Is Pakistan losing its long-standing allies?

It turned out to be a premature celebration when Khawaja Asif, Pakistan’s foreign minister, tweeted on February 20 that his country has avoided the censure of Financial Action Task Force (FATF), the global money-laundering watchdog. 

Diplomats from at least three dozens countries were in Paris to review, among other things, a proposal by the United States, to declare that controversial and outlawed groups misuse the Pakistani banking system, putting the international financial system at risk. 

As a result, Pakistan is most likely to be placed next to war-ravaged countries such as Yemen and Syria, from where terrorists can easily launder money. 

“Grateful to friends who helped,” Asif said in his tweet, referring to the Gulf Cooperation Council (GCC), China and Turkey — who among the FATF’s 37 members were the only ones backing Pakistan and opposed the US resolution. 

FATF is discreet about its dealings. Those attending the meetings are bound by a confidentiality clause, which says they cannot disclose internal proceedings in public unless they are authorised to do so. 

Decisions at the forum are taken through a consensus. But proposals are dropped if three or more countries oppose them. 

Pakistan, which is not a FATF member, had the required backing to avoid Washington’s move. But after Asif’s tweet the US diplomats went out of their way, cajoling and demanding, other members to withdraw their support to Islamabad. 

In the end, China and Saudi Arabia backed out and Turkey alone stood by Islamabad. 

“The real story is about the diplomacy and not terrorist financing. Countries that Pakistan expected would speak for it, didn’t. It’s the sign of Pakistan’s isolation,” Adil Najam, Dean of the Frederick S. Pardee School of Global Studies at Boston University, told TRT World. 

“It’s also about how the US applied all its muscle at a little-known forum just to make sure a decision came against Pakistan.” 

Being on FATF’s so called grey-list threatens Pakistan’s fragile economy. It makes international borrowing expensive and discourages foreign investors.

The writing on the wall 

Pakistan had already been on the grey list for three years — from 2012 to 2015. Its name was removed after Islamabad took steps to make it difficult for terrorists to use banking services.

Khurram Husain, a senior Pakistani journalist, says since then the FATF warned Islamabad on multiple occasions to take action against proscribed organisations. 

“This issue did not just surface in January,” he says. “Pakistan was continuously being asked to implement the UN Security Resolution 1267, which names prohibited entities and individuals.” 

At the center of controversy is Pakistan-based Hafiz Saeed. India considers Saeed as one of its main rivals for supporting an armed uprising in India-controlled Kashmir and accuses him of orchestrating the 2008 Mumbai attacks, a charge he denies.

Saeed is head of Jamat ud Dawa, a religious charity that operates free medical clinics and hospitals across the country. Jamaat ud Dawa, however, is listed as a terrorist organisation by the UN.

But Saeed has continued to work freely in Pakistan and even launched his own political party in Pakistan named Milli Muslim League (MML).

Days before the three-day FATF session began on February 21, the Pakistani government launched a crackdown on the MML. The police even raided a charity linked to the party.

“That action came just a week before the FATF meeting and failed to make any impact,” Yawer Shameem, the former head of compliance at Standard Chartered bank’s Pakistan operation, told TRT World.

Pakistani authorities put Saeed under house arrest in January 2017 but he was released later in the year,  prompting the US to warn of “repercussions”.

Shameem says Pakistani authorities find it difficult to contain the proscribed groups as they often change their names.

“And when the leaders of these groups are brought for prosecution, witnesses don’t show up. Courts then have no choice but to let [the] accused go.”

On the other hand, the US alleges that Islamabad supports the Haqqani Network, a militant group fighting the Washington-backed government in Afghanistan. 

“Pakistan has done a lot in last couple of years to curb terrorist financing and money laundering especially with the AML law it enacted after a lot of political haggling,” says Shameem. 

“So I think the FATF decision reeks of politics.” 

Pakistan had to make sweeping regulatory changes the last time to lift itself out of the FATF’s grey list. 

The country's banking system was lenient toward customers who took out loans or opened bank accounts with bare minimum requirements. 

That all changed in the past couple of years. The central bank pressured all the banks to implement strict compliance requirements and background checks. 

The only major money laundering case to hit a Pakistani bank involved HBL , but its compliance violation pales in front of similar failures in major international banks such as HSBC and BNP Paribas. 

The lost brotherhood 

Pakistani leaders say they had the support of at least three FATF members before the watchdog ostracised the country on February 20. 

“We had made it. but then they [the US] went behind our back to get a review in an unprecedented step,” Miftah Ismail, the advisor to the Pakistani prime minister on finance, told a news channel in Pakistan.

FATF is yet to officially acknowledge that it has identified Pakistan as a country that doesn't adhere to the watchdog's guidelines. But Pakistani officials have publicly stated that the country is likely to be placed in the grey list. 

Ismail didn’t respond to multiple calls and text messages. FATF’s executive secretary also didn’t respond to TRT World’s email.

Najam of Frederick S. Pardee School says GCC’s decision to back out wasn’t surprising considering Saudi Arabia’s relations are not at their best with Pakistan these days. 

Islamabad has opted out of the Riyadh-led military assault in Yemen in 2015, something that annoyed the Gulf region’s leadership. Later, Islamabad adopted a neutral position when Saudi Arabia and other GCC members boycotted Qatar. 

“The more interesting case is why China changed its stance,” Najam says.

After the Saudis backed out and Pakistan lost the support of at least three countries, China decided to play neutral. 

“Beijing didn’t want to embarrass itself by losing at the forum. It’s a major power and so it neither said yes or no.”

The unusual effort the US diplomats made in getting their proposal go through is a warning sign for Pakistan, Najam says. 

“The old US message was to do more. The new message is expect more,” Najam says. “Washington seems convinced that Pakistan is playing a double game in Afghanistan.” 

 In his first tweet in 2018, the US President Donald Trump announced suspending hundreds of millions of dollars in aid that Pakistan receives for fighting militancy.

“Pakistan has failed to convince the US and others that it is sincere in its fight against extremism. And that’s because of our poor diplomacy,” Najam says. 

Islamabad’s role at multilateral organisations such as the United Nations and World Trade Organisation (WTO) is negligible, he says. 

“Our diplomacy is entirely India-centric. We haven’t paid attention to platforms where we could make friends. How you vote and who you vote for at places like the UN and WTO is an IOU that you use later. Pakistan hasn’t paid attention to that.”

The economic impact

The FATF is scheduled to formally announce Pakistan’s grey-listing in June. In the intervening period, Islamabad has been asked to work on an action plan, which details how it intends to address the concerns raised by the FATF members. 

The four analysts TRT World spoke to echoed that the FATF’s move would have no immediate impact on Pakistan’s economy. But a lot depends on how Washington will deal with Islamabad in the near future. 

“If this is part of a larger foreign policy to pressure Pakistan to take action then this could be followed up by more stringent measures — perhaps a harsher IMF review, or difficulty in disbursement of loans from other multilateral organisations,” says Khurram Husain.

The US is Pakistan’s biggest export destination, and Islamabad should be wary of straining ties with Washington, says Saad Bin Ahmed, Head of Equities Broking at Arif Habib Limited, a Karachi-based brokerage house.

Pakistan’s current account deficit — which shows Pakistan is buying more goods and services from abroad then selling — can hit $13 to $14 billion in the financial year that ends in June 2018. 

“[The] major concern is that Pakistan would need financing from the IMF. The US and UK have a lot of say in the IMF’s affairs. They were also the one pushing hardest against Pakistan at the FATF. You can certainly assume it won’t be easy to take a loan from the IMF,” Ahmed says. 

Foreign investors remain concerned about the fallout of the FATF meeting, he says. 

“[The] Pakistani government works on push button basis. When it saw that FATF was about to list it, it took the action. This doesn’t go well for investment.” 

The lingering Kashmir issue 

What happened at the FATF meeting was extensively reported in the Indian newspapers and channels. 

India's aggressive posturing turned the otherwise routine bureaucratic exercise into  a major international event, says Najam. 

“What we are seeing is a toxic mix of a vindictive US president and an Indian prime minister [Narendra Modi] who is bent upon isolating Pakistan.” 

This could harm Pakistan’s Kashmir policy as its leaders struggle to make a strong case for Kashmiris’ right to self determination. 

“Pakistan has been most effective on Kashmir only when it was a major player on the diplomatic front just like in the 1960s or in president Zia ul Haq’s era of 1980s,” says Najam. 

For India, the FATF's changing stance against Pakistan is a small victory against its archrival. But it has also triggered a debate within Islamabad whether it can continue to give a breathing space to armed groups fighting battles in Kashmir and Afghanistan. 

“I don’t think the Kashmir cause, the struggle of the Kashmiri people against enormous odds, is well served by violent actions perpetrated from across the border (Pakistan-administered Kashmir),” says Husain, the journalist. 

“That is a very important point which needs to be understood by the Pakistani security establishment.”