Challenges for financial institutes in implementing robust customer due diligence in Pakistan
| Date | 01 September 2022 |
| Pages | 926-946 |
| DOI | https://doi.org/10.1108/JMLC-06-2022-0095 |
| Published date | 01 September 2022 |
| Author | Nasir Sultan,Norazida Mohamed |
Challenges for financial institutes
in implementing robust customer
due diligence in Pakistan
Nasir Sultan
Accounting Research Institute, Universiti Teknologi MARA (UiTM), Shah Alam,
Malaysia and Department of Management and Administrative Sciences,
University of Gujrat, Punjab, Pakistan, and
Norazida Mohamed
Accounting Research Institute, Universiti Teknologi MARA (UiTM),
Shah Alam, Malaysia
Abstract
Purpose –This study aims to investigatesthe challenges faced by Pakistani financial institutes(FIs) and
regulatorsin implementing robust customer due diligencemeasures.
Design/methodology/approach –The study adopted a qualitative technique. Twenty-five semi-
structuredinterviews with chief compliance officers and regulatorswere conducted.
Findings –The study concluded thatthe main challenges are name screening, obsolete nature andquality
of databases and undocumented, unregistered and unregulated portions of the economy and society. In
addition, identification and verification of high-profile customers and beneficial owners, lack of specialised
staff and cost of complianceare the significant challenges faced by FIs in Pakistan.
Originality/value –The Pakistani financial sector is less researched on anti-money laundering front,
especially concerning customerdue diligence. Further, the social, cultural and economic norms of the Indian
sub-continentare more or less the same. Therefore, the study findingscould be generalised to the region.
Keywords Customer due diligence, Know your customer, Financial regulations,
Financial institutes, Anti-money laundering
Paper type Research paper
1. Introduction
The conception of any anti-money laundering (AML)/combating financing of terrorism
(CFT) regime brings with it potential to its outcomes (Getz, 2006;Unger et al.,2014;Pol,
2018) and specific issues concerning its implementation in practice, comprising the need to
have a robust set of rules and responsibilitiesthat can be trusted upon by public and private
sectors (Verhage, 2011). Therefore, the Financial Action Task Force (FATF) issued 40þ9
recommendations as global principles for developing the international AML/CFT regime to
combat money laundering (ML) (Al-Suwaidi and Nobanee,2020). In addition, many studies
argued that ML endangers economic and financial systems, i.e. Quirk (1997),Barrett (1997),
Paradise (1998),Masciandaroand Portolano (2003),Hetemi, Merovci and Gulhan (2018).
The ultimate goal of launderersis to seek ways to legitimise their ill-gotten funds and use
them in the future without the fear ofdetection (Keesoony, 2016). For this purpose, financial
institutes (FIs) are used as vital channels by launderers (Masciandaro, 1999;Rajgiri, 2019).
The main reasons for selecting FIs for laundering are their quick processing and cost-
effectiveness (Ruce, 2011).However, the risk of FIs failures has tremendously increased due
to deficient and ineffectiveAML regimes (Yeoh, 2014;Murrar and Barakat, 2020).
JMLC
26,5
926
Journalof Money Laundering
Control
Vol.26 No. 5, 2023
pp. 926-946
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-06-2022-0095
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
Therefore, the preventive measuresof the FATF recommendations are decisive, and the
success of preventive measures lies in the robust implementation of customer due diligence
(CDD) (Busarovs, 2021;ElYacoubi, 2020). Furthermore, CDD intends to ensure FIs establish
customer identification and verification (De koker, 2006;Mugarura, 2015). Therefore, the
process of CDD is deliberated as the backbone of the global fight against ML/terrorist
financing (TF) led by the FATF (Jun and Ai, 2009).
The financial sector, especially banking, is the central pillar of the economy and has a
pivotal role as a financial intermediary; therefore, banks’trustworthiness is essential
(Thalassinos and Dafnos, 2015). Once the financial integrity of any FI is questioned,
investors lose confidence in it (Vaithilingam and Nair, 2007). Moreover, banks have an
indispensable rolein economic growth and stability by boosting the allotment efficiencyand
utilisation of funds (Al-Omar and Al-Mutairi, 2008;Suryanto, 2016). Therefore, the
performance of FIs is of paramount importance in both local and international economies,
but continuous and vigilant surveillance is required. FIs without strong AML regulations
cannot prevent and fight efficiently against ML and act as caretakers of the legitimate
financial system (Pramodet al., 2012;Verhage, 2009).
However, the global ML scandals in FIs suggestthe ineffectiveness of FIs as gatekeepers
(Yeoh, 2020). For example, the failures ofthree recent FIs incidents endorse the claim; these
FIs include a respected bank from Denmark (Shwartzkopff, 2019), a global mega German
bank (Harding, 2019), and a large global Dutch bank (Jaeger,2018). In addition, since 2000,
more than two dozen FIs pled guilty or agreed to disgraceful settlements with the US
authorities on alleged breaching of AML rules. [Noonan and Cohen, 2019;European
Systemic Risk Board (ERSB), 2015]. These failures had been depicted as the handiwork of
little bad apples (Rustin, 2013;Fleimingand Giles, 2014), but the magnitude of the issue and
their recurring (Bray, 2019) advise poor supervision by regulators (Wolf, 2012) and the
meagre state of corporategovernance practices in FIs (Yeoh, 2016).
The current situation of financial crimes has left FIs with no other optionbut to develop
and implement compliance programs or face regulatory penalties (Sykes, 2018). So, the
performance of FIs is not satisfactory on CDD/KYC front, as evident by the regulator’s
massive penalties on FIs. In2019, global financial authorities (central banks and regulators)
fined FIs for non-compliance with the AML regime a US$8.14bn fine. Interestingly, this fine
included historic violations(Comply advantage, 2020). Total aggregated bank fines reached
US$14.21bn in 2020; the most significant penalty amounting to US$3.0bn was imposed on
Goldman Sachs. The most common violations are breaches of AML procedures (Finbold,
2020).
The financial sector of Pakistan consists of banks, non-bank finance companies (NBFC)
and modarabas, asset management companies and collective investment schemes (AMC
and CISs) and other financial institutions, including exchange companies (ECs),
development finance institutions(DFIs), the Central Directorate of National Savings (CDNS)
and the Pakistan Post Office, brokers,investment advisors and insurance companies.
However, the performance of Pakistani FIs is not satisfactory concerning AML. State
Bank of Pakistan (SBP) fined different banks for non-compliance with AML/CFT
regulations. Alarmingly, the ratio of fines imposed by regulators has unprecedentedly
increased by 845% in Pakistan from 2019 (Comply Advantage, 2020). In addition, SBP
imposed regulatory penalties on commercial banks for violations of CDD measures,
Rs.1,123m in 2019 (Pkrevenue, 2019), set another PKR1.68bn on 15 banks (Ali, 2020),
Rs.500m in the first quarter of 2021 (Rahman, 2021). On the same grounds, Pakistani FIs
with an international presence faced penalties by foreign regulators and closed their
branches, i.e. Habib Bank closed its New York Branch.
Robust
customer due
diligence
927
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