Moddy’s terms Pakistan’s listing under increased monitoring a credit negative for banks

Nation special report

ISLAMABAD: To ensure the implementation the new rules and regulations set by Financial Action Task Force (FATF), Pakistan has reportedly decided to follow these restrictions in three areas in the next few days as part of compliance with recommendations of the Financial Action Task Force (FATF) regarding anti-money laundering and combating financing of terrorism (AML/CFT) in Pakistan.

The rules will cover real estate, gems and jewellery sectors to minimise chances of parking of terror financing there. The FBR will also work as a focal organisation for monitoring services of income tax practitioners.

In the meantime, the Financial Action Task Force’s (FATF’s) announcement that Pakistan will remain on its list of jurisdictions under increased monitoring is credit negative for the country’s banks, Moody’s Investors Service said its latest credit outlook report released on Thursday.

The services of lawyers and chartered accountants will be monitored through the law division and the Securities and Exchange Commission of Pakistan (SECP).

“We have sent these rules to the law division for vetting,” FBR spokesperson and Member Policy Dr Hamid Ateeq confirmed to Dawn. After vetting, he said, the rules would be notified for implementation.

Provinces will be asked to bring DC rates of properties closer to market value The Paris-based FATF reviewed measures taken and progress made by almost 15 countries, including Pakistan, vis-à-vis AML/CFT in its plenary concluded on Feb 21.

Representatives from 206 countries and jurisdictions around the world attended the meeting. Pakistan’s minister for economic affairs led the country’s delegation.

Under the rules, jewellers will document and record the value of transactions. This information will be shared with the FBR through a proper system to be put in place after notification of the rules. The jewellers will also report suspicious transactions, which means buying or selling of gold and precious stones beyond a certain limit.

The jewellers will also submit a special return form to be notified by the FBR, which has data of around 30,000 jewellers across the country.

The proposed rules will apply to housing authorities or sub-registrar offices where property exchanges are attested. The property agents will not come under the purview of these rules. A new FATF regulation, Designated Non-Financial Business or Profession, will also be implemented.

There are 35,000 attesting authorities in the country. The basic purpose of the rules are to know the customers and to conduct due diligence.

According to the FBR, the regulation is very problematic in many countries, but Pakistan will try to implement it.

The government is also considering convincing the provinces to revise valuation table rates closer to market value to address the concerns of terror financing parked in the real estate. “We have asked the provinces to revise DC rates closer to market value,” a senior FBR official said, adding that the tax rates would be lowered to neutralise its tax impact.

He said the revised DC rates would be announced in the next budget through finance bills of the provinces. “We don’t want to hurt business of real estate and jewellers,” the official said, adding that representatives of these sectors had been asked to cooperate for implementation of the global standards.

However, the official said that for effective control the government would have to make further amendments in the anti-money laundering act as well. “We are not sure when it will happen,” he said.

According to an official report of the FATF chairman, to date, Pakistan has largely addressed 14 of 27 action items, with varying levels of progress made on the rest of the action plan. The FATF strongly urges Pakistan to swiftly complete its full action plan by June 2020.

Moddy’s comments

The Financial Action Task Force’s (FATF’s) announcement that Pakistan will remain on its list of jurisdictions under increased monitoring is credit negative for the country’s banks, Moody’s Investors Service said its latest credit outlook report released on Thursday.

The FATF, an inter-governmental body tasked with setting global framework requirements around anti-money-laundering, counter-terrorist financing and other related threats to the international financial system, said last week that Pakistan will remain on its list of jurisdictions under increased monitoring, along with 17 other countries, after failing to complete a June 2018 action plan by the assigned deadlines.

Pakistan, which has been presenting its progress to FATF every four months since the agreement of the action plan, will remain on the list until at least June when the next evaluation will take place.

“The announcement is credit negative for Pakistani banks because it raises questions about potential additional restrictions relating to banks’ foreign-currency clearing services as well as their foreign operations. Banks’ profitability risks being constrained as a result of increased compliance and operational costs,” said Moody’s.

The FATF has warned that it will urge member countries to increase their attention when conducting business transactions with Pakistan if the country’s government, regulatory body and other stakeholders of the financial system fail to complete the action plan, which emphasises combating terrorist financing by June 2020.

Should they fail to do so, international financial institutions could curtail their interactions with Pakistani banks and other financial companies, including terminating correspondent banking relationships. This in turn will further constrain banks’ ability to generate business and result in higher compliance costs.

Improving but still-weak, compliance with global anti-money-laundering and combating terrorist financing standards — both by Pakistani banks and the country’s authorities — means that banks still risk losing access to foreign-currency clearing services.

Access to foreign-currency clearing transactions, typically conducted through international correspondent banking relationships, is crucial for Pakistani banks because it allows them to process cross-border payments for clients.

Clearing in US dollars is particularly important given Pakistan’s high import and export economic activity as well as the fact that a large proportion of international payments are made in this currency.

This risk has so far not crystallised in the jurisdictions that have been placed on the increased monitoring list, said Moody’s.

A number of domestic banks with foreign operations have been subject to investigations relating to anti-money-laundering or counter-terrorist financing issues that have resulted in penalties, higher compliance costs and in some cases the removal of overseas licen