Compliance Guidelines:

Compliance Regulations of Pakistan

Anti-Money Laundering Act, 2010 (AMLA 2010)

Section 2

• Money laundering involves the proceeds of a criminal activity, which could include income generated from illegal activities such as drug trafficking, fraud, corruption, tax evasion, or any other criminal offense.
• This section defines money laundering and provides clarity on what constitutes a money laundering offense under the law.

Section 3

• Offense: A person commits the offense of money laundering if they knowingly engage in a financial transaction or acquire, possess, use, conceal, or transfer any property, knowing or having reason to believe that it represents the proceeds of a crime.
• Penalty: If convicted of money laundering, the offender can be imprisoned for a term of up to 10 years and fined up to twice the value of the property involved in the money laundering offense.

Section 5

• Section 5(4) permits simplified CDD for certain low-risk customers or categories of transactions.
• Reporting entities can apply reduced CDD measures when they determine that the risk of money laundering or terrorist financing is low. However, they must still identify and verify the customer’s identity.

Enhanced Customer Due Diligence

• Section 5(5) requires reporting entities to apply enhanced CDD measures when dealing with higher-risk customers or transactions.
• Enhanced CDD includes conducting more in-depth background checks, obtaining additional information, and scrutinizing transactions more closely.

Politically Exposed Persons (PEPs)

• Section 5(6) specifically addresses the identification and monitoring of politically exposed persons (PEPs), who are individuals entrusted with prominent public functions.
• Reporting entities are required to apply enhanced CDD measures when dealing with PEPs due to their increased risk of corruption and money laundering.

Ongoing Monitoring

• Section 5(8) requires reporting entities to continuously monitor their business relationships with customers.
• They should scrutinize transactions for suspicious activity and update customer information as necessary to ensure it remains accurate and up to date.

Section 7

Suspicious Transaction

• Section 7 of AMLA 2010 mandates that every “reporting entity” shall report any suspicious transaction to the FMU.
• The law defines a “suspicious transaction” as any transaction or attempted transaction that gives rise to a reasonable ground for suspicion that it may involve proceeds of a crime or may be related to money laundering or terrorist financing activities.

Anti-Terrorism Act, 1997 (ATA)

• The ATA was amended in 2013 to incorporate measures related to combating the financing of terrorism.
• This act criminalizes the financing of terrorism and establishes procedures for freezing and confiscating assets linked to terrorist organizations or individuals.
• It also outlines penalties for individuals or entities involved in terrorist financing activities.
• The ATA prescribes enhanced penalties for individuals convicted of terrorism offenses, including the death penalty or life imprisonment.
• It allows for the seizure and forfeiture of property belonging to terrorists or those involved in terrorism-related activities.

Preliminary (Sections 1-2)

• Section 1 – Title and commencement
• Section 2 – Definitions, including definitions for “terrorism,” “sectarian hatred,” “firearms,” “explosive,” “property,” and several other key terms used in the act.

Proscribed Organizations (Sections 3-11B)

• Section 3 – Power to proscribe organizations
• Section 4 – Proscription orders, appeal against
• Sections 5-11B – Deal with membership, funding, support, representation, and other aspects of proscribed organizations.

Terrorist Acts (Sections 6-8)

• Section 6 – Terrorist acts
• Section 7 – Punishment for terrorist acts
• Section 8 – Punishment for threats, etc.

Procedures, Investigation, and Prosecution (Sections 9-27)

• This section covers the procedures for handling terrorist suspects, their detention, investigation, prosecution, bail conditions, witness protection, and related aspects.

National Savings AML & CFT Regulations 2020

The National Savings AML & CFT (Anti-Money Laundering and Countering Financing of Terrorism) Regulations 2020 of Pakistan are an essential framework for combating money laundering and terrorist financing within the National Savings Organization.

Identification and Verification

• Central Directorate of National Savings (CDNS) will conduct CDD as specified in subsection (1) of section 7A.
• For conducting CDD as required by sub-section (2) of section 7A, CDNS will adhere to sub-regulations (2) to (18) of regulation 4.

Procedures for Identification

CDNS is to:

• Identify the customer.
• Verify the customer’s identity using reliable and independent documents, data, or information specified in sub-regulation (9) of regulation 4.

Dealing with Authorized Representatives

In cases where a customer is represented by an authorized agent/representative, CDNS will:

• Identify every person acting on behalf of the customer.
• Verify the identity of such persons using documents/data mentioned in sub-regulation (9) of regulation 4.
• Verify the authority of the person acting on behalf of the customer.

Beneficial Owner Identification

• CDNS will identify the beneficial owner and take measures to verify their identity using documents/data sources detailed in regulation (9) of regulation 4, ensuring they are aware of who the beneficial owner is.

Article 9: Record Keeping Procedures

CDNS must maintain records that are comprehensive enough to allow the reconstruction of individual transactions. This should detail the nature and date of the transaction, the type and amount of currency involved, and the specific customer involved. Such records should be able to provide evidence for the prosecution of criminal activities when required.

Article 10: Sanctions for Violations

Any breach of the provisions within these regulations will be subjected to penalties in accordance with the AML/CFT Sanctions Rules, 2020. The sanctions will be imposed by the Supervisory Board as per clause (h) of sub-section (2) of section 6A of the AML Act.

Banking Companies Ordinance, 1962 (as amended)

The Banking Companies Ordinance, 1962 (BCO 1962) is a significant piece of legislation in Pakistan that governs the functioning and regulation of banking companies operating in the country. It has undergone amendments over the years to keep pace with the evolving financial landscape.

Some key provisions related to AML and taking precautions are given below:

• The ordinance establishes rules for the corporate governance of banking companies, including the appointment of directors and the conduct of board meetings so there could be prevention in case of money laundering.
• It grants regulatory authorities the power to inspect and supervise banking companies to ensure compliance with regulatory standards.
• The ordinance outlines penalties for non-compliance and provides mechanisms for enforcement.

Section 31

In terms of section 31 of Banking Companies Ordinance, 1962 all banking companies in Pakistan are required to surrender to SBP, unclaimed deposits, which have not been operated for the last ten years except a deposit in the name of a minor or a Government or a court of law.

KYC and CDD Regulations Recommended by SBP

Know Your Customer (KYC)

KYC is a set of procedures and practices that financial institutions and other entities follow to verify the identity of their customers. The goal is to ensure that institutions have sufficient information about their customers to assess the risk of money laundering, fraud, and other financial crimes. In Pakistan, KYC regulations include the following key aspects:

• Customer Identification: Financial institutions are required to obtain and verify the identity of their customers before establishing a business relationship. This includes collecting documents such as national identity cards, passports, or other government-issued identification.
• Customer Risk Assessment: Institutions must assess the risk associated with each customer and apply appropriate due diligence measures based on the risk level. Higher-risk customers may require more extensive checks and monitoring.
• Ongoing Monitoring: KYC is not a one-time process. Financial institutions are required to monitor customer transactions and activities continuously to detect and report suspicious behavior.
• Record Keeping: Institutions must maintain records of customer identification and transaction information for a specified period.

Customer Due Diligence (CDD)

CDD is a component of KYC that involves conducting a more in-depth examination of high-risk customers or complex transactions. CDD measures help financial institutions better understand their customers and the nature of their financial activities. In Pakistan, CDD regulations include:

• Enhanced Due Diligence (EDD): For high-risk customers or transactions, financial institutions must perform enhanced due diligence, which may involve gathering more detailed information, conducting additional background checks, and seeking senior management approval.
• Politically Exposed Persons (PEPs): Financial institutions are required to identify and subject PEPs and their family members or close associates to more stringent due diligence measures.
• Source of Funds and Wealth: Institutions must inquire about the source of funds or wealth when dealing with high-value transactions or customers to ensure that the funds are legitimate and not related to illegal activities.
• Third-Party Relationships: When entering into business relationships with third parties, financial institutions should conduct due diligence on these entities to assess the risk they may pose.

References:

1. State Bank of Pakistan
2. Banking Mohtasib Pakistan
3. National Savings (AML and CFT) Supervisory Board for National Savings Scheme