Financial Crime World

Financial Institutions’ Role in Preventing Financial Crime in Pakistan: A Critical Analysis

Pakistan’s financial institutions are at the forefront of detecting and preventing the transfer of corruption proceeds out of the country. However, the current situation is far from satisfactory. The government has made commitments to reduce corruption, but repatriating stolen assets and preventing corruption-related illicit outflows are key to delivering on that promise.

Challenges in Preventing Financial Crime

Tax Evasion

  • Widespread tax evasion in Pakistan’s informal economy makes it difficult for financial institutions to ascertain the legitimacy of their clients’ business.
  • Regulators, State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP), should clarify expectations on reporting tax evasion and ensure that financial institutions’ resources are not disproportionately directed towards addressing tax offences at the expense of other predicate offenses.

Lack of Best Practices

  • Financial institutions lack best practices in identifying higher-risk customers and establishing the source of their funds and wealth.
  • The banking sector’s compliance efforts have been largely focused on automated transaction-monitoring processes, while the SBP’s supervision style should be adjusted to pay greater attention to banks’ understanding and mitigation of risks.

Exchange Companies Sector

  • Opaque ownership structures and potential links to politically exposed persons pose money-laundering risks in the exchange companies sector.
  • The State Bank of Pakistan (SBP) should increase its supervision of these companies, and enforcement efforts by the Federal Investigation Agency against unlicensed hawala/hundi operators are essential.

Regulated Businesses

  • Regulated businesses under the SECP’s purview are only beginning to come to terms with anti-money-laundering requirements.
  • Outreach and enforcement efforts by the SECP can help demonstrate the rationale behind these regulations and alert the sector to the possibility of enforcement.

International Engagement

UK-Pakistani Relationship

  • Pakistan’s perception of being “grey-listed” by the Financial Action Task Force (FATF) in June 2018 as a political move has led to a mismatch in Pakistani and international illicit finance-related priorities.
  • The UK is seen in Pakistan as an enabler of corruption, and the predominant focus of UK law enforcement efforts is drug trafficking.

Need for International Coordination

  • Combining the UK perspective on Pakistan as a destination country for proceeds from drug trafficking and organized crime activities and Pakistan’s view of the UK as a magnet for corruption proceeds is vital to promoting a productive dialogue and cooperation.
  • Ultimately, it is essential to address these challenges and promote greater international coordination and cooperation to effectively combat financial crime in Pakistan.