A Tale of Financial Aspects of Countering Terrorism

Money Laundering Terror Financing FATF

In 2018, the Financial Action Task Force (FATF) put Pakistan on the so-called ‘grey list’ for not taking sufficient actions against money laundering and terror financing. Technically, financing has represented a noteworthy challenge in tackling the scourge of terrorism, as it is fundamental in directing all terrorism-related activities. It is no secret that terrorism does not arrive in a vacuum rather it flourishes in presence of a financial environment often riddled with lacunas. On economic front, terrorism damages the repute of a state’s financial institutions. It was noted in a notable research, that 1% cent increase in terrorism reduces Foreign Direct Investment (FDI) by 0.104%, domestic investment by 0.039% and economic growth by 0.002%. During 2007-2015, Pakistan has spent additionally PKR 2.2 trillion on security related expenditures to counter the threat of terrorism. There is also sufficient evidence that militants in past were able to exploit financial regulatory loopholes in Pakistan.

Also Read: Transformation from Terrorism to Tourism: Prosper Pakistan

In June 2010, FATF had identified the strategic deficiencies and since then Pakistan has established the legal and regulatory framework to meet its commitments in its action plan. In 2017, the National Task Force was established under NACTA as an effective platform for relevant stakeholders for effective coordination, floating policy suggestions, and sharing of experience and knowledge. Later in 2018, Pakistan was put on the ‘grey list’ for not being fully in compliance with the international financial regime’s guidelines, especially FATF recommendations and for taking little action against proscribed militant organizations. Countries placed on these lists not only see a decrease in foreign investment but foreign companies also hesitate to invest due to undesired regulatory oversights. When a country comes in the grey list, it faces many problems like; (i) economic sanctions from international institutions (IMF, World Bank, ADB etc.) and countries, (ii) problem in getting loans from international institutions (IMF, World Bank, ADB etc.) and countries, (iii) overall reduction in its international trade and possible international boycott.

Geopolitical Motives…??

Needless to say that inclusion in this list is also driven by geopolitical motives of certain countries, most specifically India and United States’ desire for entreating a favourable outcome in the region by using FATF as a lever. The downside of FATF grey listing is that it also implicitly conveys an impression that the country’s financial system was weak and effective measures were not being taken to halt money laundering riddled with weak oversight.

Pakistan’s Progress

There has been progress on Pakistan’s part in the fight against terror financing and money laundering and the understanding of private banks pertaining to the issue has also increased through scores of tangible measures to bring an effective regulatory regime. The FATF also acknowledged the steps already taken by Pakistan to prevent money laundering and terrorists’ access to financial sources. Though Pakistan had taken numerous actions regarding Anti-Money Laundering (AML) and Counter Terror Financing (CTF), still there are many gaps in its existing AML/CTF framework. FATF has stressed the need for further implementation of the action plan by Pakistan. Much more needs to be done about the informal financial network through physical measures, such as border control and increasing physical checks to ensure that any kind of liquid cash does not change hands. Transactions should be through banks only that can be seen by the financial regulator – State Bank of Pakistan (SBP), foreign remittances in particular.

What Needs to be Done

In this context, Pakistan is required to negotiate leverages under pretext of recovering its economy under Generalized System of Preferences (GSP) related arrangements extended by Europe and US. For this purpose, Pakistan may need to build its case to Europe and US, as both may need to understand Pakistan’s concerns regarding reviving its economy, while it strengthens its counter-terror-financing and anti-money laundering regime. Pakistan ought to take note of FATF’s compliance regarding nuclear proliferation and effectively undertake active planning and war-gaming to thwart any pressure from FATF to that end. An offensive proactive diplomacy on Pakistan’s part may also be needed in order to preempt and deter states aligned with India to put any pressure regarding undue change of goal-posts warranting unrealistic compliance in garb of FATF.

Pakistan needs to take stock of member countries in FATF and reach to countries at the diplomatic level. On other hand, Pakistan’s foreign office and business community also need to reach out to multi-national corporations and business partners that have invested their capital in Pakistan. Simultaneously, Pakistan ought to persuade states individually regarding the efforts it has taken under FATF action plan. Since, prospects of remaining on grey list or being placed on black list will adversely affect cash-flows through banking channels. Therefore, it is imperative that Pakistan conditions interest of banks, multinational corporations and important FATF member states that have limited or larger business interests in Pakistan.

Proactive measures need to be met at war-footing to discourage remaining terror financing and money laundering loopholes in our legal, executive and regulatory regime. Compliance remains in Pakistan’s national interest as it will help improve Pakistan’s international standing. After being placed out of the grey-list in the upcoming months, Pakistan must jump on the opportunity to apply for the membership of FATF. Any member state desiring membership will be given an observer status, transpiring which the observer state is granted a full-membership. Attainment of membership will help Pakistan use the platform for its foreign policy and grand-strategy objectives.

To get most out of Pakistan’s current stay in the grey list, Pakistan ought to strive for the FATF Action Plan’s full implementation by noting the role of financial observers such as the World Bank (WB). The WB in particular is involved in conducting “mutual evaluations” with Pakistan, as the one conducted last year. By taking both FATF and WB in proportion, catastrophic consequences to Pakistan’s capital inflow can be avoided. Pakistan must factor in the country’s structural weaknesses, being born on an uneven wavelength with the global economic frontiers.

Gulshan Rafique_Author

Ms. Gulshan Rafiq is a Researcher at Islamabad Policy Research Institute (IPRI). She holds an M. Sc and M. Phil degree in Defence and Strategic Studies from Quaid-i-Azam University Islamabad. Her research areas cover contemporary international affairs, traditional security threats and nuclear nonproliferation issues. She regularly contributes in national/international dailies and renowned academic journals and can be reached at gul.quaidian@gmail.com

Disclaimer: The views expressed in this article are authors own and do not necessarily reflect the editorial policy of The Reader’s Review.

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