On Sept. 30, Noor-ul-Haq Qadri, Pakistan’s minister of religious affairs, brazenly shared a stage with Hafiz Saeed, the founder of the terrorist group Lashkar-e-Taiba, who has been subject to United Nations sanctions dating back a decade thanks to his role in planning and supervising the November 2008 terrorist attacks in Mumbai.
Incidents like this one are emblematic of the policies that have run Pakistan afoul of financial crimes watchdog groups. One of them, the Financial Action Task Force (FATF), had its annual plenary meeting last week in Paris, where it grappled with hard cases such as Pakistan.
FATF was chartered in 1989 by the G7 countries to monitor money laundering and terrorist financing around the world. In the years since it was launched, its membership has grown to almost 40 nations. Among other tools intended to coax countries toward financial transparency, FATF’s blacklist for nations that do not uphold its standards can effectively cut them off from the international financial system.
Pakistan has long been at risk of such censure. From 2012 to 2015, FATF subjected the country to extra monitoring for suspected money laundering and financial dealings with terrorists. The country graduated from this so-called gray list in 2015, after implementing new financial regulations as part of an IMF program—the first it had completed in 20 years. But old habits die hard, especially in a country with a sclerotic bureaucracy and a powerful military that uses militant proxies against its neighbors.
And so, at a February meeting of FATF this year, the United States lobbied to return Pakistan to the task force’s gray list as part of a broader campaign to pressure the country to get serious about rooting out terrorists. Pakistan was initially confident that its remaining allies in FATF, particularly China, would protect it from enhanced scrutiny. At the last minute, though, China supported Pakistan’s downgrade. Pakistan had to acknowledge that it would go back on the gray list in 2018 and would be at risk of falling to the black list in 2019 if it didn’t make serious reforms.
Pakistan was confident that its remaining allies in FATF, particularly China, would protect it from the gray list. At the last minute, though, China supported Pakistan’s downgrade.
That was no small admission. Pakistan is in the middle of a balance of payments crisis and is in desperate need of increased international investment. As long as it is on FATF’s gray list, though, the country will have a hard time accessing commercial borrowing. FATF scrutiny will also factor into Pakistan’s upcoming negotiations with the IMF, which are slated to begin in early November. (The IMF typically insists on progress against FATF benchmarks as part of its programs with gray-list countries.)
In turn, Pakistani Prime Minister Imran Khan has been seeking financing from Pakistan’s traditional friends, Saudi Arabia and China, as a way to reduce the amount of money it will need to take from the IMF and, in turn, lessen the pain of IMF conditionality and austerity. Earlier this week, Saudi Arabia announced that it would offer Pakistan loans totaling $6 billion, but Islamabad will need more than promises—especially at a time when the Saudis are trying to shore up international support in the aftermath of the journalist Jamal Khashoggi’s apparent slaying.
For observers, China’s decision not to protect its ally seemed a welcome surprise. But the move was at least partly strategic. The same month, China was elected to the hold the vice presidency of FATF, its first leadership role since joining the organization in 2007 and a position all but guaranteed to land it the presidency next summer. China needed Indian support to win the seat, and India was only willing to give it if China joined the consensus on downgrading Pakistan to the gray list.
FATF is exactly the kind of technical body that makes the rules-based international order work. It depends on consensus among member states to function. Its ability to monitor hard cases like Pakistan, a long-time frenemy of the United States and a strategic partner of China, is reason for optimism. But the drama surrounding the decision offers two lessons about the future of the rules-based international order.