Dr. Usman W. Chohan* explains the consequences of the Financial Action Task Force (FATF) in the fight against terrorism and the consequences of its implementation over the years.
*Dr. Usman W. Chohan, UNSW Business School; Critical Blockchain Research Initiative (CBRI); Centre for Aerospace & Security Studies (CASS).
The Financial Action Task Force (FATF) was formed in 1989 as part of an effort to toughen anti-money laundering and terrorist financing practices around the world. This working paper presents the audience with a critical background of the FATF, along with important critiques of its structure and approach. This allows for a close examination of the implications that the FATF might portend for potentially non-compliant jurisdictions, and how they must navigate the political dynamics of the task force whilst adhering to better financial oversight and management of their own accord so as to strengthen the global financial architecture and combat money laundering practices.
Keywords: Terrorism, Financial Action Task Force, APG, FATF, Money Laudering, Pakistan, Radicalism
Overview The Financial Action Task Force (FATF) was formed in 1989 as part of an effort to toughen anti-money laundering and terrorist financing practices around the world. At the present time, the FATF poses a complex challenge to Pakistan that is both multifaceted and severe, with both immediate and long-term consequences for our national financial architecture. Pakistan sits on its ‘grey-list’ of countries, and it risks being put on the ‘black-list’ if enough political machinery is deployed against it, and it is determined that Pakistan isn’t “doing enough” to satisfy the FATF’s requirements. Such a move would have far reaching effects on Pakistan, including its ability to manage the flow of international remittances, engage in international commerce, and arrange interim lending agreements with institutions such as the International Monetary Fund (IMF), among other factors.
At the same time, a sizeable political undercurrent permeates the workings of the FATF. It is not an arm of the United Nations and does not enjoy an enshrined legitimacy. Its membership is voluntary, and only comprises 36 countries, most of whom are EU members. New rules are continually added to its mandate, and so even a country that may have been previously compliant (as Pakistan was) can come into its crosshairs at any time. It does not have an accountability mechanism whereby it can report its oversight functions or give countries recourse against its decisions. Worse still, despite its horrifically large black economy, India is maneuvering to have co-chairmanship of the FATF in the Asia-Pacific region, which can allow it to weaponize the FATF against Pakistan.
As such, the FATF’s own legitimacy has yet not been fully established, its stipulated requirements change arbitrarily and abruptly, and its attitude towards Pakistan reflects the “do-more” rhetorical strategy that the United States has repeatedly employed against Pakistan to mask the shortcomings of others. If the powers-that-be truly cared about international money laundering and “dark money,” they would most certainly be waging a war against Panama, the Cayman Islands, the Bahamas, the British Virgin Islands, or Delaware. In fact, Pakistan has already long imposed strong anti-terror financing laws that are tougher than those stipulated by the FATF, but their implementation has been characterized by a haphazard approach and a reactive stance: whenever India or the United States beat the drums on Pakistan’s supposed “terror funding,” Pakistan has responded by implementing financial oversight or regulatory actions. Pakistan’s approach must shift from the reactive to the proactive.
As such, this working paper presents the audience with a critical background of the FATF, along with important critiques of its structure and approach. This allows for a close examination of the implications that the FATF might portend for Pakistan, and how Pakistan must navigate the political dynamics of the task force whilst adhering to better financial oversight and management of its own accord. The findings of the paper are that strong financial enforcement and oversight are in Pakistan’s best interest, but it must adeptly maneuver the intrigues posed by certain members of the FATF, and change from pursing a reactive approach towards a proactive one, to signal that it proceeds with better financial regulation of its own accord. At the same time, Pakistani stakeholders should be made aware of the political element in international financial “task-forcing” that mirrors the “do-more” harassment which has entrenched itself in the Western playbook. All Pakistani stakeholders must realize that international economic institutions can and do serve as tool for structural violence, and the FATF is playing just such a role against Pakistan.
The Financial Action Task Force (FATF) was formed at the Paris G-7 summit in 1989 as part of an effort to toughen anti-money laundering and anti-terrorist financing practices around the world. In its own words, the FATF’s primary objective is to ensure that “financial systems and the broader economy are protected from the threats of money laundering and the financing of terrorism and proliferation, thereby strengthening financial sector integrity and contributing to safety and security.”
There are 36 full members today, along with many observer bodies and a host of associate and senior associate members. Pakistan is not a full member for the FATF, but rather a “Senior Associate Member.” The criteria to join the FATF are diverse, but generally one must be considered strategically important (large population, large GDP, developed banking and insurance sector, etc.), must adhere to globally accepted financial standards, and be a participant in other important international organizations. As this report will suggest, it is questionable if Pakistan should have ever joined this organization, except under duress. Once having become a member, each country or organization must endorse and support the most recent FATF recommendations, commit to being evaluated by (and evaluating) other members, and work with the FATF in the development of future recommendations.
The FATF was given the responsibility of examining money laundering techniques and trends, reviewing the actions which had already been undertaken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering. In April 1990, less than one year after its creation, the FATF issued a report containing a set of Forty Recommendations, which were intended to provide a comprehensive plan of action needed to fight against money laundering.
Following the 9/11 Attacks of 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF. In October 2001 the FATF issued the Eight Special Recommendations to deal with the issue of terrorist financing. The continued evolution of money laundering techniques led the FATF to revise the FATF standards comprehensively in June 2003. In October 2004 the FATF published a Ninth Special Recommendations, further strengthening the agreed international standards for combating money laundering and terrorist financing, also known the 40+9 Recommendations.
In February 2012, the FATF completed a thorough review of its standards and published the revised FATF Recommendations. This revision was intended to “strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime.” They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass destruction, and to be clearer on transparency and tougher on corruption. The 9 Special Recommendations on terrorist financing have since been integrated with the measures against money laundering. This has “resulted in a stronger and clearer set of standards,” according to the FATF. The criteria of the FATF comprise two aspects: technical compliance and effectiveness. Effectiveness refers to the ability of countries to produce outcomes to the FATF’s satisfaction (how “effective” systems are), while technical compliance refers to general adherence to FATF stipulations. In other words, technical speaks to the letter, while effectiveness speaks to the spirit of the recommendations.
While the recommendations and the rigor of the FATF may seem stringent, it can and has been argued that Pakistan’s laws against Anti-money laundering (AML) and Terrorist Financing (TF) are more stringent than those stipulated by the FATF. Pakistan uses a domestic proscription mechanism under the AntiTerrorism Act 1997 (ATA). This powerful legislation was initiated to shore up largely antiquated promulgations such as the Foreign Exchange Regulations Act (1947) and the Banking Companies Ordinance (1962). This was followed by the National Accountability Ordinance (1999). Pakistan set up its Financial Intelligence Unit in December 2007, concomitant with national legislation that criminalized money laundering through the Anti-Money Laundering Ordinance (AMLO, 2007), enacted as an executive order in September 2007, which was validated by subsequent constitutional amendment and Supreme Court decision. It passed an Anti-Money Laundering Act (2010), and then an even more stringent Anti-Money Laundering Amendment Act (2015).
As with many spheres of Pakistani life, the legal frameworks are well-crafted and existent, but what has lacked instead has been the enforcement of these laws, which has been done in a haphazard manner, and in a reactive manner as well. This is partially a reflection of the political winds that blew in the post-9/11 era, but more so a sign of the limited resources that the state has at its disposal to grapple with a massive and substantially illiterate population running along subsistence lines and a largely undocumented shadowy economy. Such conditions are ripe for the proliferation of informal economic transactions, and Pakistan has therefore opened a front on which it can be attacked by international financial bodies with their own agendas. This agenda requires further critical appraisal, which the next section proceeds to do.
Chohan, Usman W., The FATF in the Global Financial Architecture: Challenges and Implications (March 14, 2019). CASS Working Papers on Economics & National Affairs, EC001UC (2019). Available at SSRN: https://ssrn.com/abstract=3362167