Anti-Money Laundering Laws and its Impact on Financial Credibility of Pakistan

by

Aga Faquir Mohammad, Advocate Supreme Court

“Laundering is the act of transferring illegally obtained money through legitimate accounts so that its original source cannot be traced”[1]. Money Laundering is a means of disguising illegal money as legitimate proceeds in such a way that the original source remains hidden. It became notorious internationally causing United Nations Organization (UNO) to criminalize this practice under “The United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (UNODC 1988 Declaration)[2].

After a decade of passing ‘UNODC 1988 Declaration’, the United Nations General Assembly adopted a plan of action, “Countering Money Laundering” to strengthen the action of the international community against money laundering. In 1989, UNO formed “Financial Action Task Force on Money Laundering (FATF)”[3], an intergovernmental body to develop policies for combatting money laundering. In the year 2001, FATF expanded its mandate to include terror financing by examining, scrutinizing, reviewing money laundering techniques.

FATF presented Forty Recommendations[4] in 1990 and revised the same in 1996 to reflect gradually developing and changing money laundering typologies. FATF Forty Recommendations provided a complete set of countermeasures to be taken by member States against money laundering practices prevalent in the criminal justice and financial system.

From 2002 onwards, States around the world revised their national money laundering laws and upgraded monitoring systems of financial transactions under FATF’s recommendations. FATF recommendations[5] requires member States to:

1. Implement relevant international conventions.

1. Criminalize money laundering by enabling authorities to confiscate proceeds of money laundering.
2. Implement Customer Due Diligence (e.g., identity verification).
3. Maintain records for all transactions conducted by financial institutions categorized under Designated Non-Financial Businesses and Professions (DNFBP).
4. Establish Financial Intelligence Unit (FIU) to receive, disseminate suspicious transaction reports.
5. Cooperate internationally in investigating and prosecuting money laundering.

FATF maintains a "blacklist of high-risk jurisdictions”[6] and a "grey list of jurisdictions under increased monitoring"[7] evaluating countries based on High Risk and Non-Cooperative jurisdictions. FATF constantly updates jurisdiction lists[8] identifying non-cooperative countries as money laundering/terrorist financing risk.

On 28 February 2008[9], while evaluating global efforts to combat Money Laundering & Financial Terrorism Risk (ML/FT), FATF placed Pakistan under “grey list of increased monitoring jurisdictions” showing concern on risks emanating from archaic AML/CFT laws of Pakistan.

Pakistan was subsequently removed from grey list in June 2010 by FATF being satisfied with the progress and political commitment by Pakistan on conditions that Pakistan:

1. demonstrate adequate criminalisation of money laundering and terrorist financing[10];
2. demonstrate adequate procedures to identify, freeze and confiscate terrorist assets[11];

• ensure a fully operational and effectively functioning Financial Intelligence Unit[12];

1. demonstrate effective regulation of money service providers, including appropriate sanctions regime, and increasing the range of ML/FT preventive measures for these services[13];
2. improve and implement effective controls for cross-border cash transactions[14];
3. ensure all persons, legal entities and agents providing services for transmission of money or value, including transmission through an informal money or value transfer system or network be licensed and registered;

• require financial institutions including money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent and conduct enhanced scrutiny of and monitor for suspicious activity funds transfers which do not contain complete originator information (name, address and account number);
• review laws and regulations relating to Non-profit organisations for prevention of concealment of funds; and

1. take measures to detect and restrain cross-border transportation of currency and bearer negotiable instruments, by introducing a declaration system or other disclosure obligation.

On 16^th February’ 2012, FATF once again placed Pakistan under “grey list” due to having legislative deficiencies leading risk to the international financial system. Pakistan was required to enact legislations meeting FATF standards regarding Special Recommendations No; II, III, VI and IX supra[15]. In February’ 2015, Pakistan exited grey list making significant progress in establishing the legal and regulatory framework relating to AML/CFT regime.

[16]FATF placed Pakistan on the grey list for the third time on 28^th June’ 2018 due to failure of Pakistan in compliance of 27 requirements of action plan.

Pakistan in an effort to avoid being blacklisted took drastic measures by banning high risk terrorist organizations; updating Custom Policies to counter terror financing through transfers via cash carriers, developed profiles of currency traffickers; sets up separate “AML/ CFT Departments” at Federal Board of Revenue (FBR) to implement laws and monitor real estate agents, jewellers and all traders falling under “Designated Non-Finance Businesses (DNFB)”; enforced financial monitoring policy “Know Your Customer (KYC)/ Customer Due Diligence (CDD) Policy” through State of Bank of Pakistan (SBP) mandating all correspondent banks and financial institutions to retain financial data of suspicious clients and report any suspicious transactions[17].

Pakistan having completed all technical and procedural requirements of 2018 and 2021 Action Plans was taken off the “list of jurisdictions under increased monitoring” with immediate effect in October 2022.

For decades, criminal elements in Pakistan used money laundering to disguise illicit monetary proceeds into funds from apparently legal source using various financial and commercial activities such as cash-oriented trades/ businesses; Trusts; Non-Governmental Organizations (N.G.O.); uncertified & unregulated Foreign Exchange Companies to remit money by way of Hawala or Hundi[18].

Money laundering was criminalized as chargeable offence by Pakistan in the 1990’s to curb terrorism and sectarian violence prevalent  under “The Anti-Terrorism Act of 1997” established “Financial Monitoring Unit (FMU)” to monitor all Suspicious Transaction Reports (STRs).

FMU has access over financial records of all Suspicious Person (SP) conducting investigations of organizations or individuals doubted to have been involved in such criminal activities. FMU worked with several Pakistani law enforcement agencies such as the National Accountability Bureau (NAB), the Anti-Narcotics Force (ANF), the Directorate of Customs Intelligence and Investigations (CII), and the Federal Investigative Agency (FIA)[19].

Following legislations has so far been enacted, amended and repealed by the National Assembly of Pakistan to curb, curtail, and control money laundering:

• The Anti-Terrorism Act, 1997 (repealed)[20]
• The Anti-Money Laundering Regulations Act, 1997
• The Control of Narcotic Substances Act, 1997
• The National Accountability Ordinance, 1999
• The Anti-Terrorism Act (Amendment), 2002
• The Anti-Money Laundering Ordinance, 2007
• The Anti-Money Laundering Act, 2010
• The Benami Transaction (Prohibition) Act, 2017
• The Anti-Money Laundering (Amendment) Act, 2020
• The Anti-Terrorism (Third Amendment) Act, 2020
• The FBR Anti Money Laundering and Countering Financing of Terrorism (AML/ CFT) Regulations for DNFBPs, 2020
• The AML/ CFT Sanction Rules, 2020[21]
• The Counter Measures for High-Risk Jurisdictions Rules, 2020
• The Anti-Money Laundering, Combating the Financing of Terrorism & Countering Proliferation Financing (AML/ CFT/ CPF) Regulations, 2021
• The National Anti-Money Laundering and Counter Financing of Terrorism Authority Act, 2023

National Assembly of Pakistan (Majlis-e-Shoora) passed “National Anti-Money Laundering and Counter Financing of Terrorism Authority Act, 2023”[22] on 3^rd August’ 2023[23] unifying all financial institutions related to FATF under one authority, namely “National Anti-Money Laundering and Counter Financing of Terrorism Authority” functioning as a focal institution responsible for planning, combining, coordinating and implementing Government's policy through an exhaustive strategic planning and necessary ancillary mechanism and to coordinate and collaborate at international level. The purpose of the Authority is to carry out liaison with the competent authorities and other national/ international organizations; to ensure implementation by the relevant competent authorities under the relevant laws with respect to AML, CFT and Targeted Financial Sanctions (TFS); to facilitate cooperation and compliance in areas relating to AML, CFT and TFS; to approve and oversee the implementation of a national action plan(s) to fight money laundering, countering financing of terrorism and targeted financial sanctions; and propose amendments in national AML/ CFT/ TFS policies' laws and regulations to the Federal Government.

[1] Black's Law of Lexicon Dictionary, 8th edition, defines the term as "the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced."

[2] UNO adopted The United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances in December 1988 in Vienna.

[3] FATF is an inter-governmental body which sets standards and develops and promotes policies to combat money laundering and terrorist financing. It currently has 33 members: 31 countries and governments and two international organisations; and more than 20 observers: five FATF-style regional bodies and more than 15 other international organisations or bodies. A list of all members and observers can be found on the FATF website at http://www.fatf-gafi.org/Members_en.htm

[4] https://www.fatf-gafi.org/en/topics/fatf-recommendations.html

[5] FATF 40 Recommendations revised 30^th June, 2003

[6] https://www.fatf-gafi.org/en/topics/high-risk-and-other-monitored-jurisdictions.html

[7] When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the “grey list”.

[8] https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Increased-monitoring-february-2023.html

[9] https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Fatfstatement-28february2008.html 

[10] Recommendation 1 and Special Recommendation II

[11] Special Recommendation III

[12] Recommendation 26

[13] Special Recommendation VI

[14] Special Recommendation IX

[15] https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Fatfpublicstatement-16february2012.html#pakistan

[16]file:///en/publications/High-risk-and-other-monitored-jurisdictions/Fatf-compliance-june-2018.html  

[17] BPD Circular No.10 dated March 29, 2003 (https://www.sbp.org.pk/bpd/2003/c10.htm)

[18] Hawalas and other similar service providers (HOSSPs) arrange for transfer and receipt of funds or equivalent value and settle through trade, cash, and net settlement over a long period of time by using non-bank settlement methods. (https://www.fatf-gafi.org/en/publications/Methodsandtrends/Role-hawalas-in-ml-tf.html )

[19] http://bankersacademy.com/resources/free-tutorials/57-ba-free-tutorials/613-aml-pakistan-sp-922 

[20] Section 11K of the Anti-Terrorism Act, 1997

[21] S.R.O. 950 (I)/2020 dated October 1, 2020, Gazette of Pakistan, The AML/CFT Sanctions Rules, 2020

[22] Gazette of Pakistan 8th August, 2023 No. F. 9(45\12023-Legi

[23] https://na.gov.pk/en/bills.php?status=pass