future borrowings from the IMF. And if we remain in the ‘grey list’ it could lead to a downgrade in Pakistan’s debt ratings, making it more difficult to tap into the international bond markets. Further, it would lead to down grading of Pakistan’s financial viability.
Global Standards on AML/CFT
It would not be out of place to recall here the Global Standards on AML/CFT. The UN Instruments and other relevant international money laundering and terrorist financing terms are:
- The United Nations Conventions/ Resolutions, UN Counter Terrorism Strategy and the FATF Standards;
- The 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances;
- In September 2003 and December 2005, the UN Convention against Transnational Organised Crime and UN Convention against Corruption;
- International Convention for Suppression of the Financing of Terrorism came into force in April 2002;
- In September 2001, the UN Security Council adopted Resolution 1373 through which it imposed certain obligations on Member States, such as the prevention and suppression of the financing of terrorist acts, the criminalization of terrorism related activities and the provision of assistance to carry out those acts, the denial of funding and safe haven to terrorists and the exchange of information to prevent the commission of terrorist acts. The Counter Terrorism Committee (CTC) to monitor the implementation of the resolution was also established;
- The UN Global Counter Terrorism Strategy was adopted by the UNGA on September 8, 2006 comprising Resolution (A/RES/60/288) and a Plan of Action;
- The FATF Standards established in April 1990 on Money Laundering issued a set of 40 Recommendations. The FATF extended its mandate in October 2001 to cover the fight against terrorist financing and issued eight Special Recommendations on combating financing of terrorism;
- Resolution 1617 (2005) of the UNSC and the Annexed Plan of Action of Resolution 60/288 of the UNGA (Sept. 20, 2006), stress the importance of implementation of FATF 40 Recommendations and nine Special Recommendations on terrorist financing. FATF have regional associate groups to ensure compliance;
- The Asia Pacific Group (APG) the group of 41 members concerned with effective implementation of international standards against AML and CTF is the Asia Pacific region is not part of the UN or some other international body. The APG is an independent organization or, more accurately, a task force. It has its own terms of reference and is funded autonomously by its members. The APG is closely aligned with the FATF and ten out of forty- one members are also members of the FATF.
- Legal Systems—Scope of the criminal offence of money laundering (No.1&2); Provisional measures and confiscation (No.3)
- Measures to prevent Money Laundering / Terror Financing—Customer due diligence and record keeping (No.4&12); Reporting of suspicious transaction and compliance (No. 13&16); Other measures to deter money laundering and terrorist financing (No. 17&20); Measures to be taken with respect to countries that do not or insufficiently comply with the FATF Recommendations (No.21&22); Regulations and supervision (No.23&25)
- Institutional and other measures—Competent authorities, their powers and resources (No. 26&32); Transparency of legal persons and arrangements (No. 33&34)
- International Co-operation— Mutual legal assistance and extradition (No. 36&39); Other forms of co-operation (No. 40).
Pakistan Specific Action Plan of FATF
The 10 points of compliance for Pakistan are listed below:
- Adequately demonstrating its proper understanding of TF risks posed by the terrorist groups above, and conducting supervision on risk-sensitive basis;
- Demonstrating that remedial actions and sanctions are applied in cases of AML/CFT violations, and that these actions have an effect on AML/CFT compliance by financial institutions;
- Demonstrating that competent authorities are cooperating and taking action to identify and take enforcement action against illegal money or value transfer services (MVTS);
- Demonstrating that authorities are identifying cash couriers and enforcing controls on illicit movement of currency and understanding the risk of cash couriers being used for TF;
- Improving inter-agency coordination including between provincial and federal authorities on combating TF risks;
- Demonstrating that law enforcement agencies (LEAs) are identifying and investigating the widest range of TF activity and that TF investigation and prosecutions target designated persons and entities, and persons and entities acting on behalf or at the direction of the designated persons or entities;
- Demonstrating that TF prosecutions result in effective, proportionate and dissuasive sanctions and enhancing the capacity and support for prosecutors and judiciary;
- Demonstrating effective implementation of targeted financial sanctions (supported by a comprehensive legal obligation) against all 1267 and 13 73 designated terrorists and those acting for on their behalf, including preventing the raising and moving funds, identifying and freezing assets (movable and immovable), and prohibiting access to funds and financial services;
- Demonstrating enforcement against TFS violations including administrative and criminal penalties and provincial and federal authorities cooperating on enforcement cases;
- Demonstrating that facilities and services owned or controlled by designated persons are deprived of their resources and the usage of resources.