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Last week in Orlando, the Financial Action Task Force (FATF) convened one of its regular meetings.

FATF is not exactly a household name, and not surprisingly its meeting garnered relatively little global media attention. And yet the organization plays a significant global role—and particularly with regards to Pakistan.

FATF is a global forum that monitors terrorist financing. If it deems any country to not be cracking down sufficiently against terrorist financing, the group’s membership may vote to put said county on a “gray list”—effectively, a watch list. If FATF believes that gray listed-countries continue to act insufficiently against terrorist financing, they can be put on a more serious black list.

Last year, FATF—not for the first time—graylisted Pakistan. At the meeting in Orlando last week, the organization concluded that Islamabad had not made sufficient progress with its “action plan”—the strategy that FATF and Pakistan had drawn up to counter terrorist financing. This means that when the group next holds a formal meeting in October, Pakistan faces the risk—even if a relatively minor one—that it could be blacklisted.

There is nothing unprecedented about Pakistan being punished for its perceived lack of action against terrorism.

There is nothing unprecedented about Pakistan being punished for its perceived lack of action against terrorism. Last year, Washington suspended all security assistance to Pakistan until it takes what U.S. officials often describe as “irreversible” steps to combat the terror groups on its soil that target U.S. troops in Afghanistan.

However, the FATF action is particularly significant given its timing. Islamabad is going through a serious economic crisis at the moment. Thanks in great part to uncompetitive exports, expensive and sizable imports, and mounting debt, Pakistan is suffering through major balance of payments problems. In recent days it has released a new budget that vows austerity—a necessary but politically risky move for a relatively new government (Prime Minister Imran Khan’s Pakistan Tehreek-i-Insaf party took office in August 2018) that had initially vowed to institute a welfare model that emphasizes social spending. Instead, Islamabad must now do the very opposite and resort to belt-tightening moves—with a new International Monetary Fund package, which will entail additional austerity on Pakistan’s part, likely to be finalized in the coming days.

In effect, Pakistan is currently in a precarious economic and political position. And the FATF’s decision could exacerbate this fragility.

Graylisted countries face reputational challenges, and foreign investors and international banks may hesitate to do business with sanctioned nations—and particularly when FATF concludes that nations, like Pakistan, haven’t done enough to warrant being removed from the gray list.

Getting blacklisted would have an even worse impact on Pakistan’s economy, given that many foreign financiers and firms would likely refuse to engage with the country at all.

In reality, Pakistan is unlikely to get blacklisted. To its credit, it has made a series of moves to crack down on terrorists in recent months. It has arrested dozens of militants and shut down many of the facilities and institutions associated with them. To be sure, critics like Washington and New Delhi may dismiss these moves as insufficient, arguing that they don’t constitute the irreversible steps—such as putting terrorist leaders on trial and shutting down their entire financial networks—needed to inspire full confidence. Still, what critics may regard as cosmetic Pakistani moves nonetheless played a role in helping keep Islamabad from being downgraded to the black list. More of such moves between now and October may help keep Islamabad off the black list. The fact that China—Pakistan’s top ally—will soon be assuming a term as chair of FATF will also improve Islamabad’s prospects in the organization in the coming months.

That said, China’s membership in FATF—as well as that of other key Pakistani friends such as Saudi Arabia—did not prevent the organization from graylisting Pakistan last year, or from issuing its negative appraisal in Orlando last week (though according to Pakistani media reports, several friends of Islamabad did forestall an attempt by New Delhi to get Pakistan blacklisted).

FATF reflects a global and cooperative effort—thereby giving its actions more credibility and clout.

Herein lies another reason for the significance of FATF. It is a multilateral organization that has collectively agreed to sanction Pakistan. Contrary to the claims of many Pakistanis, FATF does not represent an American or Indian plot to punish Pakistan. (Such sentiment is rooted in part in the strong perception in Pakistan that neither Washington nor New Delhi appreciates the effective counterterrorism measures by Islamabad that have virtually eliminated the Pakistani Taliban, the top source of anti-state terror in Pakistan over the last decade). Rather, FATF reflects a global and cooperative effort—thereby giving its actions more credibility and clout. And there are important implications here for U.S. policy.

On a bilateral level, Washington is currently treating Islamabad with kid gloves, and refraining from applying pressure on Pakistan about the terrorism issue. This is because Islamabad, in Washington’s view, is helping the United States bring Afghan Taliban negotiators to the table as part of the current U.S. effort to get a deal with the insurgents that enables America to start withdrawing forces from Afghanistan. This is, in fact, Washington’s top goal in South Asia today. And so U.S. policymakers won’t want to overly antagonize Islamabad at a moment when the Pakistanis are perceived to be helping the United States carry out its core policy objective.

FATF, however, gives Washington the cover of multilateralism to keep applying pressure on Pakistan. In this regard, FATF constitutes an important multilateral pressure point for Washington to leverage at a moment when it can’t afford to tighten the screws in a bilateral setting.

This is all to say that FATF may be an obscure organization, but it enjoys an outsize importance that certainly isn’t lost on the United States—or on a nervous Pakistan.

Follow Michael Kugelman, deputy director of the Asia Program and senior associate for South Asia, on Twitter @MichaelKugelman.

The views expressed are the author's alone, and do not represent the views of the U.S. Government or the Wilson Center. Copyright 2019, Asia Program. All rights reserved.

About the Author

Michael Kugelman

Michael Kugelman

Deputy Director and Senior Associate for South Asia
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Asia Program

The Asia Program promotes policy debate and intellectual discussions on U.S. interests in the Asia-Pacific as well as political, economic, security, and social issues relating to the world’s most populous and economically dynamic region.   Read more