Pakistan was officially placed on the Financial Action Task Force (FATF) 'grey list' on Wednesday, failing the country’s efforts to avoid the designation, diplomatic sources claimed.

The sources said that a terrorism financing watchdog took the decision during a plenary meeting in Paris, arguing that Pakistan had failed to act against terror financing on its soil.

The FATF did not make an official announcement till late in the night.

Being placed on the 'grey list' means that Pakistan's financial system will be designated as posing a risk to the international financial system because of "strategic deficiencies" in its ability to prevent terror financing and money laundering.

After being placed on the 'grey list', Pakistan will be directly scrutinised by the financial watchdog until it is satisfied by the measures taken to curb terror financing and money laundering.

Thanks to the opacity of FATF’s operations, it is uncertain what exactly Pakistan is expected to do, but what is clear is that the government has taken some steps to come into compliance with the global body’s requirements, such as proscribing key groups, whose open operations were a bone of contention, and seizing their assets.

The country spent three years on the 'grey list' between 2012 and 2015, without the designation affecting its ability to float international bonds, borrow from multilateral bodies, receive or send remittances or conduct international trade.

The status does little more than raising the compliance burden on counterparts, such as correspondent banks, dealing with entities within Pakistan’s financial system, and therefore attaches an additional cost to many external sector transactions.

Former finance minister Miftah Ismail, while addressing the National Assembly in March this year, had said that being placed on the grey list would not affect the economy and only cause "embarrassment" to the country.

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Earlier on Wednesday, caretaker Finance Minister Dr Shamshad Akhtar had urged the FATF to remove Pakistan from its 'grey list'. As the FATF plenary began its proceedings, the Pakistani delegation apprised the watchdog of steps Islamabad had taken to weed out money laundering and terror financing.

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Earlier, reports from Paris had indicated that Pakistan may get more time to take measures to implement the FATF’s anti-money laundering and terrorist-financing regulations.

The Foreign Office (FO) had confirmed in February that Pakistan would be placed on FATF's 'grey list' in June if it did not take measures to curb terror financing.

However, FO Spokesperson Mohammad Faisal had assured that an action plan to eradicate terrorist financing was being prepared and would accordingly be shared with the international body.

"Pakistan will be assigned to the ‘grey list’ in June, once an action plan has been mutually negotiated," the spokesman had said, adding that Pakistan will cooperate with FATF in every possible way.

The government was to work with the FATF to build the "action plan" to plug deficiencies identified by the watchdog, which was to be put up for approval by consensus in the June session. After that, implementation of the plan is to begin, with the Asia Pacific Group monitoring the process.

Alone at FATF

A 37-nation FATF plenary held its first meeting on Pakistan in February where China, Turkey and Saudi Arabia opposed the United States-led move to place Pakistan on the watchlist. But the US pushed for an unprecedented second discussion on Pakistan, held on February 22.

By then, Washington had convinced Riyadh to give up its support to Pakistan in return for a full FATF membership. This left only two – China and Turkey – in the Pakistan camp, one less than the required number of three members to stall a move.

At this stage, the Chinese informed Islamabad that they were opting out as they did not want to “lose face by supporting a move that’s doomed to fail”, an official source had told Dawn.

Pakistan appreciated the Chinese position and conveyed its gratitude to Turkey for continuing to support Islamabad against all odds,” the source added.