COUNTERING MONEY LAUNDERING IN PAKISTAN

COUNTERING MONEY LAUNDERING IN PAKISTAN <!--[if gte mso 10]> COUNTERING MONEY LAUNDERING IN PAKISTAN By Dr. Ikramul Haq, Advocate, Lahore Money laundering is particularly damaging to economic and social fabric of developing countries, leading to potential increase in crime and corruption, impending damage to reputation of financial institutions and markets, reduction of foreign private investment, possible destabilisation of financial markets and weakening of financial institutions, loss of tax revenue and loosening control over economic policy. Pakistan has been the worst victim of money launderers as since 1977, the successive Governments showed an extremely benign attitude toward corruption, drug trafficking and tax evasion. In Pakistan, the banks, insurance companies, non-banking financial institutions, investment companies, money transmitters and real estate agents are all targets for money launderer. The financial institutions inadvertently or otherwise support money laundering by providing means to convert cash into different types of financial instruments, to convert the currency of one country into the currency of another and to transfer funds to other financial institutions'. It is heartening to note that the SECP and other regulating agencies are providing institutional support to the Government of Pakistan for developing the necessary framework on money laundering issue. The objectives of anti-money laundering coincide with the objective of SECP i.e., to create a transparent and efficient market. Over the past three years, the SECP has been actively involved in new initiatives for ensuring transparency and governance of companies. In March, 2002, the SECP introduced Code of Corporate Governance to instill openness, transparency and accountability in the affairs of companies. Besides encompassing all listed companies, the Code has also been endorsed by the State Bank and is applicable to commercial banks. 1. Statement by the Chairman Securities and Exchange Commission of Pakistan (SECP), Dr. Tariq Hassan, while addressing a seminar on "Countering Money Laundering", organised by SECP's anti money laundering cell at Lahore University of Management Sciences on December 29, 2003. These observations by the Chairman of SECP are eye-openers. The Chairman further admitted that Pakistan is targeted by the money launderers because they generally attack the countries having weak anti-money laundering regimes. Additionally, the SECP is keen that the private and public sector companies, particularly, those using public funds for their businesses, should adhere to the Code of Corporate Governance. According to SECP's Chairman it is an admitted fact that corruption prevails not only in the top management of the 'companies but has become very common amongst the employees at all levels. Thus efforts are underway to require formal code of ethics or code of conduct to be framed and implemented by all the companies, irrespective of size, throughout the country. In recent years banking sector reforms project has been launched in Pakistan, which involves strengthening of the regime for controlling money laundering and financial fraud. While State Bank is the implementing agency in this regard, the SECP is also involved in providing the impetus for instituting anti-money laundering measures. Reforms have been initiated under this project alongwith focused research to beef up institutional capacity for anti-money laundering campaign. The important measures so far taken under this project are development of a comprehensive account opening form focusing at 'knowing-your-customer' by the stock exchanges for introduction at the time of account opening at the broker level. Compliance officers have been appointed to ensure compliance by companies with the SECP regulations and laws besides adhering to the anti-money laundering procedure. The measures also include payment by Non-Banking Financial Institutions (NBFIs) through cheques or negotiable banking instruments for money transaction above PK. Rs. 50,000. Pakistan needs to develop a permanent structure in all the institutions specifically Central Board of Revenue (C.B.R.2), Federal Investigation Agency (FIA3), SECP and State Bank so that the money laundering issue can be effectively tackled. Special Courts' should be established and Judges having expertise in financial and banking matters should be appointed, to hear the money-laundering cases. The Judges of such Courts must be imparted training in the fields of accountancy, and money laundering. There is an urgent need for introducing policy and structural changes in the banks. It is unfortunate that 'Benami accounts'4 are widely accepted in the public and private sector banks. Presently, there are 28.8 million accounts with the Pakistani banks, out of which 14.8 million were opened against personal names whereas only 432,916 are liable to pay taxes. 2. Apex revenue authority at the federal level responsible for collection of taxes and unearth untaxed money. 3. A federal law-enforcement agency of Pakistan that is similar to FBI of the United States. 4. Benami is a Persian compound word consisting of (i) `Be' which means `` without' and (ii) 'Nami' which means `name'. It literally means "without a name', that which is nameless or fictitious, and is used to denote a transaction which is realty done by a person without using his own name (i.e. benami), but " in the name of another. Nature of such transactions and their tax implications are discussed in detail in Sree Meenakshi Mills Ltd. v. Commissioner of Income Tax, AIR 1957. SC 49, 66. In the past the various Governments in Pakistan never bothered to unearth laundered money rather always joined hands with the tax evaders and money launderers by providing them unprecedented concessional schemes to whiten their ill-gotten wealth. These schemes were announced by the Governments on the recommendations of CBR's top management (corrupt mafia) in the name of improving tax collection! In Pakistan the money accrue through land transactions, drug trafficking, and suspicious transactions involve money laundering. Everybody knows that kickbacks are involved in import of textile machinery but not a single businessman has so far been prosecuted on this account by C.B.R. The C.B.R., according to all available data and indicators, is the most inefficient, incompetent and corrupt arm of the Government5. It is in fact ruled by a band of mediocre, corrupt, power-hungry and sycophants6. The C.B.R., responsible for the collection of Federal taxes, has miserably failed to introduce any tax intelligent computerized system, despite the fact that it has a market-wage oriented company, Pakistan Revenue Automation Limited (PRAL), at its disposal, to monitor the economic activities of corporate/business sectors. This failure coupled with corrupt practices (according to some estimates at least Rs.200-300 billion go annually to the pockets of tax officials) has contributed to generation of enormous black money in Pakistan. 5. Dr. Ikramul Haq, " Pakistan: Drug-trap to Debt-trap", May 2003, page 217. 6. Ibid. Large-scale tax evasion and the existence of a large black economy while resulting in loss of revenue to the State, tends to reduce the built-in elasticity of in fiscal system to the extent that the tax evaded income is spent on goods and services that help to generate inflationary 'pressures and raise the prices of real property. In the context of the prevailing grave challenge to combat terrorism, coupled with money laundering crises, and the problem of ever-growing black money, (which according to official and independent experts is around Rs. 1.8 trillion, about 70% of the total economy), there is an urgent need to launch a well-thought for anti-money laundering law to block this huge money becoming a lethal weapon in the hands of mafias who now control economy as well as the Governments. However, it is important before launching such a law to identify the sources of generation of black money. If such sources are not eliminated, the black money will keep on growing no matter how stringent laws we make. Pakistan has been facing perpetual crisis of resources for its developmental policies, crisis to meet trade deficit, crisis on account of fiscal deficit and balance of payment, and what not, one of the factors responsible for the present situation is the great speed with which black money is generated. The Central Board of Revenue is directly responsible for this as its mafia-like operations has helped the people to avoid tax on incomes by paying them "due share". Through the infamous system of S.R.Os'.7 the C.B.R's. top officials provided "legal" ways and means to the mighty sections of society to amass huge wealth that is now threatening the very survival of State. This black money in the hands of corrupt politicians, bureaucrats and terrorists has played havoc with the entire human community across borders. 7. Pakistan is a unique country where tax laws are controlled by an administrative authority, CBR, by issuing Statutory Regulatory Orders (SROs). Through these notifications unprecedented benefits are given to ruling classes e.g. exemption from duties in importing cars by President, Army Chiefs and Governors, just to mention a few. A conservative estimate is that Rs. 600 billion is generated every year in Pakistan by the parallel economy. Add to this, the black money generated through smuggling in goods and narcotics trade that is between Rs. 300 billion and Rs. 500 billion. This makes a whooping Rs. 1000 billion. When the presence of black money is so apparent, why its criminal accumulation and. generation are not revealed and the offenders punished, is a question which has been baffling honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties? Those who plundered the wealth of the nation were set free to have a good time in "exile" and those who abused powers are being invited to come again for ruling and looting whatever is left. Many renegades of Pakistan People's Party of Benazir Bhutto and Muslim League (Nawaz Group) who were facing trials for financial malpractices or plundering of banks loans are now enjoying ministerial positions in the Jamali Government, backed by General Musharraf. It is not possible to determine the precise amount of revenue loss and size of black money or informal economy in Pakistan. Revenue loss estimated by World Bank because of smuggling in 1992-93 amounted to 5.08 billion dollars. In 2003 its quantum was estimated at over 200 billion dollars. Another report estimates revenue loss, because of distortionary tax regulations and administrations, at Rs 40 to Rs 45 billion in 1989-90 and Rs.104 billion in 1995-96. Apart from direct monetary costs of corruption, other significant costs, such as loss of Government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan. According to figures released by C.B.R. on 30 May 2000, the parallel economy is growing at an alarming rate of 22.93% per annum. Every fifth rupee transacted in Pakistan is black, according to the volume of black money generated in the year 1997-98 at Rs. 600 billion or 15 per cent of Gross National Product. This means that everyday tax fraud exceeds Rs. 1.64 million. It is not the final count. We have yet not accounted for kickbacks in foreign trade, smuggling (e.g. huge tax evasion in the name of Afghan Transit Trade) and foreign exchange racketeering, apart from narcotic trade and other criminal traffic. Dr. Aqdas Ali Kazmi, Joint Chief Economist, Planning Commission of Pakistan has stated in his research paper "Tax Policy and Resource Mobilisation in Pakistan" that 70 per cent part of economy consists of 36 per cent 'pure' black economy, 18 percent exempted economy, 9 percent illegal economy, 4.5 per cent unrecorded economy and 2.5 percent informal economy (unreported economy). His study says that the problem in the low resource mobilisation is the rigid system of taxation, and the emphasis of the Government to increase revenue, ignoring the details of long-term policy measures. According to very conservative estimates the real tax potential of undeclared wealth in Pakistan is between PK. Rs. 700-1000 billion. The successive Governments have utterly failed to persuade the Pakistani people to pay taxes due from them. The common argument against paying taxes is that money so collected is spent for wasteful purposes and on unprecedented benefits enjoyed by high placed civil-military bureaucrats and corrupt politicians. In this tug of war, the tax machinery is minting money by harassing the public in the name of army rule. It was the first time in the history of Pakistan that during the General Pervez Musharraf's take-over a military ruler became a tool in the hands of tax bureaucrats for exploiting the general masses for self-interest. The poor people of Pakistan were asked to pay 23% General Sales Tax, small businesses were asked to pay minimum tax of 0.5% on their turnover irrespective whether they earn taxable income or not. On the contrary, the military elite and influential classes were granted unprecedented tax exemptions. Judging from different studies quoted above and reports published in print media from time to time, Pakistan's underground economy has the following salient features: Since 1979 (courtesy Gen. Zia's legacy of speed moue culture and its following by all the subsequent Governments, notably that of Benazir Bhutto and Nawaz Sharif), Pakistan's underground economy has developed at a surprising rate. Its large size ranging between 22% to 35% of GDP is a cause of great concern for both the official and independent economists. Its manifestations are very wide. It is not only large and all-pervasive but also exists in daily life of every Pakistani. It includes production of fake and substandard goods, smuggling, the "black society" economy, illegal business of sexual transactions and contraband toxicants, massive infringement of copyrights, interloping, tax evasion and avoidance with the active collaboration of tax officials, money corruption and rent seeking [exchange of power for money] activities of Government officials, plundering of bank loans, just to name a few and significant ones. Massive migration towards big cities confirms that a huge population of Pakistan is directly engaged in underground economic activities. The large-scale mobility of people is also a contributing factor in generating underground economy e.g. huge demand of local private houses to accommodate the mobile population. The active participation of Government officials is the most disturbing feature of Pakistan's underground economy. The rent-seeking activities of the Government functionaries emerge in an endless stream. They are the single most important catalyst for accelerating the growth and sustainability of underground economy. The State has miserably failed to check rampant corruption amongst their officials. They have emerged as the most powerful mafia whose control over the underground economy is now invincible. Why has Pakistani underground economy been evolved so rapidly over a period of last 20 years? This question baffles every concerned citizen; however there is no one adequate answer to it. There were multiple factors leading to this phenomenon, most notably the State-sponsored corruption and deliberate tolerance to malpractices. Pakistan by all means has a soil, which proved to be very suited for the propagation of an underground economy since the very early days of Independence when allotment mafia came into existence and many notorious elements turned rich overnight. They are still dominating the ruling structures as money power they enjoyed without putting any effort in achieving it. The successive civilian governments in Pakistan provided many lucrative laundering schemes to the drug traffickers, rent seekers and tax dodgers (although these were termed as good economic measures to dig out black money!).These schemes include Bearer National Fund Bonds and Foreign Exchange Bearer Bonds, Special Bearer Bonds, US Dollar Bonds & Certificates and a host of such other instruments. The object of these instruments was to mop up black money (mainly earned through illicit drug transactions) and to bring it out in the open so that instead of remaining concealed and idle, such money may become available for augmenting resources of the State and for the utilization of social and economic planning. The said schemes, however, proved counter-productive. The bearer bonds were converted into alternate currency and exchanged hands at a premium. It is an officially admitted fact that 'the instrument to render black money white was itself, used with vengeance to reconvert white money into black'. The Special Bearer Bonds carry a premium in the market and an increase in the premium was witnessed as the date of maturity of these bonds came closer. Under the Scheme any one can buy the bonds, present them to the Government and claim refund along with a specified interest. The source of investment in their purchase could not be questioned; whether it was white or black money8. Thus, the drug barons could get their money and assets legalized with no questions asked about the source of such "income". 8. How to Unearth Black Money? , Dr Ikramul Haq. During the last 15 years, money launderers in Pakistan hardly needed any international channel for money laundering. All the support from the State was available at home. Even today, if anybody brings money (earned from drug trade or any smuggling operation or own untaxed money by hiring the services of local money exchangers to show it as remittance) in Pakistan through normal banking channels, the State Bank and Tax Authorities do rot pose any question about the "source". Drug traffickers and terrorist apparatus remit millions of rupees into the country every year from bank accounts maintained in various countries in fictitious names. This money in the hands of terrorist networks has made them invincible, besides making life harder and harder for those who earn from legitimate sources. The recurrent appearance of amnesty schemes and money whitening instruments/modes shows that the State has conceded the failure of its tax machinery in performing its main function of collection of taxes. This nation has become addicted to easy money and such schemes/instruments have become a routine matter for them. The people being hooked on ill-gotten wealth/income for the last many years know for certain that after every two or three years, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less the amount than what they were required to pay under the normal income tax/wealth tax regime. It is a tragic situation where the entire State apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who have been paying their taxes honestly at much higher rates than those offered to tax evaders (ranging between 5 to 10%) under such Schemes. The SECP's Chairman and Governor State Bank of Pakistan perhaps are not aware of the fact that even today when the Pakistani Government, under tremendous pressure from the United States and other States, is introducing anti-money laundering law, the C.B.R. is committed to giving a free hand to money launderers assuring them that no question would be asked if they remit their ill-gotten-money from outside through banking channels and surrender the foreign currency to the State and get Pakistani rupees as encashment. The C.B.R. in its Letter No. F.4(34)/ITP/2002 dated 29-2-2002 reaffirmed that "the Department would adhere to its policy of not probing the foreign remittance" brought into Pakistan by any "person". In the Income Tax Ordinance, 2001, promulgated on the dictates of IMF on 13 September, 2001, a special provision [section 111(4)] has been inserted giving a free hand to money launderers that no question will be asked to them if they remit their drug money from outside through banking channels and surrender the foreign currency to the State Bank and get Pakistani rupees as encashment. This scheme presumably announced as a measure to bring huge foreign funds to Pakistani economy succeeded immensely as foreign reserves of Pakistan crossed the US$ 12 billion mark on 31st December, 2003. This scheme has been used liberally and cleverly by the Pakistani drug syndicates and tax dodgers to launder their money through State patronage. In the presence of this law is any foreign State going to take us seriously in our so-called announcements of combating money laundering and terrorism? The ugliest face of black money emerges in the corridors of power, political as well as administrative. No other country than Pakistan knows better the dangers of allowing money launderers and drug traffickers to get the upper hand. We are at present not just facing a drug-abusing population of nearly 4 million, mostly young, but also many terrorist organisations which threaten the Government itself. The fact is that a cartel or a group of cartels have become so powerful that they can work out agreements with terrorists and saboteurs to undermine the authority of the State. Pakistan has been facing a perpetual crisis of fiscal deficit for the last many decades. Amongst many causes for this malady is an ever‑growing size of underground economy. No serious effort has been made by successive Governments, both military and civil, to determine the loss of revenue due to underground economy, not to talk of devising concrete counter measures to bring enormous untaxed money into the mainstream of economy. All pervasive corruption and unprecedented tolerance towards black money has made Pakistan a State where the very survival of public institutions is at stake at the hands of ruthless forces representing money power. One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fabric of society. They put integrity at a discount and place a premium on vulgar and ostentatious display of wealth. This shatters the faith of the common man of the dignity of honest labour and virtuous living. It is, therefore, no exaggeration to say that ill-gotten wealth is like a cancerous growth in the country's economy, which if not checked in time, is certain to culminate in its death. There is a need for a wider plan to document the entire economy once and for all. The present Government must remember that half-hearted measures, typical of tax bureaucracy, will not yield the desired results. The firmness, consistence and steadfastness must be shown to counter money launderers, terrorists and tax evaders. Our survival now lies in freeing the society from the clutches of the corrupt. Pakistan is passing through the worst crisis of resource mobilisation manifesting it in the huge budgetary deficits. Revenue has to be collected and all measures both stringent and persuasive have to be taken in that direction. The Government has, therefore, to plan in terms of a well-thought-of anti-money laundering-cum asset seizure legislation to draw upon the huge reservoir of the drug and untaxed money. In case swift action is not taken to seize money and property arising out of corruption, tax evasion and narco-arm-trade, the day is not far when we are declared a nation of terrorists, as our present tolerance to ill-gotten money is a suicidal path leading to self-annihilation.