Combating Money Laundering and Terror Financing through Digitalization

Money laundering (ML) and Terror Financing (TF) has emerged as some of the most drastic challenges to the modern world. The growing menace is a vertex point of the organized crimes and terrorism-related activities because it is a fundamental aspect of resource management and enhancement. From Asia to Europe, the Middle to Africa, America all the states around the globe are exposed to this alarming trend over the past two decades and this threat likely to escalate in foreseeable future due to the unprecedented environment fostered by the global outbreak of a pandemic. With growing technological innovations and modernization trends, the reliance on technology has exceeded over the period. The digitalization aspect has further enhanced the ambiguous configurations with reference to business-related activities. With all this progressive development, the security risks have also deepened further with a multifarious trajectory of transnationalism and global integration. It has become a paradox in nature that the global world is fascinated by technological dependence and vows to combat such risks through the means of technology, this key assertion justifies that humans have become a tool that is subordinated to the technologically driven calculus in all the sphere of life. Apart from third world states, first world countries such as European and American states are most vulnerable to the illicit trends of money laundering and terror financing. The growing influence of non-state actors, the role of charity organizations and non-governmental entities have also become a major drive force behind the worldwide spread of Money laundering and financing of terrorism.

Digitalization and technological advancement has integrated the contours of global economy whilst Money laundering and Terror Financing has become must easier for criminal actors. This diversification has drawn ambiguous configurations and it has posed heinous challenges for combating globally spread menace of illicit activities vis-à-vis Ml/TF.

It is not confined to a single state or entity rather it is embodied in the social fabric all across the world and the majority of the global economy is driven through such covert designs. According to the author’s model, a global money-laundering total of $2.85 trillion per year, heavily concentrated in Europe and North America. Likewise, according to the Basel AML Index 2020 report, the average risk score across all 141 countries on the ML/TF list remains unacceptably high, at 5.22 out of 10 –where ten is equal to the maximum risk. Even the European Union and Western Europe overall risk score is 4.01. Likewise, East Asia and Pacific loom with an overall 5.6 risk score. With the justification of those facts, FATF expectations from any country in the world to attaining 100% precision in the containment of ML/TF is a wild goose chase in the dark.

As far as Pakistan’s anti-money laundering drive is concerned, it started back in the year 1997 when the country issued its first-ever Anti-Terrorism Act to block the funding channels of CFT and other illegal channels of money laundering. However, in 2004, FATF revamped its compliance model and introduced its 40 recommendations, including the terror financing protocols that remain its standard-issue list thereafter. In the year 2007 – the Anti-Money Laundering Ordinance was issued by Pakistan in compliance with FATF protocols to further strengthen the indigenous mechanism of the illegal flow of money. In 2008, FATF issues a major early report with concerns about AML/CFT implementation in Pakistan and it is pertinent to mention that, the country was plugged in with the menace of terrorism and it has been proactive as a frontline actor in combating the counterinsurgency and countering terrorism operations. Despite such challenges, the country continued its structure of anti-money laundering and enacted the Anti-Money Laundering Act in 2010.

Pakistan had been a key strategic partner of the US., however, in 2012 the bilateral ties between US-Pak relations hit low and concurrently FATF puts Pakistan on its ‘grey list’ of monitored jurisdictions. This entails FATF’s irrationality and influencing role of western lobbies to use the entity in aligned with their interests rather than for the real cause of establishment. In 2015, Pakistan made further developments to uplift its security system regarding the shadow economic activities and it further brought legal reformative measures through enacting the AML, Amendment Act as part of measures to get off the ‘grey list’ and its efforts paid and Pakistan exited the ‘grey list’ that year.

During 2014, the strategic partnership of Pakistan and China further transcended into the deep economic nexus as in the year 2015 both countries jointly announced the establishment of the China-Pakistan Economic Corridor (CPEC), with a $62 billion allocation for infrastructure and investment projects. Following the flagship project of BRI, it became the hotspot for irking ties and this notion became another intervening aspect for pushing Pakistan into the grey-list for the second time. Pakistan was placed on the ‘grey list’ in June as part of a renewed effort by India to conspire to subjugate Pakistan through economic violence. There is another key point that countries such as Afghanistan and India, whose black economy in relative (Afghanistan) or absolute (India) terms, would far outstrip Pakistan, are conspicuously omitted from the FATF’s grey list. India escalated its hybrid war strategy and weaponized the mirror body of the FATF, the Asia Pacific Group (APG), to sanction Pakistan further into the year ‘FATF blacklist’, 2020 a plenary of the FATF is held in Paris from February 16, 2021. Pakistan has made significant progress on 14 points out of the required 22. To review Islamabad’s performance on its action plan, it is evident that the country has taken stringent reformative measures and been able to address 21 of the 27 action items.

The aforementioned statistics entails that Pakistan has shown immense cooperation and engagement with the FATF compliance protocols whenever it was asked for an appraisal. Considering the efforts and cooperation of Pakistan, the country must be exempted from the FATF grey list status. Another significant challenge Pakistan faced in the due course was the eruption of the pandemic, which has further exposed the world to the MML/TF risks, due to overreliance on technology for trade and economic activities. Without mapping a layout, FATF cannot further push a state into a position where it further gets into a turbulent environment under the looming cloud of sanctions. It is evident that Pakistan has taken all the inclusive measures through the utility of all available resources, however, those strategies should not be confined to adhere to the FATF compliances but it should be a long-term initiative that can subvert the illicit and illegal flow of money.

Pakistan has taken stringent reformative measures and been able to address 21 of the 27 action recommendations provided by FATF

Pakistan should adopt a compliance culture subsisting by education and training programs as an imperative to bring adherence and awareness, in accordance to ML/TF combating global regimes. Other bearings include ensuring internal controls to mitigate any potential areas that pose a high risk for that specific organization or financial institutions. In addition, conducting an institutional risk assessment is important and understanding how to do a risk assessment and the methodology behind the risk assessment. Once the risks are assessed, then, the action plan to mitigate the gaps; through identifying mechanisms, should be identified. Similarly, establishing a risk appetite, risk threshold as far as the corresponding bank is considered determining you know what level of risk; they are determining to accept in order to do business with the respondent bank. This surveillance enhancement procedure can be further propelled with the initiative of a dual method- a risk-based approach and a rules-based approach to implementing this program, it is important to incorporate documentary tension, and recorder tension so that previous information can be accessed easily. This notion can be further encrypted by creating a screening and appropriate software to identify customers, determine whether they or not they are a path, and determine whether the source of wealth of income is and really know your customer the KYC acronym and to understand really what the level of risk is with the customer. Most importantly, undertaking a risk rating on the products and services that the organization offers must also be critically appraised through the means of technology and modern gadgets introduction would assist to have checks-balances.

Therefore, a multitude of areas like in-depth training within an organization is essential to establish and maintain corresponding banking relationships. Banks should focus on the technological aspect as well, which includes using updated software that screens and searches effectively and efficiently, an assessment of whether the manual versus the automated technology being used is effective, and whether there is a better option available. Similarly, ensuring am effective implementation of training for the individuals to apply the technology.

To conclude, the global regimes must take all the preventive measures into account while assessing the case of any state that holds the threat of ML/TF. Merely punishing a state through imposing sanctions cannot serve the purpose, and there is a dire need for structural changes to mitigate the challenges posed by this repression of the illicit flow of money worldwide.

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About Mushahid Hussain Naqvi 12 Articles
Mushahid Hussain Naqvi is the Assistant Editor at TAT and Sub-Editor at Melange International Magazine