The Mutual Evaluation Report (MER) of FATF’s Asia Pacific Group (APG), released in October last year, graded Pakistan as largely compliant (LC) on eight recommendations, partially compliant (PC) on 28 recommendations and non-compliant (NC) on four recommendations, out of the total 40 recommendations made by FATF.
The Follow-Up Report (FUR) released by Asia Pacific Group (APG) now, analyses the progress of Pakistan in addressing the technical compliance deficiencies identified in its MER. Another follow-up report would evaluate any progress Pakistan has made to improve its effectiveness.
Since the 2019 MER, Pakistan has taken a number of steps to more comprehensively identify and assess the money laundering (ML) and, in particular, the terrorism financing (TF) risks for the country. This has included conducting a Terrorist Financing Risk Assessment (TFRA) and a sectoral risk assessment on cash smuggling, which have both been supplemented by addenda.
In September 2019, Pakistan also issued a new National Risk Assessment on ML and TF (2019 NRA), which will be updated every two years. In November 2019, Pakistan also issued a confidential paper on ‘Transnational TF Threat Profiles of Key Terrorist Organisations’, which supplements the TFRA and 2019 NRA.
The 2019 NRA includes a sectoral analysis of TF threats, however, the analysis of the “Designated Non-Financial Business and Professions”(DNFBP) sectors is minimal and does not consider in any detail known instances of terrorist organisations acquiring real estate and using it to raise funds. Overall, based on these assessments, Pakistan’s rating of the TF threat faced by the country has been revised to ‘High’.
The MER found that Pakistan had not identified and assessed the ML/TF risks that may arise in relation to the development of new products and business practices. The MER also found that not all financial institutions were required to comply with the requirements to assess the ML/TF risks of new products, business practices and technologies prior to their launch or use or take appropriate measures to mitigate the risks.
Pakistan has also revised its Exchange Companies Manual to require exchange companies to conduct ML/TF risk assessments of new products, business practices and technologies prior to their launch or use and take appropriate measure to manage and mitigate the risk. Similar obligations have been imposed on CDNS and Pakistan Post under the new Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT) Rules that apply to these sectors.
However, these instruments are not considered ‘enforceable means’, as no penalties for non-compliance have yet been specified.
Based on the risk assessment of crypto-currencies, Pakistan has decided to prohibit them and certain virtual asset activities. This prohibition has been given effect through central bank’s circulars that prohibit all banks, deposit taking financial institutions (DFIs), micro-finance institutions (MFBs), payment system operators/providers and exchange companies from processing, using, trading, holding, transferring value, promoting and investing in virtual currencies/coins/tokens.
In addition, the Companies Act, 2017, prohibits companies from engaging in a business that is restricted by any law, rules or regulations. The interaction of this law and the SBP Circulars means SECP regulated entities and other companies are also prohibited from dealing in virtual assets.