Recent developments

What is the FATF?

The FATF is a global watchdog for money laundering and terror financing.

“The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.”

The organisation was established by the G-7 Summit that was held in Paris in 1989 in response to mounting concern over money laundering.

Originally comprising 16 members and has since expanded to 39 members.

The FATF Plenary, it’s decision-making body, meets thrice a year.

What’s the significance of ‘Grey List’ and ‘Black List’?

First, the terms ‘Grey List’ and ‘Black List’ don’t officially exist in FATF parlance.  Instead, you have “Jurisdictions Under Increased Monitoring” and “High-Risk Jurisdictions subject to a Call for Action”. The FATF places a country on the ‘Grey List’ as a final warning to get it to comply with its directives.

While being on grey list does not invoke international sanctions, it warns banking institutions and trade bodies of increased risks in transactions with the countries under the FATF’s enhanced monitoring regime.

With Pakistan’s continuation in the ‘Grey List’, it will be difficult for the country to get financial aid from the IMF, the World Bank, the ADB and the European Union, thus further enhancing problems for the nation which is in a precarious financial situation.

If a country still refuses to comply, it will be blacklisted by the organisation or be put on the ‘Black List’.

Nineteen countries including Pakistan have been placed on the FATF ‘Grey List’, while only two countries have been placed on the ‘Black List’: Iran and North Korea.

Why Pakistan is struggling to get out of its ‘grey list?’

Pakistan has been scrambling to avoid being added to a list of countries deemed non-compliant with anti-money laundering and terrorist financing regulations by the global watchdog, a measure that officials fear could further hurt its economy.

Over the past 12 years, Pakistan has been placed on the ‘Grey List’ thrice.

Most recently in June 2018, when the FATF urged Islamabad to implement a 27-point action plan to curb money laundering and terror financing by the end of 2019. However, the deadline was extended due to the coronavirus pandemic.

In February, the FATF gave a fourth extension to Pakistan to fully implement a 27-point action plan and “strongly urged” it to meet the remaining three conditions about terror financing investigations and the United Nations Security Council resolutions.

The three red flags that FATF concluded still needed work were:

  1. “Demonstrating that terrorist financing investigations and prosecutions target persons and entities acting on behalf or at the direction of the designated persons or entities”; An US terror report said that “they have made no effort to use domestic authorities to prosecute other terrorist leaders such as JeM founder Masood Azhar and Sajid Mir, the mastermind of LeT’s 2008 Mumbai attacks”.
  2. “Demonstrating that terrorist financing prosecutions result in effective, proportionate and dissuasive sanctions”;
  3. “Demonstrating effective implementation of targeted financial sanctions against all 1,267 and 1,373 designated terrorists, specifically those acting for or on their behalf.”

Pakistan would remain on the grey list till June 2021, a statement issued by the FATF from Paris had said.

What are Pakistan’s chances of exiting ‘Grey List?’

According to the sources, Pakistan has implemented 26 of the 27-point FATF action plan. “There is partial progress on the point of conviction.”

In view of the US withdrawal from Afghanistan, Pakistan is likely to remain on the grey list as it would require two to three more months to implement the remaining one point.

According to the report, the situation is likely to change further by September when the US withdraws its troops from Afghanistan and due to Pakistan’s best strategy, the influence of the FATF is expected to be diminished.

President Joe Biden wouldn’t be interested in offering complete support to India in the form of pushing for Pakistan’s inclusion on the blacklist.

This is partially because it will only harm Washington’s interests in Afghanistan and the ongoing collaboration with Islamabad to secure an exit from the country. Also it could further ruin Pakistan’s struggling economy, something which Washington may not be interested in seeing happen.

What is India’s stand of Pakistan’s ‘Grey List’ status?

The US terror report said that progress by Islamabad “remains unfulfilled” on “the most difficult aspects of its 2015 National Action Plan to counter terrorism”.

New Delhi has deep misgivings about Pakistan’s commitment to discourage terror actors from using its territory to launch attacks in India even as it is widely believed that terrorist groups have access to support at the official level inside the country.

Most Favoured Nation is a treatment accorded to a trade partner to ensure non-discriminatory trade between two countries vis-a-vis other trade partners.

Under WTO rules, a member country cannot discriminate between its trade partners. If a special status is granted to a trade partner, it must be extended to all members of the WTO.

 When did India grant MFN status to Pakistan?

India granted MFN status to Pakistan in 1996, a year after the formation of WTO.

Pakistan still hasn’t granted India with MFN status. On the other hand, it came up with a dissimilar but globally popular Non-Discriminatory Market Access (NDMA) agreement.

The reason Pakistan has chosen to adopt the NDMA with India is due to political mistrust and a history of border conflicts.

What is the volume of trade between India and Pakistan?

Bilateral trade between India and Pakistan stands at $2.61 billion. The major commodities and goods in which both countries trade include cement, sugar, organic chemicals, cotton, man-made filaments, vegetables and certain fruits and tubers, mineral fuels, mineral oils, salts, earths, stone, lime, dry fruits, steel and plastering material.

Does MFN mean preferential treatment?

In literal explanation, MFN doesn’t mean preferential treatment. Instead it means non-discriminatory trade that ensures that the country receiving MFN status will not be in a disadvantageous situation compared to the granter’s other trade partners.

When a country receives MFN status, it is expected to raise trade barriers and decrease tariffs. It is also expected to open up the market to trade in more commodities and free flow of goods.

MFN essentially guarantees the most favourable trade conditions between two countries. These terms include

  • Lowest possible trade tariffs
  • The least possible trade barriers
  • Highest import quotas.

The WTO rules allow discrimination in certain cases like in cases when a country signs free trade agreements in a region. In that situation, a country may grant special favours and trade concessions to a country as compared to non-member countries of that group.

What are the pros of MFN?

MFN status is extremely gainful to developing countries.

It provides access to a wider market for trade goods, reduced cost of export items owing to highly reduced tariffs and trade barriers.

These essentially lead to more competitive trade.

MFN also cuts down bureaucratic hurdles and various kinds of tariffs are set at par for all imports.

It then increases demands for the goods and giving a boost to the economy and export sector. It also heals the negative impact caused to the economy due to trade protectionism.

What are the disadvantages of MFN?

The main disadvantage is that the country has to give the same treatment to all other trade partners who are members of the WTO. This translates into a price war and vulnerability of the domestic industry as a result.

The country is not able to protect domestic industry from the cheaper imports and in this price war, some domestic players have to face heavy losses or growth restrictions.

Consequence of India Withdrawing MFN to Pakistan

India’s decision to impose a 200% customs duty on all Pakistani goods will lead to a significant drop in Pakistani imports to India. However, given the low trade volume, it will not have any noticeable impact on Pakistan.

There is a high possibility that this would increase the share of informal trade (trade routed through third countries like UAE and Singapore) between India and Pakistan, which currently is estimated to be at $4.71 billion – almost double the formal trade.

Retaliatory tariffs by Pakistan will jeopardise Indian exports worth close to $2 billion, thus harming India.

Legal Tenability: Article XXI (b) of GATT allows a WTO member country to take any action that ‘it considers necessary’ for the protection of its essential security interests. But it requires a reasonable explanation as to why and how increasing customs duty to 200 percent on Pakistani products is ‘necessary’ to protect Indian security intersts.

Conclusion

For bilateral and SAARC regional trade to blossom, a congenial atmosphere has to be created. It is difficult to talk of trade when suicide bombers are killing Indian soldiers. Therefore, Pakistan has to act decisively and ensure that its soil is not used for terrorism against India.

A surgical strike is essentially a swift and targeted attack on specific target that aims to neutralise them while ensuring minimum collateral damage to the surrounding areas and civilians.

How is it carried out?

These attacks can be carried out via air raids, airdropping special ops teams or a ground operation.

India Army’s Parachute Regiments have highly trained para-commandos that are specially drilled to carry out such operations. The Indian Navy boasts of its feared marine commandos or MARCOS and the Indian Air Force has Garudas for asset protection and containment.

On 29 September 2016, India conducted surgical strikes against terrorist launch pads across the Line of Control in Pakistani-administered Kashmir, and inflicted “significant casualties”.

Implications of Surgical Strike

This was the first operation conducted by the Army across a wide frontage of well over 100 kilometres at multiple terrorist targets along the LoC.

Second, by taking ownership of the strike, India snatched the initiative from Pakistan, which had continued its provocations through terrorist attacks at regular intervals.

Third, the Army raised the cost of using terrorism as an instrument of state policy by a couple of notches.

Fourth, the Pakistani narrative about the absence of India-targeting terrorists on its soil stood exposed for the world to see.

Fifth, the strikes proved to be an important element for maintaining the morale of the people of India and the armed forces.

Sixth, the strike reinforced the credibility of the government and displayed its resolve, even as justified restraint and maturity was on display.

Seventh, India called into question the Pakistani belief that it would not react to terrorist provocations because of the fear of escalation.

Eighth, Pakistan’s ‘high effect low cost war’ becomes a ‘low effect high cost war’ and that is exactly what the surgical strikes have achieved.

Nine, There is a danger that the new dynamic in India-Pakistan relations could lead to the termination of the ceasefire on the LoC. It could lead to the destruction of the LOC fencing which has played a significant role in reducing infiltration.

Ten, This could aid a new  project of stepping up the Kashmir heat on India. Especially if the current situation of civil unrest festers, it could help Pakistan by creating a new crop of militants, as well as a support structure which could be utilised by a new wave of infiltrators.

Eleven, China is unlikely to get involved in the situation if it simmers at its present level. Neither India nor Pakistan show an inclination to go further. India has made its point that it intends to police the LoC more intensely. For the present, Pakistan has conveniently sidestepped the challenge by denying anything happened.

Twelve, Pakistan’s ‘high effect low cost war’ becomes a ‘low effect high cost war’ and that is exactly what the surgical strikes have achieved.

Conclusion

The surgical strikes are a game changer and Pakistan will be subjected to more such strikes as and when it crosses the Lakshman Rekha.