This explainer, first published on February 21, 2020, when Pakistan originally received a reprieve of four months, is being republished with additional information on October 24, 2020, when Pakistan was given more months on the ‘grey list’ by FATF.
New Delhi: Pakistan may have avoided being bumped upwards into a ‘black list’ by the global terror financing watchdog, but it remains on the ‘grey list’ of countries which have deficiencies in the anti-money laundering and counter terror financing regime.
After a three-day plenary, FATF announced on Friday (October 23) that Pakistan remained on the ‘grey list’ and had time till February 2021 to fully implement the “Action Plan’. Out of the 27 action points, Pakistan has, so far, fully met the standards of 21 points.
Here is a quick overview of the FATF categorisation and Pakistan’s chequered history with the inter-governmental group.
Why was this FATF meeting significant?
From October 21, officials from around 205 countries, jurisdictions and other countries started the first ever virtual FATF plenary meeting for 2020 in Paris. Every year, there are three plenary meetings of the inter-governmental body tasked with rooting out money laundering and terror financing by plugging loops holes in the international financial system.
For India, FATF has become an important measure to put pressure on Pakistan to dismantle the infrastructure that supports cross-border attacks.
The virtual meeting was also taking place after a gap of eight months, as the June plenary was cancelled due to coronavirus pandemic.
What are the ‘black’ and ‘grey’ lists?
These two terms actually do not exist in official FATF terminology. The group does identify “jurisdictions with weak measures” through two public documents issued at the end of the plenary held thrice a year.
The first is the FATF’s “public statement’, that lists two set of countries. The first one which is colloquially known as a ‘black list’, is for “countries or jurisdictions with such serious strategic deficiencies that the FATF calls on its members and non-members to apply counter-measures”. This ‘black list’ category has a small group which is less stringent – and only calls on its members to apply enhanced due diligence measures proportionate to the risks arising from the deficiencies associated with the country”.
The second public document “Improving Global AML/CFT Compliance: On-going process” is the ‘grey list.
These list countries that have a “strategic weakness” in their regime to counter money laundering and terror financing. Once listed as ‘jurisdiction under increased monitoring’ by FATF, they will have to complete an action plan within a certain time period. FATF does not ask its members to take additional “due diligence” measures against the ‘grey list countries”, but encourages states “to take into account the information presented below in their risk analysis”.
Why was Pakistan put on the FATF ‘grey list’?
Pakistan had first figured in a FATF statement after the plenary of February 2008. At that time, FATF had noted Pakistan’s recent progress in adopting anti-money laundering legislation but urged financial institutions to be aware of the “remaining deficiencies” that could constitute a vulnerability in the international financial system.
Pakistan gave a “high level” commitment in June 2010 that it would work with FATF and Asia Pacific Group, the regional FATF-like body, to sort out these differences. But, it continued to not demonstrate enough progress to be taken out of the grey list even in October 2011.
The FATF public statement of February 2012 listed Pakistan among countries who have “Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies”. A senior minister in then Nawaz Sharif government and opposition leader Khawaja Asif described this move as a “black list”.
The FATF’s main concern was that Pakistan did not have appropriate legislation to identify terror financing, as well as, confiscate terrorist assets. Pakistan went out of the Public Statement to the second statement of “Improving public compliance” from June 2014, which noted that the country had made “significant progress”.
Within nine months, Pakistan was “no longer subject to the FATF’s monitoring process under its on-going global AML/CFT compliance process”.
After three years, Pakistan was back on the ‘grey list’ in June 2018. The FATF press release indicated that the ‘action plan’ should largely look at plugging the holes in terror financing and activities of UN-designated terrorists.
The action plan submitted by Pakistan has 27 points, including full implementation of that targeted financial sanctions against all UN-designated terrorists.
Was there politics behind Pakistan going back on the ‘grey list’ in June 2018?
The US had spearheaded the move that led to the FATF plenary to first propose that Pakistan be assigned to the ‘grey list’ in three months.
In the run-up to the June 2018 plenary, Pakistan did take some steps like amending the anti-terrorism act and clamping down on affiliates of Jamaat-ud-Dawa, a UN-designated terror group.
At the same time, JUD leader Hafiz Saeed, who is the key mastermind of the 2008 Mumbai terror attacks, was allowed to enter the political mainstream, with his political wing contesting seats in the parliamentary elections.
While foreign ministries insist that the FATF is a technical body, geo-politics does play a role, with countries using the money laundering watchdog as diplomatic leverage.
“Bottom line is that FATF’s grey listing of Pakistan should not be looked at in isolation but placed in the larger picture of US-Pakistan relations that have had many ups and downs,” asserted an article in Pakistani newspaper Dawn.
In the run-up to the February 2008 decision, the US had weaned Saudi Arabia away, leaving only China and Turkey supporting Pakistan. China eventually withdrew its objection. A few days later, India publicly congratulated China for its election as vice president of FATF, lending credence to the suspicion that a deal had been reached behind closed doors.
What has happened since Pakistan was put on the ‘grey list’ in 2018?
Since June 2018, all the FATF plenaries have retained Pakistan on the grey list. However, it was not enough to be brought out of the ‘grey list’. But, it was sufficient that Pakistan could not be bumped up to the FATF public statement which, with China, Turkey and Malaysia backing Islamabad.
Pakistan raised the pitch that the FATF had been politicised, with Pakistani Prime Minister Imran Khan stating that India wanted to destroy Pakistani economy. China has also stated that there were “political designs” behind “some countries which want to include Pakistan in the blacklist”.
Ahead of the FATF’s October 2019 plenary, the Asia/Pacific Group on Money Laundering, after considering Pakistan’s Mutual Evaluation Report, found critical gaps in Islamabad’s reforms to curb the flow of funds to proscribed terror groups like Jamaat-ud-Dawa and Lashkar-e-Toiba.
Indian defence minister Rajnath Singh had claimed that the FATF would “blacklist Pakistan anytime” – which was seized on by Pakistan’s foreign minister as an example of the politicisation of the body. Since then, statements by Indian political leaders about FATF have been relatively rare.
In October 2019, Pakistan had fully met only five out of the 27 action points. But, it managed to avoid the ‘black list’ and was given a reprieve till February 2020.
Pakistan managed to deliver on 14 out of 27 action points by February this year, which allowed FATF to give it a grace period of four months to fully implement the Action Plan.
With COVID-19 becoming a full-fledged pandemic, the June plenary was cancelled and Pakistan got a reprieve of four months till October. Last month, Pakistan government convened a joint session of parliament and passed over a dozen legislations that would upgrade the country’s legal mechanism to meet FATF standards. At the time of the October 2020 meeting – the first virtual plenary in FATF – Pakistan had complied with 21 out of 27 action points.
Why does Pakistan remain on the grey list? Will it ever be ‘blacklisted’?
It is highly unlikely that Pakistan would ever join North Korea and Iran in the FATF public statement. As evident from the composition of the ‘black list’, the US would have to show a strong push to put Pakistan in the top tier of countries whose financial regimes face isolation from the international system.
Two days before the FATF plenary began, the US Principal Assistant Secretary of State for South and Central Asia, Alice G. Wells had praised Pakistan for convicting Hafiz Saeed and his associate as an important step “in meeting its international commitments to combat terrorist financing”. India had, however, termed the conviction of Saeed as an ‘eyewash’.
With the US currently in the midst of the final leg of a peace deal with the Taliban, Washington may not have been too eager to push Islamabad, especially since Pakistan’s economy was already in deep doldrums.
However, Pakistan, despite support from countries like Turkey, Malaysia and China, had not made enough progress to also exit the grey list, as per various technical evaluations.
However, it has got extensions in the last three plenary meetings in October 2019, February 2020 and October 2020. This is because it managed to steadily increase the number of action plan points that it has fully implemented. “As long as we see a country is progressing in action items, and we have seen progress with Pakistan, we give them a chance to repair the outstanding issues,” FATF president Marcus Pleyer told reporters on October 24.
To exit the ‘grey list’, Pakistan will have to tell the FATF member states that it has completed the Action Plan. Once a FATF onsite investigation team verifies Islamabad’s Action Plan implementation, then the decks will cleared for Pakistan to finally leave the ‘grey list’.