Pakistan in midst of aggressive FATF lawfare

Head of an international leading law firm in Oman analyzes how the role of FATF and similar institutions should be seen in the context of lawfare and the difficulties for Pakistan to get out of its crosshairs.

Hassan Aslam Shad

May 22, 2019

FATF. Grey list. Pakistan. These three words combine in a sentence to convey ominous prospects for Pakistan. Since June 2018, Pakistan has been on the Financial Action Task Force grey list. Unless it demonstrates compliance by September 2019, it faces the real prospect of being moved to the FATF black list.

So what is this FATF thing all about and why is it important for Pakistan?

The FATF’s importance for Pakistan needs to be understood in the backdrop of “lawfare”, a concept that has gained significant traction lately. Lawfare can help understand the role of institutions such as FATF and their importance in shaping the future of a country such as Pakistan that has been in the crosshairs of its aggressive campaign.

Lawfare: Leveraging International Legal System Against an Adversary

Simply put, lawfare is the use of law as a weapon of war. It is the leveraging of the international, regional and/or domestic legal system as a weapon against the adversary. Lawfare is increasingly becoming the preferred method of waging war in the 21st Century and for obvious reasons.

The UNSC Resolution 2462 also refers to previous UNSC resolutions that require all countries of the world to ensure that their domestic laws and regulations establish serious criminal offenses that enable prosecution and penalization of terrorist funding and financing.

First, there is no armed conflict and therefore no loss of life, which is an inevitable consequence of armed conflict. Countries thus avoid global condemnation of causing loss of life. Second, by deploying lawfare, countries avoid the financial cost of waging war. 21st Century warfare is “war by other means”: no crossing of international borders, no spilling of blood and yet achieving the objectives of war.

Lawfare can be of various types ranging from financial/economic to cyber/media or a combination of two or more of these. Increasingly, lawfare has been used to neutralize the adversary’s capacity to pursue its geo-strategic objectives and to otherwise choke its ambitions.

US Lawfare Against Iran

Recent examples of lawfare include US’ economic lawfare against Iran which started in 2006 under the George W Bush Administration. Around 2006, the US introduced financial measures against Iran’s uranium enrichment activities. The key US agency involved in this lawfare is the US Treasury Department which acts as the guardian of the US’ financial interests globally.

In November 2018, US sanctions against Iran that were withdrawn in 2015 were re-imposed by the Trump administration. A wide net of legal measures was imposed over Iranian natural and juristic persons. This resulted in the shelving of billions of dollars’ worth of foreign projects and mass exodus of leading multinationals from Iran. One may wonder how is this lawfare (in the sense of a leveraging of a legal system) as opposed to traditional measures such as sanctions imposed against Iraq and North Korea?

Unlike sanctions, US lawfare against Iran targeted its entire financial ecosystem through a calibrated campaign. The United Nations system was set in motion by the US to force Iran to comply or face consequences. Iran’s access to international markets was curtailed and so was Iran’s link to the international financial system. The US issued threats of countermeasures against countries that dealt with Iran. All this has left Iran’s economy in tatters and the country is facing a bleak future.

Complex Web of International Rules

We live in a global order where international laws weave together countries, in a seamless yet, complex web of compliance. International laws apply both horizontally and vertically. Vertically, laws derive from supranational organizations such as the UN and flow downward to bind countries. An example is UN Security Council resolutions that are binding on all countries. An example of a regional organization whose rules apply vertically is the European Commission that issues laws binding on member countries.

International courts interpret and apply international law from time to time. The International Court of Justice (ICJ), for example, adjudicates disputes between countries and, in the process, lays down international law. Another example is the International Criminal Court (ICC), the first-ever permanent court set up through treaty (the Rome Statute) with jurisdiction over three international crimes i.e. war crimes, crimes against humanity, and genocide.

Application of international law can also be horizontal in the sense that two or more than two countries may enter into a treaty with one another. Similarly, a group of countries may agree on a set of laws to govern their common objectives. Such laws are horizontal in the sense that they apply between those countries as opposed to the deriving from a supranational organization such as the UN. Examples are regional organizations such as the Gulf Cooperation Council (GCC) that have been set up by a group of countries.

Over time, the objectives of regional organizations and inter-governmental organizations can merge with the broader objectives of supranational organizations. The result is a web of international laws that are both horizontal and vertical in the application. It is here at the crossroads of the vertical and horizontal application of international law where organizations such as the FATF are born. So what exactly is FATF?

FATF: An Overview

The FATF was set up in 1989 as an inter-governmental organization pursuant to a G-7 Summit held in Paris. The FATF does not have a “tightly defined Constitution” that prescribes its working. However, FATF has pre-defined objectives and rules that regulate its working. These have been developed over the course of the past 30 years.

The FATF’s purpose is to develop and promote policies at international and national levels to target money laundering and terrorism financing. The FATF, in its own words, “works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.” The current FATF President is Marshall Billingslea, a US national and currently Assistant Undersecretary of US Treasury Department’s Office of Terrorist Financing and Financial Crimes.

FATF Recommendations

Since 1990s, the FATF has established a series of recommendations that set out the basic framework for anti-money laundering (AML) and combatting terrorist financing (CFT). In 1990, the FATF issued 40 recommendations that list out a comprehensive plan of action for AML/CFT. In 2001, after the FATF’s mission was broadened to establish standards against terrorist financing, the FATF issued its eight special recommendations to deal with terrorist financing. These standards were revised in 2003 and a ninth recommendation was issued in 2004 which resulted in the 40+9 Recommendations. These recommendations are the FATF’s global AML/CFT standards.

FATF’s “Vertical” Crossover with UN

The FATF currently comprises 36-member countries and two regional organizations (GCC and the EC). Some prominent member countries in FATF (an elite club, no less) are US, Canada, China, Germany, France, Russia, UK, India and Israel. Indonesia and Saudi Arabia have observer status with the FATF.

Besides these member countries, nine regional organizations with an AML/CFT mandate are its associate members. This includes the Asia Pacific Group on Money Laundering (APG). Additionally, some prominent international organizations with AML/CFT mandate also have observer status with the FATF. These include the World Bank and the International Monetary Fund (IMF).

Whether or not JeM or Masood Azhar for that matter had a role to play in Pulwama is immaterial. Pakistan rightly left the burden of proving that to India which not only failed to discharge this burden but in the process made an utter mockery of itself before the world.

The membership of international organizations in the FATF with an AML/CFT mandate has resulted in a vertical crossover of the FATF in international law policymaking. This derives from the close relationship between the UN and the FATF which has been confirmed in the UNSC resolutions both current and previous.

On 28 March 2019, the UNSC Resolution 2462 (2019) reaffirmed the close collaboration between the FATF and the UN in the fight against terrorism. Resolution 2462 (2019) requires, “All States to implement the comprehensive international standards embodied in the revised 40 FATF recommendations on combatting money laundering, and the financing of terrorism.”

The UNSC Resolution 2462 also refers to previous UNSC resolutions that require all countries of the world to ensure that their domestic laws and regulations establish serious criminal offenses that enable prosecution and penalization of terrorist funding and financing. These include:

UNSC Resolution 1267 (1999) which designated Osama bin Laden and associates as terrorists and established a sanctions regime against them (subsequently extended to individuals and entities associated with ISIL). A UNSC committee was set up that supervises the sanctions measures imposed on these groups and entities.
UNSC Resolution 1373 (2001) which requires all states to prevent and suppress financing of terrorist acts and to refrain from providing any support to entities or persons involved in terrorist acts. This resolution also introduced an asset freezing mechanism to target terrorist funding and set up the counter-terrorism committee which monitors state compliance.

FATF’s 10-Point Action Plan for Pakistan

As mentioned above, Pakistan has been on the FATF grey list since June 2018. Earlier, too, Pakistan was on the FATF grey list in 2008 and between 2012 to 2015.

Let us have a look at the 10-points of the action plan for Pakistan laid down by the FATF.

(1) adequately demonstrating its proper understanding of the TF [terrorist financing] risks posed by the terrorist groups, and conducting supervision on a risk-sensitive basis;

(2) demonstrating that remedial actions and sanctions are applied in cases of AML/CFT violations and that these actions have an effect on AML/CFT compliance by financial institutions;

(3) demonstrating that competent authorities are cooperating and taking action to identify and take enforcement action against illegal money or value transfer services (MVTS);

(4) demonstrating that authorities are identifying cash couriers and enforcing controls on illicit movement of currency and understanding the risk of cash couriers being used for TF;

(5) improving inter-agency coordination including between provincial and federal authorities on combating TF risks;

(6) demonstrating that law enforcement agencies (LEAs) are identifying and investigating the widest range of TF activity and that TF investigations and prosecutions target designated persons and entities, and persons and entities acting on behalf or at the direction of the designated persons or entities;

(7) demonstrating that TF prosecutions result in effective, proportionate and dissuasive sanctions and enhancing the capacity and support for prosecutors and the judiciary;

(8) demonstrating effective implementation of targeted financial sanctions (supported by a comprehensive legal obligation) against all 1267 and 1373 designated terrorists and those acting for or on their behalf, including preventing the raising and moving of funds, identifying and freezing assets (movable and immovable), and prohibiting access to funds and financial services;

(9) demonstrating enforcement against TFS violations including administrative and criminal penalties, and provincial and federal authorities cooperating on enforcement cases; and

(10) demonstrating that facilities and services owned or controlled by designated person are deprived of their resources and the usage of the resources.

In summary, in order for Pakistan to secure an exit from the grey list, Pakistan would have to establish that it has taken steps for establishing and implementing a robust AML/CTF regime in line with the FATF’s requirements. Pakistan’s performance would be judged on 27 performance indicators that are based on the above 10 FATF points.

Pakistan’s AML/CFT Framework

Pakistani laws dealing with AML/CFT include the following pieces of national legislation:

Anti-Money Laundering Act, 2010 (as amended by the Anti-Money Laundering Act, 2015).
Anti-Terrorism Act, 1997 (as amended by the Anti-Terrorism Amendment Act, 2013 and the Anti-Terrorism (Second Amendment) Act, 2013.
Anti-Terrorism (Amendment) Ordinance, 2018 and the Anti-Terrorism Bill, 2018 (pending at the National Assembly).
Anti-Money Laundering Regulations, 2015.
Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) Regulations for Banks and DFIs (2017).
Securities and Exchange Commission of Pakistan (Anti-Money Laundering and Countering Financing of Terrorism) Regulations, 2018.

Since June 2018 (when Pakistan was first placed on the grey list), the FATF has conducted a periodic review of Pakistan’s performance. During this time, the FATF noted shortcomings in Pakistan’s AML/CFT regime and pointed out deficiencies in implementation such as ineffective inter-agency cooperation, failure to implement laws resulting in convictions of members of proscribed organizations and failure to stop flow of illicit funds etc.

Terror Financing Risk Assessment Report

According to media reports, in the first week of January 2019, Pakistan prepared and submitted a Terror Financing Risk Assessment Report. This was followed by a Pakistani delegation’s visit to explain the steps that Pakistan would take to implement the FATF’s requirements.

Although FATF is said to have expressed general satisfaction about Pakistan’s AML measures, it urged Pakistan to take strict action against proscribed outfits in line with UNSC resolutions 1267 and 1373. Pakistan was told that if it failed to do so, it could be moved to the blacklist.

Over time, the objectives of regional organizations and inter-governmental organizations can merge with the broader objectives of supranational organizations.

Apparently, the sticking point for the FATF was that proscribed outfits could contest the last general elections by changing names. The FATF asked Pakistan to demonstrate its ability to launch effective investigations and prosecutions of members of proscribed outfits.

Pakistani state agencies were told to enhance their capacity to effectively prosecute terrorist financing. Media sources also quoted unnamed government officials as saying that the upcoming FATF review (in February 2019) would determine whether Pakistan came out of the grey list or moved into the blacklist.

FATF’s 22nd February 2019 Assessment

A FATF plenary was held from 18-22 February 2019 during which the APG (an associate member of the FATF) presented Pakistan’s progress report. By this time, Pakistan was apparently hopeful of its FATF compliance progress. However, on 22 February 2019, to Pakistan’s surprise, the FATF identified it as one of 12 jurisdictions having “strategic AML/CFT deficiencies”. FATF noted the following:

Pakistan has been on the Financial Action Task Force grey list since June 2018. Earlier, too, Pakistan was on the FATF grey list in 2008, and between 2012 till 2015.

“Since June 2018, when Pakistan made a high-level political commitment to work with the FATF and APG to strengthen its AML/CFT regime and to address its strategic counter-terrorist financing-related deficiencies, Pakistan has taken steps towards improving its AML/CFT regime, including by operationalising the integrated database for its currency declaration regime.

Pakistan has revised its TF [terror financing] risk assessment; however, it does not demonstrate a proper understanding of the TF risks posed by Da’esh, AQ, JuD, FiF, LeT, JeM, HQN, and persons affiliated with the Taliban. [Emphasis added].

Pakistan should continue to work on implementing its action plan to address its strategic deficiencies….” FATF concluded: “Given the limited progress on action plan items due in January 2019, the FATF urges Pakistan to swiftly complete its action plan, particularly those with timelines of May 2019.” Media reports indicate that Pakistan narrowly escaped being blacklisted in this plenary after India presented a dossier to the FATF urging it to place Pakistan in the blacklist.

Pulwama Attack and Allegations of Indian Interference

The FATF February 2019 plenary took place in the backdrop of the Pulwama attack and the subsequent rise in Pakistan-India tensions. Around the February 2019 plenary, voices could be heard in Pakistani policy circles about Indian interference in the FATF process to diplomatically isolate Pakistan. Apparently, a co-chair of the APG is a serving bureaucrat of India.

The FATF asked Pakistan to demonstrate its ability to launch effective investigations and prosecutions of members of proscribed outfits.

In February 2019, Pakistan’s Finance Minister, Asad Umar, wrote to the FATF president asking for the APG co-chair to be replaced with another person citing this conflict of interest and a detriment to Pakistan’s interests. Media reports indicate that in March 2019, an APG delegation visited Pakistan to monitor Pakistan’s compliance and expressed concerns over lack of tangible progress on the ground.

At that time, Pakistan was required to submit a report by the third week of April 2019 to address the priority areas identified by the FATF. With the May 2019 deadline looming, and Pakistan having been told several times that it needs to do more, what possible risks does it face?

Possible Repercussions for Pakistan

If Pakistan is moved to the blacklist, this can have a devastating impact on Pakistan’s already struggling economy. Pakistan is in discussions with the IMF to secure an economic bailout package. As IMF is an observer member in the FATF and is committed to its AML/CFT recommendations, it is inconceivable that the IMF’s decision on the bailout package will be taken in isolation from the FATF’s determination regarding Pakistan.

Specifically, Pakistan’s placement on the blacklist will gravely affect its banking sector due to its inseparable link with the international financial system. Other obvious risks are foreign investors and financial institutions deciding not to invest in Pakistan or at least not before carrying out enhanced due diligence to avoid falling foul of the FATF.

Unravelling FATF Lawfare Against Pakistan

Over the years, the FATF’s importance has increased due to the powers conferred on it through laws promulged by international organizations such as the UN. Equally, the role of world powers in shaping the FATF policy cannot be overlooked. When undertaking a review of compliance by countries, the FATF is the judge, jury and executioner, all combined in one body. As a result, the FATF now enjoys unprecedented power in the international arena to shape the behaviour of states.

Did FATF Play an Even Hand?

In placing Pakistan on the grey list and pointing out its AML/CFT shortcomings, an obvious question comes to mind: has the FATF remained true to its Constitution? Conversely, and importantly, could the FATF have fallen victim to political interference and played an uneven hand towards Pakistan?

The FATF has been called a “monopoly on assessing AML standards”, a body with no real competitor of a similar stature that can challenge its authority. In the past, the FATF failed to take corrective action against member states such as Denmark when allegations of a multi-billion dollar money-laundering scandal surfaced in its largest bank. Clearly, although member countries can get away with bigger transgressions, this privilege may not be available to non-permanent members of the FATF such as Pakistan.

International courts interpret and apply international law from time to time. The ICJ, for example, adjudicates disputes between countries. Another example is the ICC, with jurisdiction over war crimes, crimes against humanity, and genocide.

With little to no political backing in the FATF, Pakistan thus had little choice but to go by the book and call the presence of an Indian co-chair on the APG a conflict of interest. This was not merely a technicality pointed out by Pakistan. If true that the Indian co-chair was lobbying for support of other member countries to blacklist Pakistan, it would cast doubt over the fairness and objectivity of the FATF’s own determination regarding Pakistan. However, to its bad luck, Pakistan’s allegation of bias against it would not, on its own, be enough to convince the FATF to delist Pakistan.

Geo-political Conundrum Facing Pakistan

Pakistan was earlier placed on the grey list in 2012 which it exited in 2015. The geo-political landscape has changed much since 2015. What worked for Pakistan in 2015 may not work for it again in 2019. Over the last few years, Pakistan has tilted further towards China for its military and economic needs.

China’s multibillion-dollar investment in the China-Pakistan Economic Corridor (CPEC) showcases the importance that it attaches to its relationship with Pakistan. Pakistan is not only China’s strategic ally in the region but a country that provides the crucial artery (CPEC) linking China’s Belt and Road Initiative (BRI) to the Middle East and beyond. But all this has come at a cost to Pakistan.

The FATF February 2019 plenary took place in the backdrop of the Pulwama attack and the subsequent rise in Pakistan-India tensions.

To counter the China-Pakistan nexus, the US in turn has positioned India as its pivot in the Asian balance of power. The US-India nexus, which is now stronger than ever, is unravelling through a robust lawfare against Pakistan. Nowadays this lawfare can be seen panning out through attempts to pull the plug on Pakistan’s economy and to thus make it slide further back in the red.

Another strategy seems to be to harp on the mantra of asking Pakistan to “do more” and to make Pakistan’s credentials appear suspect to the world. The global narrative post-9/11 has been one of zero tolerance for terrorism and terrorist financing. Since then, Indian think tanks, media houses and policymakers have all tried to gain maximum mileage out of the adversity faced by Pakistan.

In a world where the terrorism narrative sells like hot cake, India’s job was made easier after the Pulwama incident which was used by it to make the case for Pakistan’s support of JeM and its role in the Pulwama attack. All this when Pakistan’s FATF review was underway. India thus craftily built on a narrative that the world was made to believe despite lack of evidence. Perception had trumped reality.

The US has also made its intentions clear to Pakistan over time. If the manner in which it reacted (or failed to react) to the Indian attack on Pakistani territory is anything to go by, it should be clear that the US, too, views its relationship with Pakistan as a zero-sum game. The US praising Pakistan for its role in the Afghanistan peace process is no more than empty rhetoric to keep Pakistan on its side due to limited options in negotiating a peaceful Afghanistan exit.

It should, therefore, come as no surprise that the US has been opposing Pakistan’s IMF bailout, arguing that IMF dollars secured by Pakistan will be used to repay China’s debt. Behind the US opposition to Pakistan’s IMF bailout lies a stark economic reality: the US has the largest vote bank in the IMF board (16.52 percent) followed by Japan (6.15 percent), China (6.09 percent), Germany (5.32 percent), France and the UK (both having 4.03 percent each).

The global narrative post-9/11 has been one of zero tolerance for terrorism and terrorist financing.

With a limited Indian vote in the IMF board (2.64 percent) yet with a growing economic and military relationship with the US and Europe, India’s soft power cannot be estimated solely through percentages and numbers. This can be seen from India’s success in convincing the US to turn up the heat on Pakistan by tabling a UNSC resolution last February that sought to declare JeM Chief Masood Azhar a global terrorist. The urgency attached by the US to the resolution and the immediate support it got from Britain and France is cause for alarm for Pakistan.

Were it not for China vetoing the resolution and asking for further meaningful debate between stakeholders before deciding the matter, Pakistan would been left facing major embarrassment of having one of its nationals – this time the chief of the very organization (JeM) alleged by India to have carried out the Pulwama attack – labelled a global terrorist.

Around that time, Pakistan’s National Security Council reinstated the ban on JeD and called for swift action against other banned outfits. India claimed that its pressure had forced Pakistan to ban JeD. Expectedly, Pakistan called it a routine matter that had nothing to do with India’s pressure. Regardless, Pakistan’s decision to belatedly ban JeD would have made it appear non-serious. Worse, the timing of the ban which coincided with world pressure on Pakistan made it appear weak. In other words, another self-inflicted wound by Pakistan.

Lawfare is the use of law as a weapon of war. It is the leveraging of the international, regional and/or domestic legal system as a weapon against the adversary. Lawfare is increasingly becoming the preferred method of waging war in the 21st Century and for obvious reasons.

With FATF review around the corner, the US and India cannot be expected to give up on their efforts to cast Pakistan in further negative light. While India may not be the architect of this lawfare, and not, on its own, hold enough sway to force a global change of heart about Pakistan, yet with powerful US backing (and that of some Western countries whose opinion could have been influenced), the equation is tilted against Pakistan.

Pakistan’s Response

Lest we forget, Pakistan has not helped its case either. Pakistan’s response to this lawfare has been far from satisfactory. And not just from a tactical but a strategic and policy point of view. Pakistan took inordinately long to understand the seriousness of the FATF requirements and the implications of non-compliance. Pakistan ought to have known long ago that taking corrective measures such as tweaking laws here and there would not cut it before the world body.

What was required was a demonstration of intent and seriousness; an intent to “drain the swamp” of terrorist financing, no matter what its form or shape. Whether or not JeM or Masood Azhar for that matter had a role to play in Pulwama is immaterial. Pakistan rightly left the burden of proving that to India which not only failed to discharge this burden but in the process made an utter mockery of itself before the world. Needless to say, it took a while for Pakistan to realize that the optics of the presence of a “bad guy” in its territory was enough to tarnish Pakistan’s prospects before the world.

Post Pulwama, Pakistan’s diplomatic corps also took steps such as raising the Kashmir issue at the UN and highlighting India’s role in supporting terrorism in Pakistan. All this is well and good on its own. However, in light of the current global narrative that favours India, these initiatives on their own are not enough to undo the world’s “preconceived notions” about Pakistan. If Pakistan is to win the battle of ideas, it will, sooner rather than later, have to take the world into confidence about its genuine desire to bring its house in order and demonstrate progress on the ground.

Possible Outcomes for Pakistan

September 2019 is not too far when Pakistan’s case will come up for review. Who knows what can happen between now and then. In light of what has been explained here, there are two possible outcomes for Pakistan. First, the FATF may take an “object and purpose” approach. This would mean looking at Pakistan’s overall compliance since the date it was placed on the grey list (some shortcoming and deficiencies notwithstanding).

The US praising Pakistan for its role in the Afghanistan peace process is no more than empty rhetoric to keep Pakistan on its side due to limited options in negotiating a peaceful Afghanistan exit.

If the FATF adopts this approach, Pakistan would be seen to have enacted laws, introduced amendments to laws and otherwise taken some positive and concrete steps to implement the FATF’s recommendations. By implication, Pakistan would not be seen to have digressed in terms of compliance but rather to be getting closer to the targets. In such case, Pakistan would be taken off the grey list in September 2019 or, or at worst, given some further time to comply with the FATF requirements while remaining on the grey list. Such an approach would suit Pakistan for obvious reasons.

However, if the ongoing lawfare against Pakistan is anything to go by, the other approach the FATF may adopt is to pick holes in Pakistan’s narrative, point to specific failures by Pakistan to implement AML/CFT recommendations and thus label Pakistan non-compliant. This would be a literal application by the FATF of its own requirements. If the FATF goes by this approach, its recommendations would provide enough technical and legal jargon that can be used against Pakistan. The obvious disadvantage of this approach for Pakistan is that it would land in the blacklist, something that it has been trying to avoid since June 2018.

As to which of these two approaches will be adopted by the FATF is hard to predict. Time is running out for Pakistan. It is hoped that Pakistan’s policymakers understand the gravity of the matter, plug the gaps in compliance on war footing and take immediate steps to highlight all the positive work that Pakistan has done till date. It is sincerely hoped that yet again Pakistan will emerge unscathed in these testing times when some world forces are pitched against it in a rather robust financial lawfare.

Hassan Aslam Shad is the head of corporate and international practice of a leading Middle Eastern law firm. He is a graduate of Harvard Law School, USA, with a focus in international law. Over the years, Hassan has written extensively on topics of law, including public and private international law and international relations. Hassan’s LLM Thesis at Harvard Law School was a detailed study of the parallels between Sharia and the Rome Statute of the International Criminal Court. Hassan has the distinctive honor of being the first person from Pakistan to intern at the Office of the President of the International Criminal Court, The Hague. He can be reached at:veritas@post.harvard.edu.

The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.

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