The investigative approach

Published November 10, 2022
The writer is a lawyer.
The writer is a lawyer.

THE FATF has placed Pakistan on its ‘increased monitoring list’, also known as the ‘grey list’, multiple times since 2008. Those countries whose names appear on this list commit to actively working with the FATF to address strategic deficiencies in their regulatory frameworks to combat money laundering, terrorist financing, and proliferation financing.

In its announcement on Oct 21, the FATF stated that “Pakistan has strengthened the effectiveness of its [anti money laundering/ combating the financing of terrorism] regime and addressed technical deficiencies to meet the commitments of its action plans regarding strategic deficiencies that the FATF identified in June 2018 and June 2021, the latter of which was completed in advance of the deadlines, encompassing 34 action items in total”. Therefore, it said, “Pakistan is no longer subject to the FATF’s increased monitoring process”.

From a technical standpoint, Pakistan has completed the tasks assigned to it. However, its most pressing challenge now is to remain off the list in the future as well; to achieve this, Pakistan must continue to strengthen regulatory and administrative frameworks with regard to anti-money laundering and counterterrorism financing in a credible and sustained manner.

The current approach emphasises regulatory compliance, where reporting entities, such as banks, are required to submit suspicious transaction reports (STRs) against any potential money-laundering or terrorist-financing activity to the Financial Monitoring Unit.

The majority of reporting entities in Pakistan, however, continue to use manual processes to analyse and review customer data obtained through Customer Due Diligence and Know-Your-Client measures, which are often criticised for their lack of accuracy and authenticity.

It is evident from the Panama and Pandora scandals that despite KYC and CDD checks, and other regulatory controls, billions of dollars were still funnelled into tax havens even with regulatory oversight. This emphasises that the simple act of ticking boxes for regulatory compliance is insufficient to counteract the threat of illicit financial flows.

Eliminating money laundering and terrorist financing must be a joint effort.

Today, thousands of STRs are generated every day. However, the number of STRs that lead to tangible outcomes is less than one per cent of the total number generated. Legal practitioners who deal with financial crimes cases are likely to agree that STRs alone are of no actual evidentiary value unless accompanied by verifiable evidence. This is mainly because their quality does not meet the legal competence test.

It is therefore crucial that reporting entities in Pakistan, especially banks, generate high-quality STRs so that law-enforcement agencies (LEAs) may conduct successful investigations into money-laundering/ terrorist-financing activities.

The key to achieving this is to invest in technology-based solutions, namely AI and digital tools, which can eliminate low-value activities, automate processes, implement advanced analytics, utilise behavioural information to enhance client risk-rating models, and, most importantly, utilise filtering algorithms to reduce false positives when it comes to suspicious activity.

This will not only improve the screening of suspicious activities and the monitoring process, it will also add credibility to the evidentiary value of documents required to prove money laundering/ terrorist financing in both national and international courts.

Read: There and back again — a timeline of Pakistan's journey out of the FATF 'grey list'

Accordingly, the government must encourage technology start-ups as they can provide tailored digital solutions that can integrate a variety of technological features to streamline reporting and monitoring processes — the focus should be on reducing the number of unidentified STRs and identifying actual crimes.

Secondly, LEAs need to step up their efforts and form agile cross-functional investigative teams that comprise law-enforcement agents, business, fraud and cyber experts, product specialists, data scientists and financial analysts. The days are gone when investigators were individuals. Now, the key to success lies in technology-aided investigations, led by a team of subject specialists, that produce more relevant, prioritised and comprehensive results.

Lastly, to combat money laundering/ terrorist financing, the reporting entities and LEAs cannot operate in silos and function in an environment where there is distrust among them. It is paramount for all stakeholders to share credible, verifiable and irreversible intelligence and collaborate on forming public-private partnerships for investigation purposes. This would guarantee quality information when proscribed activities are intercepted.

In Britain, for instance, the Joint Money-Laun­dering Intelligence Taskforce works in collaboration with over 40 financial institutions and LEAs to collect data and information on any suspicious activity concerning money laundering and terrorist financing. Instead of relying on a single source, such as a bank, the JMLIT obtains information from a variety of sources, located at different points along the chain of proscribed activities, such as airlines, retailers, hotels and non-profits. In this manner, a more holistic understanding of the nature of illicit activities can be obtained, which is also admissible in court.

Rather than relying solely on banks and currency exchangers for reporting suspicious transactions, LEAs here should establish multidimensional partnerships in the real economy. It will be an uphill task given the social matrix of society. Yet, as long as the advantages outweigh the disadvantages, the government should improve its network of gathering data. Reporting entities should be incentivised to provide verifiable information regarding prohibited activities, thus confirming Pakistan’s commitment to eliminating money laundering and terrorist financing.

Pakistan’s grey listing adversely impacted its credibility and damaged the reputation of its institutions. FATF concerns had also affected the IMF programme: one of the conditions in the recent $6 billion bailout was compliance with the FATF guidelines.

The grey-listing experience should not be repeated. In collaboration with other stakeholders, the government should work to improve the effectiveness and efficiency of administrative and regulatory frameworks against money laundering/ terrorist financing while ensuring the continuation of economic activity and ease of doing business.

The writer is a lawyer.

Published in Dawn, November 10th, 2022

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