Strengthening Controls Against Money Laundering and Terrorist Financing: SBP's New Directives

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Strengthening Controls Against Money Laundering and Terrorist Financing: SBP's New Directives

In our continuous effort to combat money laundering (ML) and terrorist financing (TF) risks, The State Bank of Pakistan (SBP) has recently issued a set of comprehensive directives to enhance the regulatory framework. The aim is to ensure that banks and microfinance banks (MFBs) offering branchless banking (BB) services, collectively referred to as Authorized Financial Institutions, are equipped with robust mechanisms to mitigate the threats posed by ML and TF activities. This move is significant and reflects the commitment of the SBP in safeguarding the financial sector from illicit financial practices.

Biometric Verification for Cash-In and Cash-Out Transactions

The core of the SBP's new directives revolves around biometric verification (BV) of account and wallet holders for all 'cash-in' and 'cash-out' transactions conducted at BB agents' locations. These measures, set to be effective from January 31, 2024, mark a pivotal development in the fight against ML and TF. The BV requirement extends to all types of transactions, reinforcing the security of the BB system. It is important to note that this BV requirement builds upon the foundation laid by the BPRD Circular No. 10 issued on December 30, 2019.

Prioritizing BV Device Deployment in High TF Risk Areas

Recognizing the varying degrees of ML and TF risks in different regions, the SBP's circular emphasizes the prioritized deployment of new BV devices. These devices, essential for implementing the directives, will first be placed in high TF risk areas. Subsequently, the deployment will extend to other regions across the country. This strategic approach ensures that areas most susceptible to ML and TF activities receive immediate attention, further strengthening the regulatory framework.

Upgradation of Hardware and Software

To comply with the new instructions, Authorized Financial Institutions are also required to take all necessary measures and controls, including the upgradation of related hardware and software. This commitment to technological advancement ensures that the BB system remains at the forefront of security and efficiency, while simultaneously adhering to regulatory requirements.

Strengthening Automated Transaction Monitoring Systems (ATMS)

To enhance vigilance over BB transactions, the SBP has directed Authorized Financial Institutions to strengthen their automated transaction monitoring systems (ATMS). The system should be capable of flagging suspicious, unusual, or out-of-pattern transactions, as well as accounts with an unusually high number of transactions. This heightened scrutiny is in line with the Anti-Money Laundering (AML) Act of 2010, facilitating the reporting of Suspicious Transaction Reports (STRs). Such reports are crucial for initiating legal actions and criminal investigations under the relevant laws.

Reconstruction of Individual BB Transactions

In a further step to support criminal investigations, the SBP has directed the reconstruction of individual BB transactions. This process aids in gathering the necessary evidence required for legal proceedings. The comprehensive approach adopted by the SBP demonstrates a proactive stance in the battle against ML and TF activities.

Inclusion in Internal Risk Assessment Reports

To maintain transparency and accountability, the SBP has stressed the importance of including BB operations in the Internal Risk Assessment Reports (IRARs). This inclusion is a mandatory requirement under the SBP's Anti-Money Laundering/Counter Financing of Terrorism/Countering Proliferation Financing (AML/CFT/CPF) Regulations. It ensures that BB operations are subject to thorough scrutiny and assessment within the broader risk management framework.

In conclusion, the State Bank of Pakistan's recent directives to strengthen controls against money laundering and terrorist financing are a testament to the regulator's commitment to a secure and compliant financial ecosystem. These directives not only bolster the security of branchless banking operations but also align with international best practices in combating ML and TF risks. Authorized Financial Institutions are urged to swiftly implement these measures to fortify the integrity of the financial sector, and the SBP's proactive approach sets a noteworthy example for regulators worldwide.