The international financial watchdog that works on money laundering and countering the financing of terrorism (AML / CFT) is the Financial Action Task Force (More commonly as FATF). The FATF has been working & countering such activities globally since 1989 and has been constantly setting standards and reviewing them to ensure that global money laundering and terror financing to safeguard the society form any potential that it may cause.
Among the various standards that have been set up by the watchdog in terms of financial transactions that have been referred to as the red flags. These red flags are not only a potential threat to the economy but also to the public at large and hence they have been implemented all over the world. In Pakistan, the federal government has been working on it along with the State Bank of Pakistan (SBP), Securities & Exchange Commission of Pakistan (SECP) and the Federal Board of Revenue (FBR) in keeping a check on all the financial institutions that are operating in the country.
In order to curb the menace of Money Laundering and Terror Financing in the country a Financial Monitoring Unit (FMU) has been established by the Government of Pakistan. This unit is responsible for AML / CFT Regulations along with indicating the red flags for each sector to ensure that suspicious activities and transactions can be highlighted and reviewed accordingly. The FMU has indicated a range of red flags that not only just applies to banks and other financial institutions but extend to professions and trade. These red flags are not limited to AML / CFT but also other illegal activities like drug and human trafficking.
Reviewing the AML / CFT measures in Pakistan that each sector has red flags or potential red flag indicators:
1. Accountant Red Flags
The red flags of accountants are based on the following two major aspects:
- The Accountants are subject to AML / CFT obligations when, on behalf of or for a client, they prepare for or engage in a financial transaction.
- Accountants are also subject to AML / CFT obligations when they are acting as a Trust and Company Service provider by preparing for or engaging in financial activities.
Under these obligations the accountant has the right to report any suspicions as AML / CFT obligations under Suspicious Transaction Report (STR) Under Section 7(1) of AML Act 2010.
2. CDNS Red Flags
The Central Directorate National Savings (CDNS) is required to report Suspicious Transaction Report (STR) to the Financial Monitoring Unit (FMU) under Chapter –VII of the National Savings (AML and CFT) Regulations (S.R.O.956(I)/2020).
Prior to any reporting the responsible officer is required to perform Enhance Due Diligence (EDD) and update the Know Your Customer (KYC) / Customer Due Diligence (CDD) information available with CDNS based on any suspicious transaction or observation.
The reporting can be made on the following basis
- Client’s behavior
- Transactional Patterns (Accounts, Certificates & Prize Bonds)
The CDNS Red Flag rules protects the entities and officers for Suspicious Transaction Reporting (STR) under Section 12 of the AML Act, 2010 which states “The reporting entities and their officers……shall not be liable to any civil, criminal or disciplinary proceedings against them for furnishing information required under this Act or the rules and regulations made hereunder in good faith.”
The CDNS Red Flag Rules also warns of non-compliance under
- Section 33 of AML Act 2010, “Whoever willfully fails to comply with the STR requirement as provided in section 7 or give false information shall be liable for imprisonment for a term which may extend to five years or with fine which may extend to five hundred thousand rupees or both.
- Section 34 of AML Act 2010, officers, and management of CDNS are prohibited from disclosing, directly or indirectly, to any person that the STR has been reported. Violation is a criminal offence and shall be punishable by a maximum term of five years imprisonment or a fine which may extend to two million rupees or both.
3. Jewelers & Precious Metals / Stone Dealers Red Flags
Under Section 7(1) of AML Act 2010 which states that reporting entities including Jewelers & Precious Stones / Metals Dealers are also required to promptly report Suspicious Transaction Report (STR) for cash transactions (as per notified threshold for Jewelers & Precious Stones / Metals Dealers) conducted or attempted, at their counter
4. Proliferation Financing Red Flags
The proliferation financing red flags are based on the United Nations Security Council’s Resolution (UNSCR 1540) dated April 28, 2004 along with the FATF Proliferation Report 2008 & FATF’s Guidance on Counter Proliferation Financing 2010.
FATF Recommendations & Immediate Outcomes as also been taken into account under which Recommendation 2 & 7 along with Immediate Outcomes 1 & 11 comply in combating proliferation financing.
The following legislations, regulations and guidelines have been established in this regard
- Anti-Money Laundering Act 2010 (as amended up to Sep 2020);
- Anti-Terrorism Act 1997;
- United Nations (Security Council) Act, I948;
- State Bank of Pakistan’s AML/ CFT/ CPF Regulations (Issued on 30 Sep 2020);
- AML / CFT Regulations Issued by SECP;
- Federal Board of Revenue AML/CFT Regulations for DNFBPs, 2020;
- National Savings (AML and CFT) Regulations, 2020;
- ICAP’s AML / CFT Regulations for Chartered Accountants Reporting Firms; and
- ICMAP’s AML / CFT Regulations for Cost Accountants Reporting Firms.
- Guidelines on TFS and UNSC Resolutions by AML / CFT Regulatory Bodies
- Strategic Export Control Division (SECDIV), Ministry of Foreign Affairs of Pakistan has also issued detailed guidance document namely “Guidelines on the Implementation of the UN Security Council Resolutions Concerning Targeted Financial Sanctions on Proliferation Financing”
5. Real Estate Sector Red Flags
Under Section 7(1) of AML Act 2010 which states that reporting entities including Real Estate Agents, property dealers / brokers, housing authorities, and builders and developers are required to promptly report Suspicious Transaction Report (STR) for transaction conducted or attempted, at their counter in cash or through such real estate agents/developers.
6. Red Flag Indicators for Misuse of Legal Arrangements & NPO’s
In accordance to the FATF Recommendations & Immediate Outcomes the red flags have been indicated for Misuse of Legal Arrangements & NPO’s.
FATF Recommendation No. 25 & Immediate Outcome No. 5 are related to the prevention of misuse of legal Arrangements for Money Laundering/Terrorism Financing related activities along with the placement of an effective system to prevent legal Arrangements from being used for criminal purposes.
FATF Recommendation No. 08 & Immediate Outcome No. 10 are related to undertake measures to prevent Misuse of NPOs Sector for Money Laundering/Terrorism Financing related activities along with the placement of an effective system where terrorist, terrorist organizations, terrorist financers are prevented from abusing the NPOs Sector for raising, moving, and using the funds.
Under these recommendations & immediate outcomes by FATF the following Legal Arrangements & NPO’s can be formed under regulations
- Trusts (Formed and registered with provinces under the prevailing provincial Trust Laws).
- Waqfs (Formed and registered with provinces under the prevailing provincial Waqf Laws)
- Non-Profit Organizations (NPOs) (Formed as an association under S42 of the Companies Act 2017 and licensed by SECP)
- International Non-Profit Organizations (Registered with Ministry of Interior, Pakistan)
- NGOs (Registered at provincial level under the Voluntary Social Welfare Agencies Ordinance 1961, Societies Act of 1860, or Co-operative Societies act 1925)
7. Red Flag Indicators for Misuse of Legal Persons
FATF Recommendation No. 24 & Immediate Outcome No. 5 are related to undertake measures to prevent Misuse of Legal Persons for Money Laundering/Terrorism Financing related activities along with the placement of an effective system to prevent Legal Persons from being used for criminal purposes.
In Pakistan, following are the different types of legal persons that can be formed under various laws:
- Companies formed under the Companies Act 2017, namely:
- Single Member Limited Companies
- Private companies.
- Public companies (also referred to as listed companies).
- Public interest companies.
- Public sector companies.
- Companies limited by guarantee (S2 (19)).
- Foreign companies (registered under Part 12 of the Companies Act).
- Associations (formed as charities and not for profit companies) under S42.
- Red Flag Indicators related to Human Trafficking / Smuggling in Persons
- Limited Liability partnerships (LLPs) formed under the Limited Liability Partnership Act 2017 and defined under than Act as having separate legal personality (Part 2, S3), namely:
- Domestic limited liability partnerships.
- Foreign limited liability partnerships (registered under S2 (m) and Part 10).
- Cooperatives formed under prevailing Cooperative Societies laws at provincial level. These entities have independent legal status as legal persons upon registration.
- Proprietorship Concerns formed by an individual, which is required to be dully declared by the individuals in their tax returns and to be registered as a proprietorship concerns in their National Tax Number (NTN) Certificate.
- Association of Person Section 80 of Income Tax Ordinance, 2001 defines association of persons which includes a firm, a Hindu undivided family, any artificial juridical person and anybody of persons formed under a foreign law but does not include a company
8. Red Flags for Banks
The Following are the red flags that have been highlighted by the Financial Monitoring Unit (FMU) & State Bank of Pakistan (SBP) for banks and other financial institutions
- Transactions Which Do Not Make Economic Sense
- Transactions Inconsistent with the Customer’s Business
- High Value Cash Transactions
- Transactions Involving Structuring to avoid Reporting or Identification Requirement
- Transactions Involving Accounts
- Transactions Involving Transfers to and From Abroad
- Investment Related Transactions
- Transactions Involving Unidentified Parties
- Transactions Involving Embassy and Foreign Consulate Accounts
- Characteristics of the Customer or His/ Her Business Activity
- Transactions Linked to Locations of Concern
- Miscellaneous Transactions
- Potential Indicators of Money Laundering/Terrorist Financing
- Activity Inconsistent with the Customer’s Business
- Funds Transfers
- Other Transactions That Appear Unusual or Suspicious
9. Red Flags for Insurance Sector
The red flags for the sector are based on the FATF Report of June, 2007 & FATF ML/TF Report, October 2009 on the following:
- Natural Persons
- Legal Persons
- Intermediaries
- Means of Payment
- Nature of Transactions
10. Red Flags for Security Sector
The red flags for the sector are based on the FATF ML/TF Report, October 2009 on the following:
- Insider Trading
- Market Manipulation
- Securities Offering Fraud
- Customer Due Diligence
- Fund Transfers and/or Deposits
- Lending Activity
- Bearer Securities
- Unusual Securities Transactions and Account Activity
- Activity that is Inconsistent with the Customer’s Business Objective or Profile
- Rogue Employees
11. Red Flags for Terrorism Financing
The following red flags are regarded as the indicators for Terrorism Financing
- Accounts
- Transaction
- Wire Transfers
- Non-Profit Organizations (NPOs
- Proscribed Individuals/Entities, Targeted Financial Sanctions, etc
12. Red Flag Indicators for DNFBPs Regarding TFS related to TF and PF
The red flags indicated for Designated Non-Finance Business Professions (DNFBPs) are based on the United Nations Security Council Resolutions (UNSCR) 1267, 1373, 1540, 1718 & 2231. Guidelines have been made accordingly by Ministry of Foreign Affairs (MOFA) and National Counter Terrorism Authority (NACTA) in this regard which are follows:
- Guidelines on implementation of TFS related to PF under UNSC 1718 and UNSC 2231 by Strategic Export Control Division (SECDIV), Ministry of Foreign Affairs of Pakistan
- Guidelines on implementation of TFS related to TF under UNSC 1267 by Ministry of Foreign Affairs of Pakistan
- Guidelines on implementation of TFS related to TF under UNSC 1373 by National Counter Terrorism Authority (NACTA)
Additional guidelines have been issued in accordance to Section 7H of AML Act 2010 and Regulation 13 & 25 of the AML / CFT Regulatory Authorities to comply with obligations which are as follows:
- Guidelines on TFS issued by FBR DNFBPs Directorate for real estate agents, jewelers and dealers in gems, precious metals and accountants (not covered by ICMAP and ICAP)
- Guidelines on TFS issued by the Institute of Chartered Accountants Pakistan (ICAP)
- Guidelines on TFS issued by the Institute of Cost and Management Accountants Pakistan (ICMAP)
13. Red Flag Indicators for Financing & Facilitation of Foreign Terrorist Fighters (FTFs) and Returnees
The Red Flag Indicators for Financing & Facilitation of Foreign Terrorist Fighters (FTFs) and Returnees are based on the United Nations Security Council Resolution 2178 & Recommendation No. 6 by FATF which contributed to the introduction of Section 11J (3) in the Anti-Terrorism Act, 1997