Hiding the origin of illicit money and converting the money into legitimate funds or assets have a long history. In fact, the United Nations Office on Drugs and Crimes (UNODC) estimates that the amount of money laundered globally in one year is between $800 billion to $2 trillion in current U.S. dollars.1
This threat is falling short globally and money laundering is causing uncontrolled criminal activities in the financial market, society and is further fueling terrorism around the world. The whole world has fallen victim to this menace and Pakistan is no exception.
There are 39 members comprising the Financial Action Task Force (FATF).2 However, Pakistan is not a member of the FATF, it is an associate member of the Asia/Pacific Group on Money Laundering (APG), a FATF-style regional body.3 The Pakistani government has taken divergent and drastic steps in compliance with FATF’s recommendations. The government has gone one step further to ensure the active role of anti-money laundering (AML) and counter-terrorist financing (CTF) regulatory authorities comprising of regulators, the State Bank of Pakistan (SBP), Securities and Exchange Commission of Pakistan (SECP), Federal Board of Revenue (FBR), Pakistan Post, National Savings and Sindh Revenue Board (SRB), and self-regulated bodies, including the Institute of Chartered Accountants of Pakistan (ICAP), the Institute of Cost and Management Accountants of Pakistan (ICMAP) and the Pakistan Bar Council.
Furthermore, the state bank of Pakistan, being a central bank, has devised several policies, standard operating procedures and notifications for its regulated entities to rein in financial crimes at large.
Considering the endeavors of all national and international regulatory bodies, the role of financial institutions (FIs) in Pakistan has become extremely critical and decisive, and its results are yet to be seen.
In compliance with the instructions of the state bank of Pakistan, FIs must assess the prevailing situations and implement a robust mechanism to defeat financial crimes.
In order to have a clear road map, FIs must frequently review their policies, procedures, human resources and automation systems.
Internal Policies and Procedures
FIs are required to follow the instructions of regulators. Apart from said policies, FIs can devise standard operating procedures regarding their products and procedures to identify, assess and mitigate the risk.
FIs must investigate the track record of the financial crimes that are taking place around the world. Policies should be concise, comprehensive and easy to understand. FIs must ensure that the policies are not traditional but practical in nature and must cover gaps and the threats posed by criminals.
Policies must not be scattered. It is commonly observed that policies are introduced in chunks and made available to staff through shared drives, intranet, bulky manuals, addendums and different emails, which staff can find these difficult to refer to at times.
Moreover, FIs must ensure that policies are not exhaustive, complex and abstract. FIs must take advantage of artificial intelligence (IA) to place policies for each topic on a single page, to be easily read and understood by staff, rather than ignoring or avoiding reviewing abstract manuals, which will certainly prove to be useless in exposing FIs to increased risk.
FIs’ investment in training is regarded as the most valuable for their staff. When staff observe that their employer has invested in them, they feel valued. Furthermore, they feel accountable for safeguarding the interest of their FIs. In view of the current challenges of financial crimes, one thing must be given due importance—training, which must enable staff to become a stronger first line of defense.
FIs must refrain from imparting traditional knowledge or mere training and must look for a valid and solid training program. In order to make training an effective and productive tool, staff must be given an overview of different crimes that have taken place in the financial markets and should be given time for case studies, crime analysis, crime mapping and controlling.
Last but not least, staff must resolve that they have been trained and assigned to combat financial crimes and challenges faced by the national and international financial system.
Data Collection and Validation
FIs have to ensure that the staff responsible for the data collection and validation have sufficient knowledge of regulations, that they are well prepared and ready to execute the required job.
Staff should know how to get new customers onboarded, what information is required to be taken and extracted from the client, how information is validated and what documents are verified.
Currently, most FIs, specifically in Pakistan, do not have an effective mechanism for validating and verifying their clients’ information. Documents provided by the customers are neither attested nor get verified by issuing authorities or institutions. Poor data collection and validation processes make FIs vulnerable to criminals and expose the entire financial system to risk.
FIs in Pakistan must look for ways and mechanisms to counter-verify given information and documents instead of relying on the details provided by the customer.
Staff must be trained to verify the customer’s identity by comparing information or documents provided by the customer with the information obtained from concerned institutions/offices. In addition, staff should know that data quality matters the most in FIs. Therefore, obtained data should be both correct and useful.
Embracing Advanced Technology
In addition to traditional technology, FIs should include a robust artificial intelligence (AI) and machine learning plan into their detection and validation processes because money launderers and fraudsters are always mining mountains of digital data. They look for loopholes and weaker systems. As a result, FIs should embrace advanced technology.
FIs must revisit their financial allocation for system upgrading and fill-in their information technology (IT) department with a team of experts. This will not only make the systems indispensable, but it will also help circumvent financial or reputational risk.
Culture of Compliance
There is a financial saying that compliance is everyone’s responsibility. Every person who is part of an FI has a role to play. It is the core responsibility of senior management to inculcate a culture of compliance within institutions.
Culture within this context could be defined as the collective behavior toward priorities. FIs should have a clear zero-tolerance policy against system manipulation. It should be ensured that set rules are meant to be followed and never get abused, compromised or manipulated at any stage.
It has been established that the war against criminals and money launders cannot be won unilaterally, so there is a greater need to have a consortium of regulators, law enforcement agencies and FIs.
This regulatory compliance consortium must work hand in hand to establish the best practices for overall compliance of the financial system. There should be a joint mechanism in Pakistan where triggers and unusual activities can be discussed and supervised as per one’s expertise. This consortium for the exchange of information among stakeholders will help in arriving at findings, considerations, recommendations, and finally, decisions in no time. This mechanism will have everlasting positive impacts on local as well as international financial systems’ health.
- “Money Laundering,” United Nations Office on Drugs and Crime, https://www.unodc.org/unodc/en/money-laundering/overview.html
- “Members and Observers,” Financial Action Task Force, http://www.fatf-gafi.org/about/membersandobservers/
- “About APG,” APG, http://www.apgml.org/about-us/page.aspx?p=0a1d0dcc-e65f-4706-9d50-aa1d4dcefc07