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Grey listing of Pakistan by FATF and its impact on remittances

In the wake of grey listing of Pakistan by the inter-governmental Paris based Financial Action Task Force (FATF), State Bank of Pakistan (SBP) has asked all foreign exchange companies to make sure their business is in compliance with the anti-money laundering rules and regulations. Exchange companies play an important role in facilitating remittances of overseas Pakistanis. Out of our total $19 billion plus annual remittances, up to 15-20 percent according to some estimates, comes through exchange companies. If these companies don’t become fully responsible in their conduct, Pakistanis settled abroad might stop using their services and switch over totally to banks through their internationally accredited money transfer operators (MTOs).

Pakistan stands at sixth position among the largest remittance receiving countries after India, China, Mexico, Philippines and Nigeria. Home remittances of Pakistan are growing at 3.4 percent during this fiscal year, quite at par with the World Bank estimate for global average growth in remittances during 2018, and higher than its 2.6 percent forecast for the entire South Asian region. In eight months of FY18 i.e. July 2017 to February 2018, Pakistan received around $12.834 billion in home remittances and this figure may touch — or even cross — the crucial $20 billion mark at the end of the year in June.

Inflows of remittances are also witnessing a change in pattern. Saudi Arabia is still on top of the list of host countries from where the bulk of our remittances originate but Saudi remittances are currently witnessing negative growth because of imposition of a tax on non-earning family members of expatriates in the Kingdom, economic problems of Saudi economy, fall in export of our Pakistani labor there and the ongoing process of localization of jobs in the Saudi labor market etc.

Pakistan has relied on Saudi Arabia and the UAE for too long to attract remittances of overseas Pakistanis working there but now not only Saudi remittances are declining but due to changing market dynamics export of labor to the entire GCC region is falling.

One way of addressing this issue could be to intensify checks on remittances inflow through informal ways of Hundi and Hawala. If all Pakistanis in the GCC region start remitting money back home via banks and stop using informal means, it would not only boost remittances inflow but would also help Pakistan make a stronger case at FATF about its financial transactions mechanism being efficient enough to fight money laundering in all forms. In order to help the overseas Pakistani and their families back home, the government of Pakistan and the State Bank of Pakistan is also pushing the commercial banks to reduce their handling charges to encourage the remittances inflow.

 

All is not dark as there is still light at the end of tunnel. First, the launch of mobile banking/branchless banking remittance products. That will not only require aggressive marketing on the send side but also in remittance-heavy districts within Pakistan where the power of BTL activities should not be ruled out.The second is the much-delayed launch of CDNS’s Overseas Pakistanis Savings Certificates aimed at attracting remittances. According to media reports, the product has already been developed but has become the victim of bureaucratic red-tapism.

Pakistan was put on the FATF grey list back in 2012. Its name was removed from the list towards the end of February 2015 after visible improvements in the country’s AML/CTF regime. Pakistan’s banking system is gradually becoming more responsible in complying with the AML/CTF regime, but recent instances of weaknesses in the system misused for money laundering cannot be forgotten. Last year, the Department of Financial Services (DFS) of New York fined $630 million on Habib Bank Ltd after its New York branch failed to comply with laws designed to combat illicit money transfers. The bank finally managed an out-of-court settlement and paid $225 million in fines in early September 2017.

Fuller and stricter compliance of AML/CFT is the need of the hour for Pakistani banks and exchange companies to avoid the negative impact of being grey-listed by FATF. Any mishap in weak administration of AML/CFT regulations runs the risk of hampering smooth flow of export proceeds, home remittances and even foreign direct investment (FDI).

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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