Pakistan Comes Off the FATF Grey List. Can It Stay the Course?

On October 21, the Financial Action Task Force (FATF), a global financial watchdog, removed Pakistan from the list of countries under an “increased monitoring” process after four years. Pakistan was added to the FATF’s grey list in 2018 due to “strategic counter-terrorist financing-related deficiencies.” For the last four years, Pakistan was working on a comprehensive reform plan given by the FATF to address these flaws. 

While announcing the decision to remove Pakistan from the increased monitoring list, FATF President T. Raja Kumar told reporters in Paris that the country “has made significant improvements to strengthen the effectiveness of its framework for combating terrorist financing … as well as asset confiscation outcomes and [the] investigation and prosecuting [of] money laundering."

The development is encouraging, as it has the potential to boost Pakistan’s reputation on the global market at a time when the country is struggling to keep its troubled economy afloat. Presence on FATF’s grey list can severely challenge a country’s international borrowing capabilities and the financial services industry.

After putting Pakistan on the grey list in 2018, the FATF handed Pakistan a comprehensive 27-point action plan, later increased to 34 points. The plan involved segments like taking action against extremist groups and persons.

Experts say most of the work that Pakistan did on the FATF reform plan was largely implemented under Prime Minister Imran Khan's government and that the change of government didn’t impact the process beyond the fact that the new government saw it through.

Khan was ousted from office by a vote of no confidence in April, allowing the then-opposition leader Shehbaz Sharif to replace him as the prime minister.

Former head of the National Counter Terrorism Authority Khawaja Khalid Farooq told The Diplomat that while difficult decisions regarding the FATF action plan were taken and implemented during Khan’s rule, the “final contribution of political negotiations, especially with the U.S. was done by the current government with the support of the military establishment.”

Michael Kugelman, South Asia Institute director at The Wilson Center, said that while Pakistan was making forward movement toward exiting the list when the Khan government was still in power, the current government deserves credit too. However, “the Khan government can be faulted for taking so long to make progress on the FATF action plan. The last time Pakistan was on a grey list, it took less time to get off," Kugelman said.

According to Kugelman, in Pakistan’s “hyperpolarized environment,” the FATF has become politicized, with the previous and current governments wanting to take full credit for Pakistan's exit from the grey list. He contends that “credit and blame” can be placed on various doorsteps, as it is the “military in Pakistan and not the civilians that make the calls on policies like these.”

Analysts believe that Pakistan has a strong interest in staying off the grey list, given the reputational costs of being on the list. That is especially true at a time when the country’s economy is suffering badly and needs investors that could be scared away by a greylisting.

“It is abundantly clear that major corrective measures with appropriate legal framework were enunciated and implemented with tireless efforts to get off the grey list. After these strenuous efforts, civil-military stakeholders in Pakistan will try their best to stay off the grey or black list,” Farooq said. 

Abdul Basit, a research fellow at the S. Rajaratnam School of International Studies in Singapore, says Pakistan is not likely to land back on the grey list as the country has implemented a “robust regime, which would have been entirely unthinkable a couple of years ago.”

“In 2008 and 2012, Pakistan didn’t implement FATF plans so judiciously, which forced the country back on the list in 2018,” he said. This time around, “it will be difficult to grey list Pakistan because institutionally the systems have not only been installed but also enjoy policy support of the key civil-military stakeholders.”

However, doubts remain if the country can stay the course and continue to pursue the difficult task of implementing the financial watchdog’s action plan, as Islamabad has appeared on the FATF grey list multiple times since 2008.

Adnan Rafiq, a member at Pakistan’s Planning Commission, told The Diplomat that Pakistan “must continue to exercise a zero-tolerance policy on transnational terrorism, anti-money laundering, and combating the financing of terrorism irrespective of the composition of the ruling coalition.”

“While the country has been able to implement the action plan including legislative and regulatory changes needed, it is important to follow these up with effective enforcement,” he highlighted. 

Rafiq says that even after taking important steps involving the successful prosecution and conviction of perpetrators under these laws, “stringent enforcement of these legislative and regulatory changes and the conviction rates remain a sticking point.” 

“The country’s inclusion in the grey list in the mid to long term can therefore not be ruled out,” he said. “Pakistan would need to keep up with evolving international best practices on combating the financing of terrorism and anti-money laundering and also continue to translate it into concrete action on the ground.”

Similarly, Kugelman said Pakistan has been on the grey list multiple times, adding that it would be incorrect to suggest that the entire terrorist financing infrastructure has been dismantled in Pakistan. “It is always possible to make reversals to actions like the new terrorist financing conviction of Hafiz Saeed of the Lashkar-e-Taiba (LeT) and Jamaat-ud-Dawa (JuD) group that were taken to get Pakistan off the grey list,” Kugelman noted.

“While Pakistan has a strong interest to stay off the list for the foreseeable future, this doesn't rule out a return to the watch list down the road.”

Some experts point to the political considerations that play a role in the FATF's decisions. They raise questions regarding the role of the United States and India in Pakistan's case. 

Farooq said that the FATF’s decision to put Pakistan on the grey list “was not purely due to … serious flaws in our legal or economic system only.” Instead, he argued that Islamabad was placed on the grey list because a number of “important countries were not happy with Pakistan regarding its international relations." 

"To be sure, everything is political,” Kugelman said, stressing that there are several members of the FATF, like India, that would have liked to find a "pretext to keep Pakistan on the grey list for a longer time." 

However, he cautions that there's a tendency to ascribe more “political characteristics to FATF than there actually are.” 

“Let's be clear: FATF is a very technically focused organization. If you can check off all the boxes on your action plan, then that means you'll be removed from the grey list,” Kugelman said.

“It was Pakistan's completion of its action plan, and not what separate role the U.S. might have had that ultimately got Pakistan off the watch list,” he emphasized.

Basit strongly believes that Pakistan’s new army chief will stick to the policy that brought Pakistan off the FATF’s grey list, arguing that the “country only stands to lose” if it reverses course on issues like money laundering, terrorist financing, and action against armed groups and individuals.