ISLAMABAD/WASHINGTON/HONG KONG: The prospect of Pakistan being placed backon a global terrorist financing watchlist could endanger its handful ofremaining banking links to the outside world, causing real financial painto the economy just as a general election looms, reported Reuters.
Washington and its European allies have co-sponsored a motion calling forthe nuclear-armed nation to be placed on a “gray list” of countries deemedto be doing too little to comply with anti-terrorist financing andanti-money laundering regulations, with a decision expected next week whenmember states of the Financial Action Task Force (FATF) meet in Paris.
The move is part of a broader U.S. strategy to pressure Pakistan to cut itsalleged links to Islamist militants waging chaos in Afghanistan.
Pakistan, which denies such links, last month shrugged off a U.S. aidsuspension worth $2 billion. But inclusion on the FATF watchlist couldinflict real damage, bankers and government officials say.
Islamabad has sought to head off the motion by amending its anti-terrorismlaws and by taking over organizations controlled by Hafiz Saeed, aPakistan-based Islamist whom Washington blames for the 2008 Mumbai attacksthat killed 166 people.
But there are concerns Pakistan’s nearly $300 billion economy, expanding atits fastest rate in a decade at above 5 percent, could lose steam if itends up on the FATF watchlist, from which it was removed in 2015 afterthree years.
“We don’t think the consequences are going to be drastic but it’sdefinitely not good,” said one senior finance ministry official.
Military successes against militants and massive Chinese infrastructureinvestments have restored some vim to an economy hobbled by a long-runningIslamist insurgency and wrecked by the 2008/09 global financial crisis.
Officials are aiming for economic expansion to hit 6 percent this fiscalyear (July-June) and Prime Minister Shahid Khaqan Abbasi’s ruling partywill want to avert a slowdown in the lead up to a general election due inabout six months.
Being placed on the FATF watchlist carries no direct legal implications,but brings extra scrutiny from regulators and financial institutions thatcan chill trade and investment and increase transaction costs, according toexperts.
Mike Casey, a partner at law firm Kirkland & Ellis in London, said beingput back on the gray list would heighten Pakistan’s risk profile and somefinancial institutions would be wary of transacting with Pakistani banksand counterparties.
“Others might elect to avoid Pakistan altogether, viewing the legal risksassociated with doing business there to outweigh any economic benefits,” hesaid.
CURRENT ACCOUNT DEFICIT
A decline in foreign transactions and a drop in foreign currency inflowscould further widen Pakistan’s large current account deficit, the Achillesheel of an economy that required an IMF bailout in 2013 following a balanceof payments crisis.
Another major worry is that the likes of Standard Chartered, the largestinternational bank in Pakistan with 116 branches, or Citibank and DeutscheBank, who mostly deal with corporate clients, would pull out.
Banks have been retreating from high-risk countries in recent years amidintense pressure from global regulators to guard against money launderingand terrorist financing.
“The level of due diligence is already high in countries like Pakistan, butif this goes ahead then the banks will really have to reassess therisk-reward scenario,” said a senior executive with a large foreign bank,which has business interests in Pakistan.
In September, Pakistan’s biggest lender, Habib Bank, was fined $225 millionand effectively forced to shut its U.S. operations by the New Yorkregulator due to compliance failures over money laundering and terroristfinancing.
U.S. watchdogs have dished out more than $16 billion in fines foranti-money laundering (AML) compliance failings since the end of 2009,according to data compiled by Hong Kong consultancy Quinlan & Associates.
“No one wants to be get caught in a situation where for a few milliondollars of business the bank will have to pay billions in fines,” added theforeign bank executive.
There is no immediate indication the handful of international banks thatremain are considering leaving Pakistan, and banking sources point out thatthese banks are well-versed with the risks of operating in the country.
Citibank, in a statement, said: “Citi complies with all applicable U.S. andinternational anti-money laundering requirements and economic sanctions.”
Standard Chartered said it was “closely monitoring the situation and as amatter of policy, we do not comment on market speculation”. Deutschedeclined to comment.
RAISING MONEY
The FATF threat has begun to weigh on Pakistan’s stock market, althoughlocal businessmen say the country’s companies are accustomed to operatingin tough conditions.
Yet some are unnerved.
One Pakistani money manager launching an alternative investment fund saidhe fears his new venture could now struggle to attract U.S and Europeaninvestment.
“It’s already tough to raise money in Pakistan and anything to do with a‘terror financing’ watchlist will just scare people,” said the fundmanager. “There will be more scrutiny and some foreign funds will backaway.”
A Pakistani finance ministry source said the government also fears adowngrade by the credit ratings agencies, making it harder or moreexpensive for Pakistan to raise debt on the international markets.
“It reduces our credibility in the world, which is unfair,” addedPakistan’s State Minister for Finance, Rana Afzal.
Some Pakistani officials say there is growing confidence in the countrythat recent efforts against Saeed, who was the focus of the FATF motion,will be enough to stave off further action.
“We’ve taken the wind out of their sails,” said one senior Pakistanigovernment official. “If we now get punished, it would be a political moveand vengeful.” – Agencies