Pakistani banks may lose business, pay more global transactions, if terror not combated: Moody's

Credit rating agency Moody's has warned Pakistani banks that they may lose international business and pay more for global transactions if the government does not implement the FATF action plan on anti-money laundering and counter terror financing by the June deadline.

In a report released on Thursday, Moody's Investors Service said the announcement is credit negative for Pakistani banks because there are potential additional restrictions for the banks' foreign-currency clearing services as well as foreign operations.

The Paris-Based Financial Action Task Force (FATF), which is the global watchdog of international financial transactions, gave Pakistan an extension for completing the June 2018 action plan on anti-money laundering (AML) and combating financing of terrorism (CFT) till June 2020 or risk being placed on its black-list. Presently Pakistan is on the Grey List.

The FATF at its February meet warned that it will urge member countries to scrutinise their business transactions with Pakistan if the country fails to complete the action plan regarding terror financing.

Moody's further said if Pakistan fails to fully enforce the FATF action plan international financial institutions could curtail their dealings with Pakistani banks, including termination of correspondent banking relationships.

"This, in turn, would further constrain the banks' ability to generate business and result in higher compliance costs," the Moody's report added.

To date, Pakistan has addressed 14 of 27 action items given to it in controlling funding to terror groups like the Lashkar-e-Taiba (LeT), the Jaish-e-Mohammad (JeM) and the Hizbul Mujahideen, which are responsible for a series of attacks in India.

Efforts for compliance with the remaining 13 points have also progressed at varying degrees, according to the FATF.

The State Bank of Pakistan (SBP) has expressed confidence that Pakistan will exit the Grey List by June 2020, Moody's said.

But the report said compliance with the global AML and CFT standards remained weak both by Pakistani banks and the country's authorities.

"[This] means that banks still risk losing access to foreign-currency clearing services," it said.

Access to foreign-currency clearing transactions, typically conducted through international correspondent banking relationships, is crucial for Pakistani banks because it allows them to process cross-border payments for clients.

India has maintained that Pakistan extends regular support to terror groups like LeT, JeM and the Hizbul Mujahideen, whose prime target is India, and has urged the FATF to take action against Islamabad.