Pakistan has failed to complete 25 of the 27 action points given by international terror financing watchdog Financial Action Task Force (FATF) to check funding to terrorist groups such as Lashkar-e-Toiba (LeT) and Jaish-e-Muhammad (JeM) and frontal groups like Jamat-ud-Dawah (JuD) and Falah-e-Insaniat Foundation (FIF).

* With this, multilateral lenders such as the IMF and the World Bank may continue downgrading Pakistan, making its financial situation more precarious.

* The Paris-headquartered FATF has asked Pakistan to explain whether it has launched any probe into the $7 million allocated to maintain schools, madrasas, clinics and ambulances originally operated by terror groups such as LeT, JeM and LeT fronts JuD and FIF.

* JuD and FIF are founded by terror mastermind Hafiz Saeed.

* LeT is responsible for a number of terrorist strikes in India, including the 2008 Mumbai attacks and the hijacking of an Indian Airlines aircraft to Afghanistan in 1999.

* The FATF implements UN designations, which do not warrant arrest. They ask only for freeze of funds, denial of access to weapons and travel embargo. The financial watchdog also wants nations to impose penalties that are proportionate and dissuasive.

Background

* In June 2018, Pakistan was placed in the grey list and given a 27-point action plan by FATF. This plan was reviewed at the last plenary in October 2018 and for the second time in February this year, when the country was again put in the grey list after India submitted new information about Pakistan-based terrorist groups.

* The FATF keeping Pakistan in the grey list means its downgrading by IMF, World Bank, ADB and the EU, and also a reduction in risk rating by Moody’s, S&P and Fitch.

* This will add to the financial problems of Pakistan, which is seeking aid from all possible international avenues.

* The FATF has asked Pakistan to explain whether there are any terror funding investigations to unearth the sources and entities that funded these organisations with $7 million per annum for the past several years.

What is the FATF?

* The FATF is an inter-governmental body established in 1989 by the ministers of its member jurisdictions.

* The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

* The FATF is a policymaking body that works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

* The FATF currently has 35 members and two regional organisations - the European Commission and Gulf Cooperation Council.

The FATF has two types of lists - black list and grey list.

* The FATF black list or OECD black list has been issued since 2000 and lists countries that it judges to be non-cooperative in the global fight against money laundering and terrorist financing, calling them Non-Cooperative Countries or Territories (NCCTs).

* Countries that are considered as safe havens for supporting terror funding and money laundering are included in the grey list.

Implications

* Being put on the FATF watchlist could deal a blow to Pakistan’s economy, making it harder for foreign investors and companies to do business in the country.

* Also, being put on the grey list would increase Pakistan’s risk profile and some financial institutions would be wary of transacting with Pakistani banks and counterparties.

* Being placed on the FATF watchlist carries no direct legal implications, but brings extra scrutiny from regulators and financial institutions.