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Pak's listing under increased monitoring a credit negative for banks: Moody's


The Financial Action Task Force's (FATF's) announcement that Pakistan will remain on its list of jurisdictions under increased monitoring is credit negative for the country's banks, Moody's Investors Service said its latest credit outlook report released on Thursday.
The FATF, an inter-governmental body tasked with setting global framework requirements around anti-money-laundering, counter-terrorist financing and other related threats to the international financial system, said last week that Pakistan will remain on its list of jurisdictions under increased monitoring, along with 17 other countries, after failing to complete a June 2018 action plan by the assigned deadlines.
Pakistan, which has been presenting its progress to FATF every four months since the agreement of the action plan, will remain on the list until at least June when the next evaluation will take place.
"The announcement is credit negative for Pakistani banks because it raises questions about potential additional restrictions relating to banks' foreign-currency clearing services as well as their foreign operations. Banks' profitability risks being constrained as a result of increased compliance and operational costs," said Moody's.
The FATF has warned that it will urge member countries to increase their attention when conducting business transactions with Pakistan if the country's government, regulatory body and other stakeholders of the financial system fail to complete the action plan, which emphasises combating terrorist financing by June 2020.
Should they fail to do so, international financial institutions could curtail their interactions with Pakistani banks and other financial companies, including terminating correspondent banking relationships. This in turn will further constrain banks' ability to generate business and result in higher compliance costs.
Improving but still-weak, compliance with global anti-money-laundering and combating terrorist financing standards -- both by Pakistani banks and the country's authorities -- means that banks still risk losing access to foreign-currency clearing services.
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.
Clearing in US dollars is particularly important given Pakistan's high import and export economic activity as well as the fact that a large proportion of international payments are made in this currency.
This risk has so far not crystallised in the jurisdictions that have been placed on the increased monitoring list, said Moody's.
A number of domestic banks with foreign operations have been subject to investigations relating to anti-money-laundering or counter-terrorist financing issues that have resulted in penalties, higher compliance costs and in some cases the removal of overseas licences.

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First Published: Feb 27 2020 | 11:20 AM IST

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