Why was Pakistan placed on the 'Grey List' of Financial Action Task Force (FATF)? What are the implications and what measures should Pakistan take to move out of this list?

Introduction

"Follow the money," the advice made famous by the Watergate film All the President's Men (1976), is the core idea behind the Financial Action Task Force (FATF): to stop crime and terrorism, cut off their finance. In June 2018, the FATF placed Pakistan on its list of "jurisdictions under increased monitoring", commonly called the grey list, for strategic deficiencies in combating money laundering and terrorist financing. The listing came at a time of economic fragility and carried heavy costs. After four years of legislation, prosecutions and institutional reform, Pakistan was removed from the list in October 2022. Its experience shows why it was listed, what the listing cost and which measures worked.

Overview

The FATF was set up by the G7 in 1989 to fight money laundering; after 9/11 its mandate expanded to terrorist financing. It sets 40 Recommendations and reviews countries through mutual evaluations by regional bodies, in Pakistan's case the Asia/Pacific Group on Money Laundering (APG). Countries with serious deficiencies are put on the grey list, while the blacklist ("high-risk jurisdictions subject to a call for action") currently includes Iran, North Korea and Myanmar. Pakistan had been grey-listed in 2008 and from 2012 to 2015. In February 2018, the US, UK, France and Germany moved to list Pakistan again, and in June 2018 it was placed on the list with a 27-point action plan, later supplemented by a 7-point plan in June 2021.

Why Pakistan was placed on the grey list

1. Terror financing risks.

The FATF found that groups listed by the UN, such as Lashkar-e-Taiba, Jamaat-ud-Dawa and Jaish-e-Mohammed, continued to raise and move funds, and that Pakistan's understanding of these risks was weak. (Reference: FATF, Improving Global AML/CFT Compliance: On-going Process, June 2018.)

2. Weak investigation and prosecution.

Few terror-financing cases had led to prosecutions and convictions with deterrent sentences. (Reference: APG, Mutual Evaluation Report of Pakistan, October 2019.)

3. Assets of proscribed groups.

Pakistan had not effectively implemented targeted financial sanctions under UN Security Council resolutions 1267 and 1373 against designated persons and groups and their assets. (Reference: FATF action plan items on targeted financial sanctions, 2018.)

4. Money laundering vulnerabilities.

Corruption, smuggling, drug trafficking and tax evasion generated illicit funds that were laundered through property, banks and informal channels. (Reference: APG, Mutual Evaluation Report of Pakistan, 2019; Pakistan National Risk Assessment, 2019.)

5. A large informal economy and hawala.

A cash-based economy and unregulated hawala/hundi networks made it hard to trace money. (Reference: State Bank of Pakistan, AML/CFT regulations; APG Mutual Evaluation, 2019.)

6. Weak oversight of NPOs and DNFBPs.

Charities and "designated non-financial businesses and professions", such as real estate agents, jewellers and lawyers, were poorly supervised. (Reference: FATF Recommendations 8, 22 and 28.)

7. Poor inter-agency coordination.

Coordination among the FIU, police, FIA, customs, the State Bank and provincial bodies was weak. (Reference: APG, Mutual Evaluation Report of Pakistan, 2019, immediate outcomes 1 and 9.)

8. Geopolitics.

Pakistan argued that the listing was also driven by political pressure from the US and India, whose ministers publicly sought to keep Pakistan on the list. (Reference: Ministry of Foreign Affairs of Pakistan statements, 2018–2021; remarks attributed to Indian External Affairs Minister S. Jaishankar, December 2021, and the Pakistan Foreign Office response.)

Implications of grey listing

1. Economic losses.

One study estimated that grey listing between 2008 and 2019 cost Pakistan about US$38 billion in lost GDP. (Reference: Tabadlab, Cost of Grey Listing, 2021.)

2. Costly banking.

Foreign banks applied enhanced due diligence to Pakistani transactions, raising costs and delays for trade finance and letters of credit. (Reference: State Bank of Pakistan, Financial Stability Review, 2019; FATF guidance on de-risking.)

3. FDI and investor confidence.

The listing signalled risk to investors and credit rating agencies at a time when Pakistan badly needed foreign investment. (Reference: Board of Investment, FDI data; Moody's and Fitch rating reports, 2018–2022.)

4. IMF and donor conditions.

The IMF and World Bank tied programme reviews to AML/CFT reforms, adding to Pakistan's conditionalities. (Reference: IMF, Pakistan Extended Fund Facility staff reports, 2019–2022.)

5. Image and diplomatic pressure.

The listing damaged Pakistan's international image and was used by rivals to portray it as a sponsor of terrorism. (Reference: FATF plenary outcomes; Ministry of Foreign Affairs of Pakistan statements.)

6. Risk of blacklisting.

Failure to comply could have led to blacklisting, which would have isolated Pakistan from the global financial system as it has Iran and North Korea. (Reference: FATF, High-Risk Jurisdictions subject to a Call for Action.)

7. Burden on remittances and exporters.

Stricter checks made it harder for small exporters, freelancers and overseas Pakistanis to send and receive money. (Reference: State Bank of Pakistan, remittance and banking regulations, 2019–2022.)

8. A benefit: pressure for reform.

The listing forced Pakistan to modernise its AML/CFT laws and institutions, which strengthened its financial system and counter-terrorism capacity. (Reference: FATF, Outcomes FATF Plenary, October 2022.)

Measures to move out of the list (and how Pakistan exited)

1. New and amended laws.

In 2020 Parliament passed more than a dozen laws, including amendments to the Anti-Money Laundering Act, the Anti-Terrorism Act, the United Nations (Security Council) Act and a new Mutual Legal Assistance Act. (Reference: Acts of Parliament of Pakistan, 2020; National Assembly records.)

2. Prosecutions and convictions.

Courts convicted leaders of proscribed organisations in terror-financing cases, including Hafiz Muhammad Saeed in 2020, showing effective prosecution. (Reference: Anti-Terrorism Court Lahore judgments, 2020–2022; Counter Terrorism Department, Punjab.)

3. Freezing assets.

Authorities froze properties, seminaries and bank accounts linked to proscribed groups and designated persons. (Reference: Ministry of Interior notifications; NACTA, list of proscribed organisations.)

4. Risk-based supervision.

The State Bank and the Securities and Exchange Commission of Pakistan introduced risk-based supervision and imposed penalties on banks and companies for violations. (Reference: State Bank of Pakistan, AML/CFT/CPF Regulations, 2020; SECP AML regulations.)

5. Regulating NPOs and DNFBPs.

Charities were registered and monitored, and real estate agents, jewellers, accountants and lawyers were brought under AML supervision through the FBR and other regulators. (Reference: FBR, DNFBP directorate; Ministry of Interior, NPO policy.)

6. Currency and cross-border controls.

Customs declarations and limits on cash movements at borders were enforced to stop cash smuggling. (Reference: Foreign Exchange Regulation Act amendments; Pakistan Customs, currency declaration rules.)

7. Documentation and digital payments.

Expanding digital payments, such as the State Bank's Raast system launched in 2021, reduces reliance on cash and hawala. (Reference: State Bank of Pakistan, Raast instant payment system.)

8. Diplomacy and coordination.

A National FATF Secretariat and a core group led by senior officials coordinated work across agencies, while diplomacy built support among FATF members. After completing all 34 action items, Pakistan was removed from the grey list on 21 October 2022. (Reference: FATF, Outcomes FATF Plenary, 20–21 October 2022.)

Conclusion

Announcing the outcome of its plenary on 21 October 2022, the FATF stated that "Pakistan is no longer subject to the FATF's increased monitoring process." The grey listing was caused by real weaknesses in Pakistan's systems against money laundering and terror financing, sharpened by geopolitics, and it imposed heavy economic and diplomatic costs. Pakistan's exit shows that determined legal, institutional and diplomatic action works. The challenge now is to sustain these reforms, document the economy and keep illicit finance out, so that Pakistan never returns to the grey list.