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FATF’s leniency with Iran could create a precedent for Pakistan

If India wants FATF to hold Pakistan accountable for its financing of terrorist entities, it should be at the forefront of ensuring Iran finally completes its action plan without conditions and loopholes

analysis Updated: Apr 18, 2019 12:48 IST
Toby Dershowitz and Serena Frechter
Toby Dershowitz and Serena Frechter
Financial Action Task Force,Asia Pacific Group,gray-list
In February 2019, the Pakistan-based terrorist group Jaish-e-Muhammad claimed responsibility for a bombing in Kashmir that killed at least 40 Indian soldiers(PTI)

Pakistan has long faced accusations that its government either is complicit with or looks the other way when it comes to terror organisations that operate on its soil. Pakistan has just one more month to demonstrate to the Financial Action Task Force (FATF) and its associate regional body, the Asian Pacific Group (APG) that it has undertaken the necessary steps to address its terror financing-related deficiencies by the May deadline.

Though FATF will ultimately judge Pakistan on technical grounds, India plays an influential role in FATF’s assessment of Pakistan’s terror finance regime, as it serves as co-chair of the APG Joint Group. The APG makes recommendations to FATF regarding the progress of its members.

As Pakistan seeks to undermine India’s role in the review process, how else can India ensure FATF holds Pakistan to account until it makes the necessary reforms? India has pushed FATF to clamp down on Pakistan’s terrorism ties, but has not shown the same urgency when it comes to Iran.

FATF is the global body devoted to setting standards for combating money laundering and terror financing. FATF identifies countries that do not have sufficient regulations in place to counter money laundering and terror financing and places them on one of its two high-risk public documents.

The “grey list” comprises monitored jurisdictions, for which FATF “encourages its members to consider the money laundering and terror finance risks arising from the strategic deficiencies of these jurisdictions.” grey listed countries have the opportunity to reform their systems through the completion of an action plan, so that those wishing to transact in these jurisdictions can do so with higher confidence.

Those that fail to improve their policies may be moved to the “blacklist” of high-risk jurisdictions and could be subject to countermeasures, such as prohibiting the establishment of branches of foreign banks in Pakistan. FATF calls on its members to apply “enhanced due diligence measures” on blacklisted nations, including procuring information on the source of funds of customers. Countries on the blacklist also have the opportunity to address their strategic deficiencies through an action plan.

FATF grey listed Pakistan in 2018 “for failing to act against Lashkar-e-Taiba and its suspected political front, Jamaat-ud-Dawa.” Lashkar-e-Taiba militants carried out the November 2008 Mumbai attacks, which killed over 160 people. Concerned that it might land on the grey list, Pakistan renewed its expired ban on Jamaat-ud-Dawa days prior to the February 2019 meeting, but this was insufficient.

In February 2019, the Pakistan-based terrorist group Jaish-e-Mohammad claimed responsibility for a bombing in Kashmir that killed at least 40 Indian soldiers. At its triannual plenary, a week after the bombing, FATF noted that Pakistan had only made “limited progress” on its action plan, stating Pakistan “does not demonstrate a proper understanding of terror finance risks” posed by active terrorist organisations. FATF named the Islamic State, al-Qaeda, Jamaat-ud-Dawa, Falah-i Insaniat Foundation, Lashkar-e-Taiba, Jaish-e-Mohammad, the Haqqani Network, and the Taliban as groups of concern. If Pakistan does not fully complete its action plan by October 2019, it risks being moved to the blacklist.

Pakistan has been slow to implement its action items, often enacting legislation only when threatened with being placed on the blacklist. In early March, the Pakistani government announced it would crack down on institutions affiliated with Jamaat-ud-Dawa. The government reportedly “sealed or took over administrative control of several establishments” run by Jamaat-ud-Dawa and its charity, the Falah-i Insaniat Foundation. However, the government made no arrests, calling into question its commitment to aggressively eliminate the threat posed by these groups.

The Pakistani state reportedly supports Hafiz Saeed, the emir and founder of Lashkar-e-Taiba and Jamaat-ud-Dawa. Moreover, Bill Roggio, editor of Foundation for Defense of Democracies’ Long War Journal, reports that many Jamaat-ud-Dawa “charitable fronts operate inside Pakistan, with the knowledge and support of the state.” He notes, “Pakistan also routinely rounds up known terrorist leaders and places them under protective custody, only to release them when foreign pressure wanes.”

Even after major terror attacks, Pakistan failed to take meaningful action to curb these groups. In the wake of the 2008 Mumbai attacks, Pakistan claimed to detain the responsible groups’ members and shutter their offices, yet the offices were soon reopened and its leaders were released.

As long as Pakistan continues its complicity with the terrorist groups that operate on its soil, FATF will be hesitant to remove it from the grey list of monitored jurisdictions, and the market will respond accordingly.

Pakistan is not the only country undergoing an action plan for its terror financing. FATF placed Iran on the blacklist for its insufficient terror finance legislation. Iran’s financial system is built on deceptive practices, front companies, and fraudulent activities. Iran agreed to an action plan to address its anti-money laundering and terror financing deficiencies in June 2016. Similar to Pakistan, Iran’s parliament at times passed legislation – usually with unacceptable conditions and loopholes – in the weeks prior to plenaries, hoping to persuade FATF to remove it from its blacklist. Despite this, FATF has granted four extensions even though Tehran failed to complete its reform plan.

FATF’s importance comes from its credibility as a technical organisation that does not allow politics to influence decision-making. If politics is allowed to seep into the Iran-related decision-making process, then it will make it that much harder to hold Pakistan accountable as well.

FATF’s leniency with Iran could set a precedent for its policy toward Pakistan. If India wants FATF to hold Pakistan accountable for its financing of terrorist entities, it should be at the forefront of ensuring Iran finally completes its action plan without conditions and loopholes.

Toby Dershowitz is senior vice president of government relations and strategy at the Foundation for Defense of Democracies, where Serena Frechter is a government relations analyst

The views expressed are personal

First Published: Apr 18, 2019 01:39 IST