AML/CFT Regime in Pakistan: Legislative Framework and Regulatory Measures

ByMuhammad Kamran ShehzadDirector-Banking Policy DepartmentState Bank of Pakistan AML/ CFT Regime in Pakistan

Legislative Framework • National Accountability Ordinance, 1999 • Control of Narcotics Substance Act 1997 • Anti-Terrorism Act 1997.

National Accountability Ordinance, 1999 • Deals mainly with the detection, investigation, prosecution and speedy disposal of cases involving corruption and corrupt practices • The following offences under NAO covers the offence of money laundering : • Acquisition of any property / pecuniary advantage through corrupt, dishonest or illegal means • Having assets beyond known sources of income which can not be reasonably accounted for. • Pursuant to Section 20, financial institutions are bound to report suspicious financial transactions to NAB.

Control of Narcotics Substance Act 1997 The following offences/ provisions under CNSA covers the AML measures: • Makes the acquisition of assets through drug money an offence • The suspected properties / assets may be frozen and subsequently forfeited through the Court. This measure can be construed as an anti-money laundering measure. • Section 67: it is mandatory for financial institutions to report STRs to ANF, suspected to be related to drug business.

Anti-Terrorism Act 1997 • Deals comprehensively with the offences of terrorism and financing of terrorism. • Makes compulsory for the proscribed organizations to submit all accounts for it’s political and social welfare activities and disclose all funding sources. • Freezing, Seizure and Forfeiture of assets

AML/CFT Measures by SBP Institutional Arrangements • Setting up of dedicated AML/ CFT Units. • Capacity Building- training Regulatory Framework • Issuance of Prudential Regulations Monitoring & Enforcement • On-site inspection and off-site surveillance International Obligations • UNSC Resolutions- Freezing of accounts Curbing of Informal Value Transfers • Formation of Exchange Companies Documentation of Economy • Restriction on RTCs – Bearer Instruments

AML/ CFT UNITS • Primary Responsibilities of the Units • Issuance of regulations and directions to banks and DFIs in accordance with FATF Recommendations and international best practices • Receive STRs and process them for suitable action • Coordination and liaison with relevant Govt. departments, LEAs, International and Multilateral bodies • Issue directives for freezing of accounts

Regulatory Framework • A separate section in new PRs has been dedicated to regulations pertaining to AML and CFT. • PR Compliant with 40 + 9 recommendations • In line with Basel Core Principle No.15 • Violations of regulations dealt with penal action

M-1:Know Your Customer • Formulation of KYC Policy duly approved by the Board of Directors of banks/DFIs. • True Identity of Beneficial Owner, Real Party in interest or Controlling person • Requirement of minimum documents • Requirement of Introduction

M-1:Know Your Customer • Enhanced due diligence to be applied on the following high risk customers: • Customers belonging to NCCTs/Offshore tax heavens, etc. • Customers in cash based businesses or high value items • High net worth customers with no clearly identifiable sources of income • Customers who have been refused by another bank • Correspondent banks • Non-face-to-face/on-line customers • verification of walk-in customers

M-2: Continuous Monitoring • Ensure that the business is conducted in conformity with high ethical standards, banking laws and regulations • Specific Procedures be established for: • Ascertaining customer’s status and his source of earnings • Monitoring of accounts on regular basis • Checking identities and bonafides of remitters and beneficiaries • Retaining internal record of transaction

M-2: Continuous Monitoring • Transactions out of character/inconsistent with the history, pattern and normal operation of the account to be viewed suspiciously and properly investigated • Suitable training to employees • Banks/DFIs to issue necessary instructions for guidance and compliance by all concerned

M3: Record Retention • All necessary record of transactions both domestic and international be retained for five years. • Such records should be sufficient to permit reconstruction of individual transactions • Records relating to identification including business correspondence to be retained for at least five years • Records relating to STRs to be retained even after the lapse of five years and not to be destroyed without prior permission of State Bank

M4: Correspondent Banking Banks/DFIs to gather sufficient information about their correspondent banks to understand fully the nature of their business including: • Management and ownership • Major business activities • Location • ML prevention and detection measures

M4: Correspondent Banking • The purpose of account • The identity of any third party that will use the correspondent banking services • Condition of the bank regulation and supervision in the correspondent’s country • Banks/DFIs not to enter or continue correspondent banking relationship with shell banks

M-5: Suspicious Transactions • Banks/DFIs to pay special attention to all complex, unusually large transactions, which have no apparent economic and visible lawful purpose. • Examples of suspicious transactions • STRs to be reported if there are reasonable ground to suspect that funds are proceeds of a criminal activity, within three days, through Compliance Officer to Banking Policy Department • Tipping off strictly prohibited

Further Processing of STRs. • STRs reported by banks, at present, are forwarded to NAB which is the relevant agency for investigation and prosecution of of all kinds of corruption.

International Cooperation-UNSC- Resolutions-Freezing of Accounts Bank accounts of proscribed individuals and entities frozen. ( Rs.600 million Approx US$ 10million) • Request for supply of information from foreign jurisdictions are currently dealt in accordance with prevailing laws.

Interagency Coordination • Regular meetings of high ups of – NAB-SECP-PBA- Ministries. • Exchange of necessary information between stakeholders • Working Group formed by Ministry of Foreign Affairs to review all agreements/ MoUs.

Informal Value Transfers- Formation of Exchange Companies Amendment in (FERA) 1947: • SBP is empowered to grant license and monitor Exchange Companies and make rules/ regulations • Authorized Money Changers replaced with Exchange Companies • Full fledged ’25’ Category ‘B’ 33. • Exchange Companies are subject to SBP regulations and onsite inspection

Informal Value Transfers- Formation of Exchange Companies • Full fledged exchange companies – Authorized to deal in foreign currency notes, coins, postal notes, money orders, bank drafts, travelers checks and transfers. • Category ‘B’ only sale/ purchase of FC notes payment location • ECs are allowed to open booths for remote areas

Curbing of Informal ValueTransfers • Banks have been encouraged to gear up their systems and infrastructure for providing efficient remittance services • There is restriction on physical transportation of cash exceeding US $ 10,000/-

Curbing of Informal ValueTransfers • The steps were successful as workers remittances increased gradually • 1999-00 $ 913 M • 2000-01 $ 1,022 M • 2001-02 $ 2,341 M • 2002-03 $ 4,191 M • 2003-04 $ 3,826 M • July 04-Feb 05 $ 2,607 M (expected over US$4 Billion for the whole year)

Documentation of Economy • Bar on Issuance of Rupee Traveler Checks of denominations in excess of Rs. 10,000. • Almost all bearer instruments have been eliminated.

Challenges • Reporting of STRs by banks • Cash based economy- low rate of literacy, lack of banking services in remote areas • Financial deepening and documentation in phased manner • Partial information and common names- identification of persons/ entities associated with terrorism (UNSC Resolutions)

Road Ahead • Enactment of Anti Money Laundering Legislation • Establishment of FIU • Enhanced Coordination between Various Agencies

Thank You

AML/CFT Regime in Pakistan: Legislative Framework and Regulatory Measures