Anti-money laundering and terrorist financing

• The world of black money

Money laundering in inextricably linked to commission of crime. The act of converting the proceeds of crime – property, assets or cash — so that it appears legitimate is called money laundering. The word laundry signifies the fact that in the original state the proceeds were ‘dirty’. The process of laundry has at least three stages: placement (in banks), layering (moving through several banks and jurisdictions) and integration into the financial system (through additional transactions).

Paradoxically, in the post-colonial era, resource-scarce developing world continued to remit billions of dollars to the developed world in the form of cheap deposits made by a group of wealthy individuals obtained through tax evasion or pure corruption. Well reputed banks were competing to attract such deposits by offering enhanced features of safety, secrecy and ease of transfer across jurisdictions. Money laundering was almost like an adjunct to business-friendly practices and heavily protected in the name of secrecy of banking transactions. This became problematic when the developed world authorities realised their own citizens were taking advantage of such facilities and depriving them of tax revenues as well as a rise in criminal activities and incidents of laundering of proceeds of crimes.

It was not until 1986 that the US made its first law on anti-money laundering. In 1989, the G-7 finance ministers established a Financial Action Task Force (FATF), with its secretariat in Paris, charged with the responsibility to evolve a coordinated approach in combating money laundering in their jurisdictions. A few other countries were also invited to join the forum. FATF has developed 24 standards (called Recommendations) including model legislation and institutional arrangements that would deny money launderers access to the mainstream financial system. After 9/11, an important dimension of countering financing for terrorism CFT was also added, followed more recently by concerns relating to proliferation of weapons of mass destructions.

A FATF plenary is scheduled on 18 February 2018 where the US and India are reportedly moving a motion to put Pakistan back on the watch-list

Pakistan was a late starter in developing its AML/CFT regime. It was done, initially, as an ordinance promulgated in 2007 but the final act was approved in 2010. The introduction of AML was a major development. A set of crimes, called predicate offenses, were declared to carry the offense of money laundering, entailing a penalty of up to 10 years of imprisonment and confiscation of all proceeds of crime whether moveable or immovable, which would then vest in the federal government. The responsibility of charging and prosecuting the offenders of predicate offenses rests with the agencies administering the law of predicate offense. The more effective part of the law is a layered system of prevention aimed at interdicting the flow of dirty money through the country’s financial system. For this purpose, the law provides for setting up of a Financial Monitoring Unit (FMU) under the ministry of finance, which is housed within the premises of the SBP.

The law requires the financial institutions (and some professional bodies) to provide reports on suspicious transactions to FMU, if they have reasons to suspect that the transaction may be proceeds of crimes. After due scrutiny, the FMU then decides to transmit the suspicious transaction report (STR) to various agencies responsible for taking cognizance of the predicate offense. These include, FBR, FIA, NAB, and ANF, among others. These agencies then undertake required inquiries, investigation and, if needed, prosecution of offenders. Another report generated by FMU is currency transaction reports (CTRs), which track the movement of cash beyond a prescribed limit. The law also provides detailed architecture for investigation and prosecution of AML offenses, the courts of jurisdiction, procedures to be followed, including the procedure for grant of bail to the accused.

The Anti-Terrorist Act (ATA) 1997 did not address the subject of financing for terrorism. The ATA (Second Amendment) Act, 2014, filled this gap by adding a new offense in ATA that relates to providing financial support to someone who engages in terrorist activities. Besides, there was the issue of going after proscribed entities engaged in terrorism. The amendment filled that gap also.

AML-CFT is an extraordinary enterprise requiring multiple levels of training and skill-development before an effective regime can be put in place. In fact, AML is a radically new regime of criminal liability and prosecution having a wide-ranging application. Those engaged in combating white collar crimes are adapting it with relative ease. But for ordinary law enforcing agencies such as police, the task is herculean. The old methods and traditions for dealing with the standard criminal cases has greatly conditioned their outlook. Furthermore, for them to investigate financial trail of financing and nabbing the culprit requires considerable effort, skill and training. Also, the financial resources needed to accomplish this task are not readily available. FMU is providing such training on a limited scale, while special cells have been established in provincial IG offices to follow up the cases involving AML offenses. Several countries, most notably Australia, have offered training facilities to Pakistan law enforcing officers.

Pakistan faced a great deal of obstacles in evolving an internationally acceptable AML-CFT regime. That led, in 2012, to Pakistan’s placement in the watch list that required close monitoring. It was referred to a peer group called Asia Pacific Group (APG) to work on improving its regime. With the help of APG, a large number of steps were taken by the present government to remove the deficiencies pointed out by mutual evaluation methodology. These efforts were successful as Pakistan was removed from the watch list in 2015.

A sticking point that remained a source of concern, and also of contention with some members of FATF, was the extent of action taken by Pakistan against UN listed proscribed entities under the UNSC Resolution 1267. In particular, Jamaat-ud-Dawah (JUD) and Falah-e-Insaniyat Foundation (FIF). These members objected to free movement of the leaders of JUD and continued activities of FIF in funds mobilisation, its ambulance service and presence on the Web.

There was a limitation under the ATA, which depended heavily on provincial administration to take action against proscribed organisations, in particular, seizing of assets and taking over their charitable work. Earlier, the government had put the leaders of these organisations under house arrest but they were released by the High Court, as had happened on previous occasions as well.

On 11 February, 2018, the president promulgated an Ordinance further amending the ATA, 1997. New provisions have been added enabling the federal government to freeze, seize and manage properties, assets and charitable works of the banned organisations and individuals. Rules under the law were immediately framed and necessary action of taking over properties, assets and operations has been done.

A FATF plenary is scheduled on 18 February 2018 where the US and India are reportedly moving a motion to put Pakistan back on the watch-list. The APG is submitting an evaluation report on Pakistan stating that the actions required to control the activities of banned organisations under UNSC Resolution 1267 are not effective. The main evidence produced is the press reports on the activities of FIF and its continuing presence on the Web. Interestingly, the Pakistan Telecommunications Authority (PTA) has removed all sites hosted from Pakistan and what remains on the web is beyond PTA jurisdiction. Here, in fact, FATF should ask other member countries to shut down these sites hosted in their countries.

Viewed in this background, Pakistan has a very strong case to fend-off the challenge in Paris. However, the bigger challenge, as in the past, would be to defend the actions against JUD chief and FIF in the courts of law. Without having solid evidence to prosecute them, the freezing and take-over orders could be overturned by the Court. In such an eventuality, the banned organisations should approach the UN Sanctions Committee for their removal from the Resolution 1267, a procedure that is available to those who have been placed in the list without proper evidence.