The State of KYC/AML Compliance in Pakistan

Terrorism and the ongoing war on terror have become popular concepts in Pakistan, costing the economy even more than its current GDP, in terms of lost lives and infrastructure. One of the most disturbing consequences is the impact on institutions, with the State Bank of Pakistan (SBP) being one of the leading examples. Ever since, FATF has expanded its domain to curbing anti-terrorist financing and money laundering.

Currently, Pakistan’s financial sector struggles to comply with global AML/CFT standards. The SBP acts as the prime enforcer of global regulatory standards and develops best practices for due diligence of customer on-boarding and ongoing monitoring for both financial and non-financial institutions. Despite several efforts by the central authority, implementation has been a far cry from international standards.

Pakistan’s banking sector has high barriers to entry. New players have recently emerged in the market by acquiring old banks and rebranding their operations. Conventional operations and procedures implemented in most banks in the country expose it to serious AML/CFT breaches. Outdated compliance models and high costs of operations invite further fines by international regulators, and make compliance an even distant dream.

In this year alone, 10 banks were fined by SBP for AML/CFT compliance shortfalls. Some of these are easy to detect and solve. Poor internal governance and a rent-seeking mindset among employees contribute significantly to the current state of the financial sector. Violation of rules and deadlines, along with personal motives, prevent concerned officials from carrying out their duties efficiently. Blaming the frontline alone would be unfair as back offices also need to be trained in adopting the new style.

Pakistan has recently moved its focus from the agricultural sector to the services sector due to growth opportunities. It is ironic that progress in the tech sector is fast, but the country struggles to meet AML/CFT standards in the financial sector. The threat of being placed on FATF’s grey list still looms large for Pakistan due to basic inconsistencies in KYC and AML compliance.

The media in Pakistan is often criticised for not highlighting the country’s financial issues and sharing information related to the SBP. Non-compliance issues are not considered newsworthy and end up only on the last few pages of newspapers, and off-hours programs on national television. It is also true that news about nepotism in politics and corruption in financial services is often pushed into the limelight on purpose.

Reporting standards in the media need to be improved, with a view to spread awareness about KYC/AML compliance and user security standards. Data breaches are now increasingly common and easier than the opening of a bank account. Sadly, these are hardly reported on mainstream media.

Interest in FinTech and Artificial Intelligence is growing in Pakistan, but growth in these sectors is slow.

Regulators need to encourage banks towards new digital standards for the banking sector as the number of digital users in Pakistan is increasing by the hour. Mobile carriers with their Microfinance banks are giving regulators a tough time, and charging high prices because of the unavailability of similar services by mainstream banks.

Banks are trying to move towards digital systems, but struggle to find reliable Identity Verification Service Providers (Know Your Customer) that maintain high standards in comparison with conventional banks. The SBP and SECP also need to develop technology beyond biometrics in the country. This is because a significant portion of the population is illiterate, leaving ample room for identity frauds, as identified by the National Accountability Bureau (NAB) in a fake account scandal 2 years ago.