Gaping hole in Pakistan’s FATF compliance

There is a gaping hole in Pakistan’s efforts to plug terrorist financing under international pressure which can put the country on the blacklist. It is not yet known whether the loophole in small saving schemes has been left deliberately to help terrorist groups, many of whom enjoy the patronage of the state, to dodge the FATF scrutiny.

Small savings in Pakistan generate over Rs 4 trillion in over seven million accounts held by individuals, equal to 28 percent of all bank deposits.  The possibility of terrorist groups and individuals holding these accounts remains quite high, given the number of terror groups and cadres in Pakistan. By Prime Minister Imran Khan’s own admission, a couple of years ago Pakistan was home to over 40000 terrorists.

For the last few years, the global money laundering and terrorist financing watchdog, the Financial Action Task Force (FATF), has been asking Pakistan to comply with international standards and rules of anti-money laundering and anti-terrorist financing laws and regulations. Although Pakistan has complied with some of the conditions set by FATF, with great reluctance, there is one area which has not paid due care to plug the terrorist financing–small savings accounts.

These shortcoming were flagged by FATF in its two recent compliance reports–in October 2019 and September 2020. The October 2019 report clearly stated that a large section of the banking sector, both formal and informal, was either out of the ambit of any anti-money laundering law or did not cater to any existing regulations of identifying suspicious accounts and transactions. In the follow-up September 2020 report, the FATF referred to the new set of rules issued by Pakistan following the October 2019 report but provisions for prosecution were still missing from the rule book which allowed the banking sector to be lax in identifying suspicious accounts and transfers.

The problem lies with the new rules–National Savings Schemes (AML and CFT) Rules, 2019, which calls for scrutiny of all account holders–seven million of them–in six months and risk profiling of the account holders in a similar period.

The All Pakistan National Savings Officers Association (APNSOA) has flagged several reasons why Pakistan was unlikely to fulfill the FATF obligations regarding the small savings sector. The first is the problems in identifying the consumers as a mechanism for doing so has not been put in place despite such a tight, and almost impossible, deadline. To illustrate, printed copies of KYC (Know Your Customer) were not available, till April this year, in any of the National Savings Centres.

The mismatch between intention and action on the ground, according to the banking officers, are the result of the inefficiency on the part of the Anti-Money Laundering and Counter Terrorism Financing Supervisory Board, and misuse of powers. The officers point out that the supervisory authority, which was a critical stakeholder, had simply failed to plan and implement any steps that would help Pakistan comply with  Anti-Money Laundering and Counter Terrorism Financing stipulations. The authorities have not tweaked the software application of National Savings to keep up with the new provisions. The banking staff is yet to be provided with adequate equipment and protocols to verify data, check KYC documents and use biometric data.Guidelines for the banking staff and customers alike are missing as now.

With these massive problems in just one segment of the financial sector, Pakistan’s efforts at complying with FATF are likely to remain inconclusive when the international watchdog meets next time.

About the Author
Fabien Baussart is the President of CPFA (Center of Political and Foreign Affairs)
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