Issue

Context:

India's security agencies had prepared a dossier nailing the culpability of Pakistan in the Pulwama terror strike.

This was presented to the terror financing watchdog, Financial Action Task Force (FATF) to push for Pakistan's inclusion in the FATF's black list.

About:

A delegation of the Asia-Pacific Joint Group (APJG), which is a regional association of the FATF, is scheduled to reach Islamabad, and following a review over the next two days, submit its report to the FATF.

Pakistan has objected to India as being a Co-Chair of APJG and has asked FATF to appoint any other member country as co-chair “to ensure that the review process is fair, unbiased and objective.

Background:

Financial Action Task Force (FATF):

• It is an inter-governmental body established in 1989 on the initiative of the G7 to develop policies to combat money laundering.
• The objectives are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
• It is a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
• It monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally.
• In collaboration with other international stakeholders, the FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.
• Its decision making body, the FATF Plenary, meets three times per year.
• It was not formed as a formal international organization. Rather, the FATF is a task force composed of member governments who agree to fund the FATF on temporary basis with specific goals and projects.
  
  

  Financial Intelligence Unit – India (FIU-IND) It was set by the Government of India as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. It is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. It is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

Analysis

The FATF’s 38 members (36 member jurisdictions and two regional organizations, the European Commission and Gulf Cooperation Council), two observer jurisdictions (Indonesia and Saudi Arabia), and multiple observer organizations (mainly international banks and law enforcement bodies) attend the Plenary.

India is an FATF member; Pakistan is not.

In 2018, FATF approved the nomination for monitoring of Pakistan under its International Cooperation Review Group, commonly known as the ‘grey list’.

The move backed by the US and the UK was passed by the body that works to combat money laundering and terrorist financing after China and the Gulf Cooperation Council withdrew their opposition.

The action plan was forwarded to the International Cooperation Review Group (ICRG) of the Asia Pacific Group (APG).

The ICRG identified four key areas of concerns:

• Deficiencies in supervision of anti-money laundering and counter-terrorism financing regimes.
• Illicit cross-border movement of currency by terror groups.
• Progress in terror financing investigation and prosecution.
• Implementation of the UN Security Council resolutions 1267 and 1373 for curbing terror financing.

In June 2018, Pakistan submitted a 26-point action plan to the FATF, committing to implement it over the next 15 months.

The action plan included a squeeze on the finances of Jamaat-udDawa, Falah-i-Insaniyat, Lashkar-e-Taiba, Jaish-e-Mohammad, Haqqani Network and the Afghan Taliban.

The failure to negotiate the action plan could have led to Pakistan being blacklisted.

In January 2019, the FATF decided to keep Pakistan on the grey list, based on a review that concluded that the country had made “limited progress” in curbing money laundering and terrorism.

Pakistan was on the FATF watch list between 2012 and 2015 as well, but only for money laundering.

Whether Pakistan remains in the grey list or is placed in the black list will be clear by October 2019.

India's stand at the FATF:

India has been an active member in the FATF and in its various sub-groups after 2013 following New Delhi’s effort to introduce changes to the AML/CFT (combat money laundering and terrorist financing) systems and laws.

India has been lobbying hard for the strict monitoring of Pakistan, and highlighting the funding of terrorist activities by that country.

India has in the past provided evidence of the involvement of Pakistani officials in peddling fake currency, and planning attacks on Indian assets on foreign soil.

What happens if Pakistan gets blacklisted

• The FATF black list means the country concerned is "non-cooperative" in the global fight against money laundering and terrorist financing
• Currently, the list is populated by North Korea and Iran.
• If Pakistan lands on the list, FATF members could decide to restrict, target or even prohibit financial transactions with it. This spells serious consequences for Pakistan's financial sector and its economy.
• It may not only negatively impact foreign investor sentiment but also lead to a downgrading of the country by multilateral lenders like the International Monetary Fund (IMF), World Bank, ADB, EU and also a revision in risk rating by Moody's, S&P and Fitch.
• Pakistan’s all-weather allies China and Saudi Arabia have also refused to protect Pakistan at the FATF. The blacklisting will prevent institutions like IMF from financially supporting Pakistan, which is anticipating a financial crisis.

This could become a difficult circumstance for Pakistan given that Pakistan is likely to secure an IMF bailout soon to stave off a balance of payment crisis and help shore up its economy - the country's foreign currency reserves have reportedly dwindled to around $8 billion, just enough to cover about two months of imports. Landing on the FATF black list might jeopardize such plans.

Learning Aid

Practice Question:

Pakistan has revised its terrorism financing risk assessment; however, it does not demonstrate a proper understanding of the terrorism financing risks posed by Da'esh, Al Qaeda and the related terrorist organizations that operate from its soil. How far would the FATF framework help in taming Pakistan? Critically evaluate.