lang="en-US"> FATF Procedure and its Application on Pakistan 2021
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FINANCIAL ACTION TASK FORCE PROCEDURES AND APPLICATION ON PAKISTAN

FATF (Financial Action Task Force) is an inter-governmental body established in 1989 for preventing money laundering however, subsequent to 9/11 it expands its activities to counter terrorist financing, and further in April 2012 it added efforts to counter the financing of proliferation of weapons of mass destruction too. 

It operates to assess the level of risk of such illegal activities existed in countries. Its assessing bodies are FATA, FATF Style Regional Bodies (FSRBs) and International Financial Institutions IFIs. There are 09 FSRBs and 02 IFIs namely:

FATF STYLE REGIONAL BODIES (FSRBs)

  • APG – Asia/Pacific Group on Money Laundering (Dealing in the matter of Pakistan)
  • CFATF – Caribbean Financial Action Task Force
  • MONEYVAL – Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism
  • EAG – Eurasian Group
  • ESAAMLG – Eastern and Southern Africa Anti-Money Laundering Group
  • GAFILAT – Financial Action Task Force of Latin America
  • GIABA – Inter Governmental Action Group against Money Laundering in West Africa
  • MENAFATF – Middle East and North Africa Financial Action Task Force
  • GABAC – Task Force on Money Laundering in Central Africa

 

INTERNATIONAL FINANCIAL INSTITUTIONS (IFIs)

  • IMF – International Monetary Fund
  • WORLD BANK

COMPLIANCE STATUS

Till today, FATF has issued 49 recommendations for compliance, and measures the status of compliance based on four level of compliance i.e. “compliant”, “largely compliant”, “partially compliant”, and “non-Compliant”. In rare circumstances “not applicable” is also used. Where a country has significant deficiencies in its compliance status, the follow-up will be made as enhanced (expedite) follow-up and country may either be identified as in grey list or blacklist based on the significance of non-compliance and attitude of the country towards compliance.

PAKISTAN PRESENT STATUS OF COMPLIANCE

Pakistan was first reviewed in 2009 and results were devastated. However second review was carried in October, 2018 for its status of compliance. The results of assessment were not encouraging and Pakistan has majority of partially complied recommendations. Exact results of compliance with 40 FATF recommendations were as follows:

  • Complied                            01
  • Largely complied               09
  • Partially complied             26
  • Non complied                    04

 

Noncompliance were identified in respect of recommendations

  • R 22       (DNFBPs Customer due diligence),
  • R 25       (Transparency & Beneficial ownership of legal arrangements),
  • R 28       (Regulation and supervision of DNFBPs), and
  • R 38       (Mutual legal assistance freezing and confiscation)

 

Under 26 partially complied recommendation there were two crucial recommendation that are mandatorily required to be complied that are:

  • R 10       (Customer due diligence)
  • R 20       (Reporting of suspicious transactions)

As result of review, Pakistan has got total 30 PC and NC, and the effectiveness rating were “Low” for 10 out of 11 matters. One “Moderate” rating was given in respect of international cooperation only. Therefore it has been listed in grey list and recommended for enhanced follow up.

Total 12 required priority actions were identified and that are as follows:

  • Pakistan should assess and understand its Money Laundering / Terrorist Financing risks including transnational risks and risks associated with terrorist groups operating in Pakistan such as Da’esh, Al-Qaida, Jaish e Muhammad, Flah-e-Insaniat Foundation (by Jamat u Dawa), Lashkar-e-Taiba, Harakat al-Nujaba.
  • Pakistan must enhance the use of financial intelligence in Money Laundering / Terrorist Financing and predicate crime cases, particularly the use of financial intelligence to target terrorist groups and higher risk predicate crimes.
  • It must enhance the use of the money laundering offence commensurate with Pakistan’s Money Laundering risks. This includes increasing the technical and operational capacity investigators, prosecutors, judges and other.
  • Pakistan should improve asset confiscation commensurate with Pakistan’s Money Laundering / Terrorist Financing risks including cross-border currency.
  • It must enhance the use of the Terrorist Financing offence commensurate with Pakistan’s Terrorist Financing risks, particularly the active targeting of terrorist groups operating in Pakistan.
  • It must address technical deficiencies in Pakistan’s legal framework for implementing TFS (Targeted Financial Sanctions) for terrorism / Terrorist Financing without delay, improve implementation by all FIs (Financial Institutions) and DNFBPs (Designated Non-Financial Business or Profession) including in relations to persons.
  • Address technical deficiencies in Pakistan’s compliance with R.8 (Intense monitoring of NPOs with higher risk).
  • Address technical deficiencies in Pakistan’s legal framework for implementing TFS for PF (Proliferation Financing) and expand the work of the CRMC (Compliance Risk Management Committee) to support implementation by FIs and DNFBPs and monitoring of compliance by SBP and SECP.
  • Supervisor should issue revised AML/CFT regulations to rectify remaining technical deficiencies including extending specific AML/CFT obligations to CDNS (Central Directorate of National Savings), Pakistan Post, and DNFBPs, and provide further guidance to regulatory entities on the relatively newer requirements.
  • Due to the significant Money Laundering / Terrorist Financing risks posed by hawala / hundi, Pakistan should enhance enforcement actions against hawala / hundi under the Foreign Exchange Regulation Act 1947.
  • Pakistan should assess the ML and TF risks for all types of legal persons and legal arrangements
  • Continue to improve Pakistan’s ability to consistently provide and seek timely MLA (Mutual Legal Assistance). This should include addressing hurdles to MLA under the ATA (Anti-Terrorism Act), NAO (National Accountability Ordinance) and AMLA (Anti Money Laundering Act) or enacting a standalone MLA law, and increase LEA (Law Enforcement Authorities) capacity.

After review, first follow up review was carried in August, 2020 where Pakistan requested re rating for recommendation 1 (Assessing risk & applying risk based approach), recommendation 6 (Targeted financial sanctions terrorism & terrorist financing), and recommendation 29 (Financial intelligence units).

Pakistan has also raised a major disagreement with the process, analysis and rating for Recommendation 6 therefore, it remains disputed. Pakistan has been re ranked for Recommendation 29 whereas, little progress was shown in respect of Recommendation 1 therefore no re ranking was made for Recommendation 1.

Under first review Pakistan has made progress in approximately every recommendation however, the progress were not enough for re rating. Only status of one recommendation was re rated.

Second follow up review was made in February, 2021.  In this follow up review Pakistan has been able to address it deficiencies and nearly manage to get required number of compliance however, due to three following major issues it still remained under the list of enhanced follow up. Required compliances are:

  • Demonstrating that terrorist financing investigations and prosecutions target persons and entities acting on behalf or at the direction of the designated persons or entities;
  • Demonstrating that terrorist financing prosecutions result in effective, proportionate and dissuasive sanctions; and
  • Demonstrating effective implementation of targeted financial sanctions against all 1,267 and 1,373 designated terrorists, specifically those acting for or on their behalf.

It is expected from Pakistan that it shall comply with these remaining issues in its upcoming follow up review in June, 2021.

CURRENT PROCEDURE OF ASSESSMENT

Initially FATF / FSRB Secretariat or IFI contact point(s) engage with appointed coordinating person from assessed country and make early engagement with higher level authorities to obtain support for the entirety of the process.  

Assessing bodies agree timeline for evaluation, agree milestones to achieve, and relevant responsibilities of assessing bodies as well of the country being assessed.

Timeline agreed are extendable to two months for events and on-site visits but such extension must not impact the plenary discussion date therefore, extension may require earlier start of the evaluation process. Therefore, the broad timeline of the evaluation is agreed at least 14 months before the plenary discussion.

After agreement of timeline the assessment team, supported by the secretariat, conducts a desk-based review for technical compliance and a draft of technical compliance annexure which is provided before onsite visit to the country being assessed.

The country being assessed provides information to assessing body which should only take into account relevant laws, regulations or other AML/CFT measures that are in force and effective at that time, or will be in force and effect by the end of the date of on-site visit.

Other countries which are FATF and FSRB members are invited to provide information on their experience of international co-operation with the country being evaluated, or any other AML/CFT issues that they would like to see raised and discussed during the on-site visit.

Based on preliminary review assessing team may identify specific areas which it would pay more attention to during the on-site visit and in the MER (Mutual Evaluation Report).

The team consults the assessed country for the matters identified, and send the report to the reviewers and to the assessed country.

After preparatory assessment an initial internal preparatory meeting was held during on-site visit. The assessing team meets with representatives of the assessed country, the private sector and other relevant non-government bodies and persons to carry country’s national risk assessment.

The assessors work on the draft MER ensuring that all the major issues that arose during the evaluation are noted in the report, and discusses and agrees ratings and key recommendations.

After on-site visit the draft MER will be sent to the assessed country, which should have at least 4 weeks to review and provide its comments on it to the assessment team.

On receipt of the assessed country’s comments, the assessment team reviews these comments and make further amendments to the draft MER and begin drafting the Executive Summary.

The assessment team and assessed country work to resolve any disagreements over technical compliance or effectiveness issues and identify potential priority issues for plenary discussion.

Draft is revised accordingly and provided to external reviewers.

The revised Executive Summary and MER, together with the conclusions of the quality and consistency mechanism, and assessors’ response, will then be sent to all members, associate members and observers, including FATF at least five weeks prior to Plenary for their written comments.

The comments received will be made available to all delegations.

Ideally three weeks preceding the Plenary, the Secretariat engages the assessed country and the assessors on priority issues, and other comments received on the MER or Executive Summary and prepare a list of priority and substantive key issues that will be discussed in Plenary and/or Working Group.

The list of substantive key issues will be circulated to all delegations at least two weeks prior to the plenary discussion.

The MER is discussed in plenary meeting, where appropriate, important technical issues would also be discussed. The President / Chair manages the discussions and the time for discussion is limited to a reasonable length (ideally three to four hours). The procedure for the discussion are as follows:

  • Assessment team briefly presents, in high-level terms, the key issues and findings from the report. The team will have the opportunity to intervene / comment on any issue concerning the Executive Summary or MER.
  • Assessed country makes a short opening statement.
  • The plenary discusses the list of key issues.
  • Time permitting, other issues could be raised from the floor, and discussed by the plenary.

At the end of the plenary discussion, the MER and the Executive Summary will be submitted to the plenary for adoption.

Secretariat will work with the assessors to amend all documents as agreed by the plenary, and will circulate a revised version of the report to the assessed country which shall confirm MER is accurate. Care will be taken to ensure that no confidential information is included in any published report. The assessment body will then forward the final version of the report to the FATF Secretariat.

FOLLOW-UP PROCESS

The FATF and FSRBs’ follow-up procedures includes two types of process:

  • Regular follow-up as the default monitoring mechanism, based on a system of regular reporting.
  • Enhanced follow-up, involving a more intensive process of follow-up, for countries with significant deficiencies, or countries making insufficient progress.

 

A country would be placed into enhanced follow up if it has 08 or more NC/PC ratings for technical compliance, or is rated NC/PC on any one or more of Recommendations 3, 5, 10, 11 and 20. A country would also be placed into enhanced follow-up.

A country would also be placed into enhanced follow-up if it has a low or moderate level of effectiveness for 7 or more of the 11 effectiveness outcomes, or it has a low level of effectiveness for 4 or more of the 11 effectiveness outcomes.

The purpose of this article is to enlighten the reader about the FATF operations and particularly brief them about the status and efforts of Pakistan in making compliance with FATF recommendations. This article is part of series of articles related to AML/ CFT regulations which covers FATF follow up procedure, FATF recommendations, and related local Acts, Ordinance and Regulations. We shall highlight every significant matter in detail and in simplified way to let the reader has good understanding of their responsibilities and compliance.

Prepared and Researched by

Muhammad Salman

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