STATE BANK OF PAKISTAN STRENGTHENS REGULATIONS FOR

UNCLAS SECTION 01 OF 02 ISLAMABAD 000923

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN KTFN PREL PTER PK
SUBJECT: STATE BANK OF PAKISTAN STRENGTHENS REGULATIONS FOR
DETECTION OF MONEY LAUNDERING


1. (SBU) Summary: In March, the State Bank of Pakistan amended its
rules to detect money laundering and terrorism finance, requiring
all banks in Pakistan to establish compliance units, conduct due
diligence on customers, and identify suspicious customers and
transactions. The rules are a response to a recent evaluation by
the World Bank and Asia-Pacific Group of Pakistan's compliance with
the Financial Action Task Force (FATF) recommendations. End
Summary.


2. (SBU) New rules enacted by the State Bank of Pakistan (SBP) in
March broadly require that banks and development finance
institutions, through their Boards of Directors, develop due
diligence and know-your-customer procedures, and identify high risk
customers.

Compliance Units Now Mandatory
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3. (SBU) The new SBP rules require every bank in Pakistan to set up
a compliance unit with a full-time director, create management
information systems to regularly monitor customer accounts and
transactions, regularly update customer information, and plan
suitable training for compliance staff. The rules also require
banks to maintain up to date customer records, as well as to notify
the SBP in writing of any failure to comply with the rules.


4. (SBU) Previously, banks in Pakistan were not required to have
separate compliance units. While foreign banks maintain separate
compliance units based on international standards, local banks have
allowed compliance monitoring to blur with enforcement of other
regulations. As a result, according to one international bank
manager, local banks do not have effective compliance monitoring and
often overlook these types of issues.


5. (SBU) The same international bank manager estimated it will take
approximately six months for local banks to build capacity
sufficient to comply with these rules, as they will have to
reorganize and hire new employees. He also said he was confident
that international banks in Pakistan would be willing to assist in
this effort.

Customer Identification
--------------


6. (SBU) The most important aspect of the new rules is the
requirement that customers' Computerized National Identity Cards
(CNICs) are verified with the National Database and Registration
Authority (NADRA). Banks must obtain attested copies of all
customers' CNICs not later than June 30, 2009, and discontinue
relationships with customers who do not comply. Previously, SBP
rules required banks to identify their customers, but old identity
cards were not tied to NADRA's computerized database and were more
easily forged.

Enhanced Due Diligence
--------------


7. (SBU) The rules also identify categories of high risk customers
and require banks to conduct enhanced due diligence on their
accounts. High risk customers include non-residents, private
banking customers, non-governmental organizations and charities,
customers in cash based businesses or with no identifiable source of
income, and customers with connections to countries where anti-money
laundering laws are lax or offshore tax havens.



8. (SBU) The new rules require the SBP to inspect banks and their
staff for compliance with these regulations, and to refer negligent
or non-compliant banks to the Financial Monitoring Unit (FMU) for
monitoring. FMU Director Azar Kureshi reported that the SBP
conducts in-depth inspections of banks at least once a year and
conducts targeted inspections as needed. Kureshi stressed that the
FMU asks the SBP inspection unit to focus on banks' compliance with
rules related to money laundering and terror finance.

Comment
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ISLAMABAD 00000923 002 OF 002



9. (SBU) Comment: Provided they are implemented and enforced, SBP's
new counter-terrorism finance and anti-money laundering regulations
represent a welcome step towards ensuring that local banks'
compliance monitoring is elevated to a level that more closely
resembles international standards. Post expects that an FATF
recommendation compliance report to be presented to the GOP soon
will give SBP credit for changing its rules and find it to be a
credible regulator.


10. (SBU) Full implementation may prove difficult, however, as the
FMU is currently operating at half staff and its present ability to
effectively oversee the monitoring units is doubtful. Under Terms
of Reference U.S. Treasury executed with the GOP, a great
opportunity exists to help build capacity within the FMU, especially
regarding implementation of these new rules. Post may also wish to
explore opportunities to offer capacity building training to local
banks, in conjunction with the SBP, to help the banks implement the
new rules and train compliance monitoring units/staff. End comment.


PATTERSON