Financial Crimes and Punishment

On Sept. 30, Noor-ul-Haq Qadri, Pakistan’s minister of religious affairs, brazenly shared a stage with Hafiz Saeed, the founder of the terrorist group Lashkar-e-Taiba, who has been subject to United Nations sanctions dating back a decade thanks to his role in planning and supervising the November 2008 terrorist attacks in Mumbai.

Incidents like this one are emblematic of the policies that have run Pakistan afoul of financial crimes watchdog groups. One of them, the Financial Action Task Force (FATF), had its annual plenary meeting last week in Paris, where it grappled with hard cases such as Pakistan.

FATF was chartered in 1989 by the G7 countries to monitor money laundering and terrorist financing around the world. In the years since it was launched, its membership has grown to almost 40 nations. Among other tools intended to coax countries toward financial transparency, FATF’s blacklist for nations that do not uphold its standards can effectively cut them off from the international financial system.

Pakistan has long been at risk of such censure. From 2012 to 2015, FATF subjected the country to extra monitoring for suspected money laundering and financial dealings with terrorists. The country graduated from this so-called gray list in 2015, after implementing new financial regulations as part of an IMF program—the first it had completed in 20 years. But old habits die hard, especially in a country with a sclerotic bureaucracy and a powerful military that uses militant proxies against its neighbors.

Pakistan was confident that its remaining allies in FATF, particularly China, would protect it from the gray list. At the last minute, though, China supported Pakistan’s downgrade.

And so, at a February meeting of FATF this year, the United States lobbied to return Pakistan to the task force’s gray list as part of a broader campaign to pressure the country to get serious about rooting out terrorists. Pakistan was initially confident that its remaining allies in FATF, particularly China, would protect it from enhanced scrutiny. At the last minute, though, China supported Pakistan’s downgrade. Pakistan had to acknowledge that it would go back on the gray list in 2018 and would be at risk of falling to the black list in 2019 if it didn’t make serious reforms.

That was no small admission. Pakistan is in the middle of a balance of payments crisis and is in desperate need of increased international investment. As long as it is on FATF’s gray list, though, the country will have a hard time accessing commercial borrowing. FATF scrutiny will also factor into Pakistan’s upcoming negotiations with the IMF, which are slated to begin in early November. (The IMF typically insists on progress against FATF benchmarks as part of its programs with gray-list countries.)

In turn, Pakistani Prime Minister Imran Khan has been seeking financing from Pakistan’s traditional friends, Saudi Arabia and China, as a way to reduce the amount of money it will need to take from the IMF and, in turn, lessen the pain of IMF conditionality and austerity. Earlier this week, Saudi Arabia announced that it would offer Pakistan loans totaling $6 billion, but Islamabad will need more than promises—especially at a time when the Saudis are trying to shore up international support in the aftermath of the journalist Jamal Khashoggi’s apparent slaying.

For observers, China’s decision not to protect its ally seemed a welcome surprise. But the move was at least partly strategic. The same month, China was elected to the hold the vice presidency of FATF, its first leadership role since joining the organization in 2007 and a position all but guaranteed to land it the presidency next summer. China needed Indian support to win the seat, and India was only willing to give it if China joined the consensus on downgrading Pakistan to the gray list.

FATF is exactly the kind of technical body that makes the rules-based international order work. It depends on consensus among member states to function. Its ability to monitor hard cases like Pakistan, a long-time frenemy of the United States and a strategic partner of China, is reason for optimism. But the drama surrounding the decision offers two lessons about the future of the rules-based international order.

The signs are worrying. In the U.N. Security Council, for example, China has for years blocked or held up efforts to designate militants based in Pakistan as terrorists, ultimately diminishing the U.N.’s effectiveness on counterterrorism.

China can be a partner in addressing financial criminality. But if it uses its growing power to shield its friends from the scrutiny of international institutions, the legitimacy of those institutions will be undermined.

China can be a partner in addressing financial criminality. But if it uses its growing power and influence in international institutions such as FATF to shield its friends from the scrutiny of international institutions, the legitimacy of those institutions, and the rules-based order they represent, will be undermined. Along these lines, China’s recent imprisonment of the head of Interpol was similarly damaging.

In 2016, Meng Hongwei, a Chinese criminal justice official, became the first Chinese national to become the president of Interpol, an intergovernmental organization that promotes cooperation between national police authorities. By all accounts, Meng took the job seriously and allowed Interpol to function normally even at times when its decisions ran contrary to the Chinese Communist Party’s desires.

But in September, Meng was detained during a visit to China and apparently compelled to resign from his Interpol position. For days after his wife reported him missing, China provided no explanation or details of Meng’s whereabouts. Although Chinese President Xi Jinping had cited Meng’s selection as Interpol president as evidence that China “abided by international rules,” China’s treatment of Meng showed the opposite—and demonstrated the potential for illiberal powers to use their growing influence to twist institutions to their own ends.

The Pakistan episode also highlights the challenge posed by smaller illiberal states that stand ready to twist the rules-based order to their own objectives. Since the 2011 raid on Osama bin Laden’s compound, Pakistan (particularly its powerful Inter-Services Intelligence agency) has attempted to restrain, curtail, and even expel international nongovernmental organizations working in the country. Turkey has likewise banned Mercy Corps and other organizations that provided humanitarian assistance in northern Syria on the grounds that the organizations were supporting anti-Turkish terrorists there.

But Pakistan’s government has found a novel way of achieving its aims. It has used FATF standards as an excuse to target NGOs. At the beginning of October, 18 were ordered to shut down their operations and leave the country. Although the government has been scrupulously vague as to why, Asad Umar, Pakistan’s finance minister, apparently privately told representatives of the affected groups that the decision was due to financial transparency measures required by FATF.

His claim is patently absurd. FATF’s recommendation about NGOs specifically relates to groups that are “identified as being vulnerable to terrorist financing abuse” and calls for “focused and proportionate measures, in line with the risk-based approach.” International public charities are not high-risk. FATF has also provided copious advice for regulating the sector’s finances while still allowing NGOs to do their work.

The more the efforts of intergovernmental organizations like FATF that set international standards and best practices are twisted around by illiberal states, though, the less they will be able to support the liberal order.

First, decisions are made by those who show up. For example, the United States has legitimate gripes about the U.N. Human Rights Council, another intergovernmental body that out of necessity includes states with terrible human rights records. But by walking away from the council in 2018, the United States ceded an imperfect field rather than fighting for it. Among other things, the United States’ absence makes it more likely that China will be able to rewrite international human rights language in accord with its domestic political interests, a dangerous model for other international bodies, including FATF. 

Second, today’s powers should recognize that preserving and strengthening the international system is a national interest. Not every U.S. position should be designed to maximize short-term gain. At times, it is important to place the interests of the liberal order over the immediate interests of the United States. Washington has traditionally done exactly this—supporting UNESCO or International Atomic Energy Agency tasks that do not align perfectly with its short-term policy objectives in order to sustain broad support for the organizations’ overall missions.

Third, if illiberal states are going to work together to reshape global institutions, liberal states and movements should do the same. Rather than isolating itself, the United States needs to join forces with Europe and others to ensure that international organizations are expanding civic space in member states, not providing cover for retracting it.

Fourth, illiberal politics must also be countered at home. It is impossible for the United States to defend independent organizations abroad if it attacks them at home.

Pakistan is at the beginning of a long journey with FATF. Getting off the gray list is always harder than staying off, but observers can hope that the process will leave Pakistan better equipped and more committed to blocking terrorist financing and preventing terrorist groups from operating in the country.

Meanwhile, the United States and its allies are also starting a big new project: figuring out how to respond to new challenges as rising illiberal states assume a larger role in the institutions that underpin the rules-based international order.