How Has The Real Estate Sector Been Impacted By The Financial Action Task Force (FATF)

January 6, 2022

The Financial Action Task Force recently announced that it intended to keep Pakistan on its grey list. It also ruled out the possibility of blacklisting Pakistan since it has met most conditions under the recommendation plan. The government had been told by FATF that they could not be allowed to remain on the grey list because their anti-money laundering and counter financing of terrorism laws were still inadequate, especially in relation to real estate transactions.  

However, there was no mention of any action being taken against the country as a result of this decision. This is an indication that despite all efforts made by Pakistan to meet the requirements of international financial institutions, including FATF, they have failed to do so. There are many reasons for this failure but one of them is the lack of political will at both national and provincial level to implement reforms. In fact, some provinces like Punjab have even introduced legislation which encourages money laundering and tax evasion. 

It is ironic that when the world community declared war on terror after September 11th 2001, Pakistan was one of only three countries – along with Iran and North Korea – that remained outside the United Nations. This resulted in Pakistan having to struggle alone to contain terrorist activities within its borders while simultaneously trying to reform itself into a modern democracy. Since then, the government has tried hard to demonstrate that it was serious about fighting terrorism and corruption.  

However, there is little evidence to suggest that the government has done much to improve governance or reduce corruption. On the contrary, recent events indicate that the country’s leadership remains corrupt and politically incompetent. As a consequence, the economy has continued to decline and foreign investment continues to flee the country. 

How Is The Real Estate Sector Important In Limiting Money Laundering and Terror Financing? 

In order to understand why the real estate sector is so important, we need to look back at history. When the British invaded India in 1857, the Indian subcontinent was split into two nations: the Muslim-majority north and the Hindu majority south. During the next hundred years, millions of Muslims migrated from the north to settle down in the southern part of the country where they formed the nucleus of what became known as ‘Punjabi capitalism’.  

Over time, the Punjabis came to dominate politics and business in Pakistan. They established their own caste system based on economic status and arranged marriages between members of different castes. This led to inter-caste marriage becoming common practice among Pakistani businessmen. The children of such unions would grow up knowing nothing else and were therefore unable to compete with other ethnic groups. These social practices encouraged corruption, nepotism and cronyism. As a result, the country’s economy began to stagnate. 

The second factor contributing to Pakistan’s economic stagnation was the country’s failure to develop a vibrant industrial base. Unlike India, Pakistan did not possess a large indigenous population of skilled workers who could have provided cheap labour for industry. Instead, it imported low-cost unskilled labour from China, Bangladesh and India. With the help of these workers, the country’s industries developed slowly over the last century.  

At the same time, the military, which was used as a tool of repression by successive governments, was given priority over civilian development. The army continued to receive massive amounts of foreign aid and maintained an outdated nuclear weapons program. As a result, the country never really moved forward economically and now finds itself struggling to pay for imports of foodstuffs. 

Another reason why the real estate sector is so important is that it provides employment for millions of people. Most of the workforce in Pakistan consists of poor rural migrants who have come to cities seeking work. Their wages are low and they have limited opportunities to invest in property. To encourage them to buy houses, the government offers loans at low interest rates to purchase properties.  

This encourages further migration to urban areas. Consequently, demand for housing increases rapidly and prices rise accordingly. This gives the government an excuse to increase taxes on land, thereby reducing the amount of money available to the citizens. 

The government also uses the sale of state-owned lands to finance the construction of new roads and schools. This helps to provide jobs for local people and reduces unemployment. Unfortunately, however, the government does not always use the proceeds of land sales wisely. Some of the funds are transferred directly to the ruling elite and are used to bribe officials and purchase votes. This encourages corruption and leads to an inefficient allocation of resources. 

FATF And Its Recommendations for The Real Estate Sector of Pakistan 

The FATF is a body set up by the G7 countries in June 2004 to fight money laundering and terror financing. Its main purpose is to monitor the implementation of international standards relating to financial crime prevention and detection. It has four components: the Group of Twenty (G20), a network of banks; the Financial Action Task Force on Money Laundering (FATF); the FATF Regional Co-operation Agencies (ROCAs) and the FATF National Central Bureaus. 

One of the tasks assigned to the FATF is to review the laws and regulations of member countries to ensure that they conform to international best practice in the field of money laundering and counter financing of terrorism. Currently, Pakistan is under intense pressure from the FATF to reform its anti-money laundering and counter financing of terrorism legislation.  

The aim is to make the country compliant with the FATF recommendations so that it can be removed from the grey list and reclassified as either a full member or a candidate member. However, the government is reluctant to comply fully with the FATF’s demands because it fears that this will adversely affect its relations with the United States. 

Pakistan has been placed on the grey list since March 2007. Under the grey list, countries are monitored to determine whether they meet the requirements of the FATF recommendations. If the country fails to do so, then the FATF may recommend that the country be put on the black list, which means that it will lose access to international capital markets. In addition, the FATF has the power to impose sanctions against the country if it is found to be non-compliant. 

Recommendations made by the FATF are intended to prevent the movement of illicit funds through financial institutions and facilitate the identification of suspicious transactions. One of the key recommendations of the FATF is that all financial institutions should establish a central database of beneficial ownership information for real estate. This will allow the authorities to identify individuals or companies involved in the transfer of property. The FATF recommends that this data be kept for ten years. 

In order to implement these recommendations, the FATF has identified several areas where it believes Pakistan needs to improve. These include: 

  1. Increasing the transparency of land records. 
  1. Improving the exchange of information between financial institutions and law enforcement agencies. 
  1. Developing an effective system for tracing the origins of property. 
  1. Establishing a national land registry. 
  1. Introducing a legal framework for the establishment of trusts. 
  1. Strengthening the anti-money laundering regime. 
  1. Ensuring that the anti-corruption laws are implemented. 

The Way Forward For The Real Estate Sector Of Pakistan 

The FATF recommendations represent a major challenge for the government of Pakistan. It is very unlikely that they will be able to introduce reforms in the short term. Therefore, the real estate sector is likely to remain vulnerable to money laundering and terrorist financing until such time as the country’s leadership is willing to take action. However, there is still hope that the government might be persuaded to implement some of the recommendations. For example, the FATF has suggested that the government should adopt a system whereby title deeds are registered in the name of the person who actually owns the property. This would make it much easier to trace the origin of property and identify those involved in illegal activities. 

Final Words 

In conclusion, I believe that the real estate sector of Pakistan is highly susceptible to money laundering and terrorist financing. The reasons for this vulnerability are manifold and include the fact that the country lacks a robust banking system, a well-developed industrial base and a skilled labour force. Another factor is the lack of political will at both national and provincial level to implement reforms. Finally, the government is reluctant to implement the FATF recommendations because it fears that this will adversely affect its relations with the United States. 

It is clear that the real estate sector of Pakistan faces serious challenges in meeting the international standards required for combating money laundering and terror financing. However, the country has a good opportunity to turn things around. There is a need for a comprehensive overhaul of the country’s economic policies and a radical shift in its priorities. It is imperative that the government adopts a long-term strategy to transform the economy into one based on knowledge and technology rather than cheap unskilled labour. The government must also develop a new industrial policy to encourage the development of small and medium sized enterprises and to create an environment conducive to innovation. 

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