On 22nd October, Pakistan exited the Financial Action Task Force (FATF) grey list. While this exit has been a much-needed moment for the country, it is critical to evaluate whether the FATF’s decision to grey-list some countries and not others is without flaws.

FATF has largely been committed to curbing drug trafficking and terror financing rather than reducing the corruption of ruling elites — a problem that has corroded developing countries like Pakistan. One finds it important to point here the irony of the global financial watchdog’s relationship with Pakistan: the very organisation that claims to regulate and create transparency within the country’s financial system and thus bring prosperity has become why Pakistan’s economy has suffered massive losses.

The issue is augmented by minimally scrutinised off-shore centres that hide illegal activities, identity and ownership of assets.

A fascinating example is tax-haven Switzerland: in 2014, the total assets managed by Switzerland stood at 6,656 billion Swiss Franc ($6,742 billion), half of which belonged to foreign customers. Recommendations 8, 10, and 40 of FATF require countries to review the adequacy of laws and regulations that relate to non-profit organisations that the entity has identified as being vulnerable to terrorist financing abuse.

The financial institutions should undertake Customer Due Diligence (CDD) and record-keeping. There should be international cooperation concerning money laundering, associated predicate offences and terrorist financing. However, the latest Mutual Evaluation Report (MER) of Switzerland by FATF shows that Switzerland has partial compliance (PC) towards recommendations 8, 10, 16, 19, 22, 23, 33, 35, and 40.

The global financial watchdog does not always seem to act equally harshly towards all offending countries

On the other hand, Pakistan has large compliance (LC) toward these recommendations. Predicate offences such as fraud, breach of trust, corruption, and unregistered organisations prove that Switzerland has failed to apply the Anti-Money Laundering (AML) laws and to update the information of its foreign customers as per the FATF recommendations. This prompts a particularly head-scratching question: why hasn’t Switzerland been grey listed?

The Mutual Evaluation Report of the UK issued by FATF shows large compliance against recommendation 10, which renders the FATF’s evaluation dubious. The research conducted by TI-UK and Thomson Reuters in December 2016 found that overseas companies own 44,022 land titles in London, 91 per cent of which were registered in secret havens.

Before the enactment of the Economic Crime (Transparency and Enforcement) Act, 2022, UK law permitted anonymous property purchases via shell companies and offered criminals a haven to deposit their illicit gains. Similarly, the scale of off-shore ownership in the UK and London is significant. Illicit funds have been laundered in the UK, most of which came from assets looted from African and former Soviet Union governments.

However, recommendation 10 of the FATF requires real estate professionals to apply CDD in the purchase and sale of real estate. Quite interestingly, the FATF has chosen to look the other way despite this information being leaked by the Panama and Pandora papers over the years.

Furthermore, the FATF, which claims to be an autonomous organisation, has often demonstrated visible bias rather than neutrality in its assessment and decision-making processes. One doesn’t have to look much further than Pakistan’s neighbour, India, which has allegedly been involved in financing organisations to spew turmoil in Pakistan.

Despite violating nine special recommendations on terror financing, India hasn’t been subject to any investigation by the FATF. India’s nuclear black market scandal, where Indian nationals were caught smuggling uranium, is another instance where India has remained immune from any interrogation by the global watchdog.

Whether the FATF has deliberately ignored putting developed countries on the grey list or whether these are genuine errors on its part are questions that only time will unravel. What remains clear for the time being is that whatever its intentions, the FATF has proven to be a double-edged sword for Pakistan: helping it combat terror financing and money laundering on the one hand and enforcing stringent, economically detrimental conditions on the other.

If the FATF wants to maintain impartiality, it must recognise and grey-list all countries subject to non-compliance with its recommendations rather than cherry-pick weak economies. Lastly, off-shore tax havens should be regulated so that criminals and money launderers do not have an outlet to seek refuge in.

The writers are financial law students at LUMS

Published in Dawn, The Business and Finance Weekly, November 21st, 2022

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