Pakistan’s presence in grey list negative for banks: Moody’s

Updated February 28, 2020


“Pakistan’s continued presence on grey list of FATF is credit negative for its banks.” — AFP/File
“Pakistan’s continued presence on grey list of FATF is credit negative for its banks.” — AFP/File

ISLAMABAD: Moody’s Investor Service — a New York-based rating agency — on Thursday said that Pakistan’s inability to comply with the global standards on anti-money laundering and terror financing was a credit negative for its leading banks.

“Pakistan’s continued presence on list of jurisdictions under increased monitoring — commonly known as grey list of the Financial Action Task Force (FATF) is credit negative for its banks,” it said.

On Feb 21, the FATF – an inter-governmental body tasked with setting global framework requirements around anti-money-laundering, counter terror financing and other related threats to the international financial system -- announced that the country would remain on its list of jurisdictions under increased monitoring, along with 17 other countries, after failing to complete a June 2018 action plan by the assigned deadlines.

Pakistan, which has been presenting its progress to the FATF every four months since the agreement of the action plan, will remain on the list until at least June, when the next evaluation will take place. The announcement is credit negative for Pakistani banks because it raises questions about potential additional restrictions relating to banks’ foreign-currency clearing services, as well as their foreign operations. Banks’ profitability risks being constrained as a result of increased compliance and operational costs.

The FATF has warned that it will urge member countries to increase their attention when conducting business transactions with Pakistan if the country’s government, regulatory body and other stakeholders of the financial system fail to complete the action plan, which emphasises combating terror financing, by June. Should they fail to do so, international financial institutions could curtail their interactions with Pakistani banks and other financial companies, including terminating correspondent banking relationships.

This in turn would further constrain banks’ ability to generate business and result in higher compliance costs. Improving, but still-weak compliance with global anti-money-laundering and combating terror financing standards both by Pakistani banks and the country’s authorities means that banks still risk losing access to foreign-currency clearing services.

Access to foreign-currency clearing transactions, typically conducted through international correspondent banking relationships, is crucial for Pakistani banks because it allows them to process cross-border payments for clients. Clearing in US dollars is particularly important given Pakistan’s high import and export economic activity, as well as the fact that a large proportion of international payments are made in this currency.

That said this risk has so far not crystallised in the jurisdictions that have been placed on the increased monitoring list. A number of domestic banks with foreign operations have been subject to investigations relating to anti-money-laundering/counter terror financing issues that have resulted in penalties, higher compliance costs and, in some cases, the removal of overseas licences.

Among the banks that Moody’s rate, the US authorities in 2017 investigated Habib Bank Ltd over deficiencies in its risk management framework and violations of anti-money-laundering regulations. The bank consented to pay a penalty of $225 million, surrender its US banking licences and close its New York branch by the end of March.

Similarly, United Bank Ltd wound down its US operations last year, in part as a result of an investigation by the US authorities that identified weak compliance with global anti-money-laundering/counter terror financing standards.

The FATF readmitted Pakistan to its list of “jurisdictions under increased monitoring” in June 2018, at which time the government committed to an action plan based on the FATF’s recommendations around technical compliance and effectiveness. The plan contains 27 action points aimed at eliminating strategic anti-money-laundering/counter terror financing deficiencies at the financial system level, as well as at the legal, law enforcement, provincial and federal levels.

Among the areas of the FATF’s focus is the availability of tools and the timing required for identifying violations; law-enforcement capabilities and the appropriateness and timeliness of remedial actions such as sanctions and the deprivation of resources; aligning the understanding of anti-money-laundering/counter terror financing risks, information-exchange capabilities and cooperation among local supervisory, law-enforcement and other authorities; and increasing the control and surveillance of cross-border transactions through physical and electronic means.

The final deadline for the completion of the June 2018 action plan has been extended further to June. As of February, Pakistan has largely increased its compliance with 14 of the 27 identified areas, although the overall anti-money-laundering/counter terror financing framework remains below global standards.

Compliance with the remaining 13 action points has also progressed at varying degrees, according to the FATF. Because the list of remaining actions has narrowed, the State Bank of Pakistan has expressed its confidence about Pakistan exiting the grey list in June, the Moody’s noted.

Tech solutions

The Securities and Exchange Commission of Pakistan (SECP) has advised financial institutions to use technological solutions for effective screening of designated and proscribed persons and warned that penalties for violations and carelessness regarding anti-money laundering laws have been increased.

SECP Commissioner Farrukh Sabzwari Thursday chaired the anti-money laundering and countering financing of terror (AML/CFT) Compliance Forum organised to deliberate on the progress over the FATF Action Plan.

The regulator also offered its support to the industry to adopt technological solutions and enhance ongoing monitoring of transactions and reporting of suspicious transactions.

Mr Sabzwari stated that Pakistan has demonstrated significant progress towards fulfilling the FATF obligations under the action plan. “But it must continue, the efforts in combating money laundering and terror financing by accomplishing the remaining actionable items under ICRG-Action Plan,” he added.

Sabzwari reiterated the SECP’s sequential approach towards enforcement actions related to violations. While the penalty regime began with caution letters and warnings and graduated to financial penalties, the regulator needs to be aware that these penalties were on a lower level.

He warned that repeat offences and gaps in the monitoring mechanism will be dealt with more severity in future.

Published in Dawn, February 28th, 2020