Pakistan has taken a step closer to being blacklisted by a highly influential global financial crime watchdog, upping the risks for banks financing trade to and from the South Asian country.

The Financial Action Task Force (FATF), a standards-setting body for tackling money laundering and terrorist financing, announced following its plenary meeting last week that Pakistan has failed to make a string of compulsory improvements to its crime-fighting controls.

The risks are particularly acute “in light of the terrorist financing risks emanating from the jurisdiction”, the task force says. It has given the country until June 2020 to finalise reforms, which include progress in prosecuting and penalising those providing material assistance to militant groups.

The FATF also added seven countries to its so-called greylist: Albania, Barbados, Jamaica, Mauritius, Myanmar, Nicaragua and Uganda. Transactions linked to greylisted countries are not formally subject to enhanced due diligence requirements, but the task force says businesses should take their status into account as part of any risk analysis.

At the same time Iran’s place on the FATF’s blacklist has been confirmed, after the country failed to meet a final February deadline for making key improvements. Countries are now urged to apply “effective counter-measures” to bar the country from the global banking sector.

“Until Iran implements the measures required to address the deficiencies identified with respect to countering terrorism-financing… the FATF will remain concerned with the terrorist financing risk emanating from Iran and the threat this poses to the international financial system,” it says.

Pakistan has long struggled to meet the task force’s demands. Economic affairs minister Hammad Azhar said in October that the action plan, agreed in mid-2018, is “one of the most ambitious and challenging ever handed out to any country”.

One concern is that cross-border trade transactions could be affected by a sense of increasing risk. Pakistan – a major producer of textiles and clothing – exported goods worth US$23.6bn in 2018 according to World Bank figures. The largest share of all exports go to the US, followed by China and the UK. It also imports goods worth over US$60bn a year, chiefly fuel.

Pakistan’s ongoing presence on the task force’s greylist means it “certainly carries more risk for anyone seeking to do business with the country”, says Michael Ruck, a partner in TLT law firm’s financial services team and a former member of the Financial Conduct Authority’s enforcement division.

“Pakistan remaining on the greylist means it will be downgraded by the IMF, World Bank, the Asian Development Bank and the EU, and also suffer a reduction in risk rating by Moody’s, S&P and Fitch,” he tells GTR. “This will add to the financial problems of Pakistan, which is seeking aid from all possible international avenues.”

The potential for the country to be blacklisted – potentially as soon as June this year – carries even greater risk. Simon Cook, a partner at Sullivan, says that threat alone could affect the ability of a borrower in Pakistan to obtain finance.

“As lenders would have to deal with the consequences on an ongoing basis from the point in time at which Pakistan was blacklisted, even pre-existing transactions would be caught potentially,” the lawyer tells GTR.

“Unless transactions are very short term, lenders may well decide it is not worth the risk or the hassle of funding countries being threatened with blacklisting. There are also potential reputational issues to consider in funding potentially blacklisted countries.”

Cook adds that blacklisting often goes hand in hand with other restrictions such as sanctions, which can in some cases be applied retrospectively. In the case of Iran, he says that “certainly affected” financing even when sanctions had been temporarily lifted.

The impact of blacklisting Iran may be dampened by the fact banks are already prohibited with transacting with the country by US sanctions. Despite efforts by several European countries to find a workaround, financial institutions and businesses alike have so far been wary of potential enforcement action from across the Atlantic.


Greylist expands

The seven countries newly greylisted face a more uncertain future. Sullivan’s Cook says lenders active in those markets would likely be expected to carry out enhanced due diligence to any relevant deals or parties.

However, because countries are generally given a long period of time to meet FATF demands, he believes short-term financing – including most trade finance arrangements – is unlikely to be affected.

“Even for longer term deals, it may be that complying with the enhanced due diligence requirements is worth it financially for lenders,” Cook adds.

“Of the countries currently greylisted, Sullivan is working on deals in five of them – Botswana, Ghana, Mauritius, Uganda and Zimbabwe – and to date we are not finding it to be that much of an issue from a borrower’s point of view.”

The other greylisted countries are The Bahamas, Cambodia, Iceland, Mongolia, Panama, Syria and Yemen, while Trinidad and Tobago has been removed.

North Korea – effectively blacklisted since 2011 – remains subject to the most serious warning from the task force. Rather than make efforts to meet its demands, the country is notorious for attempting to compensate for its loss of international trade through state-sponsored cyberattacks.

A UN Security Council report published in late 2019 said the main cyberactivities carried out by the country include attacks through the international SWIFT financial messaging service – including hacking staff computers in order to “send fraudulent messages and destroy evidence” – as well as ransomware, ATM network manipulation and cryptocurrency theft.