IIEffective Insolvency and Creditor Rights Systems
According to S. A. Shaikh, writing in 2004 for the Organization for Economic Cooperation and Development, Pakistan's insolvency regime is founded on two principle laws that derive from British and British-Indian Law: the Companies Ordinance of 1984 and the 2001 Recovery of Finances Ordinance. In addition, reform legislation has been drafted, called the Corporate Rehabilitation Act, which seeks to modernize the system and strike a balance between creditor rights and the needs of debtors by providing workable options other than liquidation. However, this draft legislation has yet to be passed by the Parliament. Further, in the year 2000, a specialized organization, the Corporate and Industrial Restructuring Corporation, was created to deal with banks that were dealing with an excess of non-performing loans, with the hope that this non-court option would ultimately prove better than the auction process. This experience was disappointing and the organization was allowed to lapse according to the sunset provisions of its enabling legislation. Pakistan's insolvency regime is, on the whole, less costly and more efficient than is the experience of the rest of the region, and returns to the creditor are higher, according to the World Bank. There is, however, insufficient publicly available information regarding Pakistan's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.
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IDInternational Financial Reporting Standards
According to a 2007 United Nations Conference on Trade and Development report on the implementation of International Financial Reporting Standards (IFRSs), Pakistan has made significant progress in aligning national accounting requirements with international practices by adopting IFRSs and also ensuring their enforcement by putting mechanisms in place. The report further explains that in line with the Institute of Chartered Accountants of Pakistan (ICAP) proposal, accounting standards would be applicable on a three-tiered structure including: (1) tier one or public interest entities comprising listed companies, large companies that meet a certain size criteria and entities that have public accountability must comply with IFRSs by 2009; (2) medium-sized entities are required to adhere to Accounting and Financial Reporting Standard for Medium Size Enterprises developed by the ICAP; and (3) small-sized entities must comply with Accounting and Financial Reporting Standard for Small Size Enterprises also developed by the ICAP. A 2007 presentation by Mr. Asad Ali Shah of the ICAP further notes that ICAP has adopted all but IFRS 1 and IFRS 4. A few other international standards, although adopted, are pending approval of the Securities and Exchange Commission of Pakistan. Earlier, in a 2005 assessment of accounting and auditing practices in Pakistan, the World Bank commended Pakistan for making progress in bringing national accounting requirements in line with IFRSs. Nonetheless, the World Bank, as well as the 2007 UNCTAD report, identifies certain hindrances to the full adoption of international standards. For instance, IAS 39 and IAS 40 have been held in abeyance by the State Bank of Pakistan due to resistance to adoption. Other shortcomings observed by the World Bank include inadequacies in the technical capabilities of regulators, lack of implementation guidance for accounting and auditing practices, and weak professional training and education.
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ENPrinciples of Corporate Governance
A 2005 ROSC on Corporate Governance by the World Bank states that there have been significant reforms improving corporate governance in line with international best practices in Pakistan. In 2002, the Securities and Exchange Commission (SECP) introduced a Code of Corporate Governance thereby establishing a framework for good corporate governance practices for listed companies. The Code is a result of joint efforts of the SECP and Institute of Chartered Accountants of Pakistan. A 2004 IMF Financial System Stability Assessment report reiterated that Pakistan's corporate governance regulations are "extensive and comprehensive" and the Code of Corporate Governance is broadly in line with Organization for Economic Co-operation and Development (OECD) Principles. Nonetheless, weaknesses persist and the World Bank assessment recommended that compliance be improved in three main areas: disclosure of beneficial ownership, reporting of related party transactions, and rules on Annual General Meetings. Further, the report finds that ownership is concentrated, thereby limiting the influence of minority shareholders. The report also observes that the Code is weak with regards to the provisions for independent directors. A 2006 paper by Haroon H. Hamid and Valeria Kozhich further adds that the definition of "independent" covered in the Code does not address minority shareholder rights. Also, the World Bank finds that the fiduciary duties for board of directors are relatively under-developed in Pakistani law.
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ENInternational Standards on Auditing
A 2006 self-assessment conducted by the Institute of Chartered Accountants of Pakistan (ICAP) notes that Pakistan adopts International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB) without any modifications. Along with organizing regular seminars, the Institute also routinely updates the adoption status of IAASB pronouncements on its website. A World Bank assessment of Pakistani accounting and auditing practices conducted in 2005 confirms that ISAs are adopted without any modifications and that Pakistan had achieved progress in narrowing the gap between national and international requirements. Nonetheless, weaknesses exist and the World Bank points out that there are varying compliance gaps in auditing practices. The report identifies inadequate technical capabilities of the regulators, lack of implementation guidance, weaknesses in professional education and training, and the absence of independent oversight of the auditing profession as the main shortcomings in the Pakistani auditing framework. The World Bank, therefore, recommended strengthening the monitoring and enforcement mechanism, introducing independent oversight of the auditing profession, and improving the capacity of the ICAP.
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IDAnti-Money Laundering/Combating Terrorist Financing Standard
As of August 2008, there is no comprehensive assessment publicly available on Pakistan's compliance with the Financial Action Task Force's (FATF) forty plus nine recommendations and special recommendations. In a 2007 Article IV Consultation report, the IMF observed that Pakistani authorities had taken major steps towards implementing a strong legal framework to prevent money laundering and terrorism financing activities. At the forefront of these recent efforts was the promulgation (in September 2007) of the Anti-Money Laundering Ordinance, which, in addition to enacting overall regulations for anti-money laundering and combating the financing of terrorism (AML/CFT), criminalizes money laundering. According to a 2008 report by the U.S. Department of State (DoS), terrorist financing is criminalized pursuant to the Anti-Terrorism Act of 1999, which also permits Pakistani authorities to freeze assets held by terrorist individuals and entities. The AML Ordinance created the Financial Monitoring Unit (FMU) to perform the typical duties of a financial intelligence unit, namely to collect, analyze and disseminate all suspicious transaction reports (STRs) submitted by entities subject to the AML Ordinance to several law enforcement agencies responsible for enforcing financial crimes laws. However, in its 2008 Accelerating Economic Transformation Program report, the Asian Development Bank (ADB) observes that the AML Ordinance's mandate that the director general of the FMU be supervised and controlled by the general committee is inconsistent with international standards as the FMU should have financial and operational autonomy. The U.S. DoS report states that, from July 2006 through June 2007, the FMU received 22 STRs from various banks. The FMU subsequently sent five of these STRs to law enforcement agencies for further investigation. As of 2006, bank accounts of 43 terrorist individuals and entities had been frozen. The report primarily attributes the relative paucity and limited utilization of STRs to Pakistan's lack of a central repository for the reporting of STRs. The U.S. DoS report also notes several weaknesses in the AML Ordinance.
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IICore Principles for Systemically Important Payment Systems
The 2004 Financial System Stability Assessment (FSSA) conducted for Pakistan by the IMF notes that an automated retail check clearing system, National Institutional Facilitation Technologies (Pvt.) Limited (NIFT), has been in operation since 1997. Further, the State Bank of Pakistan (SBP), Pakistan's central bank, was in the process of launching a real-time gross settlement (RTGS) system. Owing to the work in progress, Pakistan was not assessed against the Core Principles for Systemically Important Payment Systems promulgated by the Committee on Payment and Settlement Systems. The FSSA, however, did observe certain deficiencies in the legal framework for payment system oversight relating to finality of payment and zero hour rule and recommended amending the State Bank of Pakistan Act with the inclusion of a chapter on payment systems. Also, the SBP's liquidity management facilities needed to be upgraded to accommodate the demands of the anticipated RTGS system and the expanded membership. A 2008 report by the Asian Development Bank provides updates on this information by mentioning that the RTGS system has been established. The 2006-2007 SBP annual report announced that the system would be named Pakistan Real Time Interbank Settlement Mechanism (PRISM). A new law, the Payment Systems and Electronic Fund Transfers Act of 2007, has also been enacted to provide the legal and regulatory framework for payment systems and electronic funds transfers in the country. However, none of the mentioned systems have been designated systemically important by the SBP or by third-party sources.
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