KARACHI: Microfinance institutions have started using a locally developed database to identify “politically exposed persons” (PEPs) in Pakistan to manage financial, regulatory and reputational risk, especially in compliance with Financial Action Task Force (FATF) recommendations, officials and sources told Dawn.

The database — recently developed by non-banking financial institute First Paramount Modaraba (FPM) — maintains data of more than 200,000 politically exposed persons.

According to the FATF, the Paris-based global money laundering and terrorist financing watchdog, a politically exposed person “is an individual who is or has been entrusted with a prominent function”.

Because such people hold positions that can be abused for laundering illicit funds or other predicate offences such as corruption or bribery, “FATF recommendations require the application of additional AML/CFT measures to business relationships with PEPs”.

Directory of over 200,000 politically exposed persons helps financial institutions track potential risks

Banks operating in Pakistan, public and private financial institutions and organisations dealing with monetary affairs and even realtors have already been using such a database for some time, especially after June last year, when it was announced that Pakistan would stay on FATF’s terrorism financing “grey list”.

Pakistan was placed on the list in 2018, which made foreign firms more cautious about investing in the country. With just two unmet targets out of the 34 action points, the FATF earlier this month retained Pakistan on the list and asked the country to address the remaining deficiencies in its financial system as soon as possible.

The situation has pushed the authorities and local financial institutions to adopt modern solutions to comply with the watchdog’s guidelines.

Microfinance institutions say they have taken the initiative both in line with the directives from the regulatory bodies and financial market watchdogs and also to secure their clients’ database amid growing challenges of its security and transparency in regular business operations.

A senior official of a local microfinance organisation said his institution had recently acquired FPM’s services to determine PEPs.

He said the need emerged after directives from the regulatory body and then to remove the risk of unknowing involvement of any such client or individual under their database that could put their operations at risk.

“Before finding this fresh technological solution, we had a certain mechanism to check their credentials, personal details and a brief history of past of individuals approaching us for loans and to avail the lending facility,” he said. “But that mechanism was falling short to comply with the emerging regulations amid FATF recommendations and that was mainly about keeping an eye on PEPs. Now with this initiative, we and all our competitors are at ease to a considerable extent. It has almost made us do our job.”

The Pakistan Microfinance Investment Company Limited (PMIC), a national-level apex institution for microfinance providers, has recently put in place the system to keep an eye on PEPs. The company, with a loan portfolio of over Rs23 billion, says it has finally found the solution for the “national requirement” and the initiative would help its 26 partners and more than 732,000 clients.

“We as a wholesale facility are also strengthening our clients for compliance,” a PMIC official said. “Some of our clients, offerings microfinance to different individuals, are not operating at a much higher level so they don’t have enough resources or facility for the required information. With the fresh partnership with the FPM, we are also facilitating them in meeting regulatory requirements and adopting financial security.”

FPM’s policies to acquire PEP data “are fully compliant with the guidelines given by international bodies”, its CEO Syed Wajih Hassan said, adding that the mechanism adopted for this purpose was based on the best global practices. “In terms of data update, PEP sources where frequent data updates are expected, FPM research team keeps a constant watch through automated or semi-automated means and any new information found, is scheduled for acquisition on an immediate basis,” he said.

The FPM, a non-banking financial institute managed by Paramount Investments Limited, which is the first to develop the system for that particular compliance, says microfinance institutions in Pakistan now find it crucial to put the system in place for their own business safety and transparency along with meeting regulatory requirements.

Published in Dawn, March 26th, 2022