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Pakistan's entry into terror grey list could snap its global banking links

Being placed on watchlist carries no direct legal implications, but brings extra scrutiny from regulators and financial institutions that can chill trade and investment

Reuters  |  Islamabad/Washington/Hong Kong 

Pulwama attack: 4 jawans, 2 terrorists killed in attack on CRPF camp in J&K
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The prospect of being placed back on a global terrorist financing watchlist could endanger its handful of remaining banking links to the outside world, causing real financial pain to the just as a looms.

and its European allies have co-sponsored a motion calling for the nuclear-armed nation to be placed on a "grey list" of countries deemed to be doing too little to comply with anti-terrorist financing and anti-regulations, with a decision expected next week when member states of the (FATF) meet in

The move is part of a broader US strategy to pressure to cut its alleged links to Islamist militants waging chaos in

Pakistan, which denies such links, last month shrugged off a US aid suspension worth $2 billion. But inclusion on the FATF watchlist could inflict real damage, bankers and government officials say.

has sought to head off the motion by amending its anti-laws and by taking over organisations controlled by Hafiz Saeed, a Pakistan-based Islamist whom blames for the 2008 attacks that killed 166 people.

But there are concerns Pakistan's nearly $300 billion economy, expanding at its fastest rate in a decade at above 5 percent, could lose steam if it ends up on the FATF watchlist, from which it was removed in 2015 after three years.

"We don't think the consequences are going to be drastic but it's definitely not good," said one senior finance ministry

Military successes against militants and massive Chinese infrastructure investments have restored some vim to an hobbled by a long-running Islamist insurgency and wrecked by the 2008/09 global financial crisis.

Officials are aiming for economic expansion to hit 6 percent this fiscal year (July-June) and Shahid Khaqan Abbasi's ruling party will want to avert a slowdown in the lead up to a due in about six months.

Being placed on the FATF watchlist carries no direct legal implications, but brings extra scrutiny from regulators and financial institutions that can chill trade and investment and increase transaction costs, according to experts.

Mike Casey, a at firm in London, said being put back on the grey list would heighten Pakistan's risk profile and some financial institutions would be wary of transacting with Pakistani banks and counterparties.

"Others might elect to avoid altogether, viewing the legal risks associated with doing business there to outweigh any economic benefits," he said.

Current Account Deficit

A decline in foreign transactions and a drop in foreign currency inflows could further widen Pakistan's large current account deficit, the Achilles heel of an that required an IMF bailout in 2013 following a balance of payments crisis.

Another major worry is that the likes of Standard Chartered, the largest in with 116 branches, or and Deutsche Bank, who mostly deal with corporate clients, would pull out.

Banks have been retreating from high-risk countries in recent years amid intense pressure from global regulators to guard against and terrorist financing.

"The level of due diligence is already high in countries like Pakistan, but if this goes ahead then the banks will really have to reassess the risk-reward scenario," said a with a large foreign bank, which has business interests in

In September, Pakistan's biggest lender, Habib Bank, was fined $225 million and effectively forced to shut its U.S. operations by the regulator due to compliance failures over and terrorist financing.

U.S. watchdogs have dished out more than $16 billion in fines for anti-(AML) compliance failings since the end of 2009, according to data compiled by Hong Kong consultancy

"No one wants to be get caught in a situation where for a few million dollars of business the will have to pay billions in fines," added the executive.

There is no immediate indication the handful of banks that remain are considering leaving Pakistan, and banking sources point out that these banks are well-versed with the risks of operating in the country.

Citibank, in a statement, said: "Citi complies with all applicable U.S. and anti-requirements and economic sanctions."

said it was "closely monitoring the situation and as a matter of policy, we do not comment on market speculation". Deutsche declined to comment.

Raising Money

The FATF threat has begun to weigh on Pakistan's stock market, although say the country's companies are accustomed to operating in tough conditions.

Yet some are unnerved.

One Pakistani launching an alternative investment fund said he fears his new venture could now struggle to attract U.S and European investment.

"It's already tough to raise money in and anything to do with a 'terror financing' watchlist will just scare people," said the "There will be more scrutiny and some foreign funds will back away."

A Pakistani said the government also fears a downgrade by the credit ratings agencies, making it harder or more expensive for to raise debt on the markets.

"It reduces our credibility in the world, which is unfair," added Pakistan's Minister for Finance,

Some Pakistani officials say there is growing confidence in the country that recent efforts against Saeed, who was the focus of the FATF motion, will be enough to stave off further action.

"We've taken the wind out of their sails," said one senior "If we now get punished, it would be a political move and vengeful."

First Published: Fri, February 16 2018. 14:08 IST