Mind mapping the money laundering regime in Pakistan

Art market has been accused of being an ideal vehicle for money laundering due to several unique aspects of art such as the subjective value of art works as well as the secrecy of auction houses about the identity of the buyer and seller

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By SHAHID ILYAS KHAN

Money laundering is one of the most complex form of all white collar crimes. It is rightly called the ”Dirty money” as it has far reaching negative effect upon the economy of any country. In Pakistan this phenomenon has been increasing at an alarming speed due to the ill-gotten money which the political and elite classes acquire due to their influence and power. What is money laundering? In simple words, the conversion or transfer of property, the concealment or disguising of the nature of the proceeds, the acquisition, possession or use of property, knowing that these are derived from a criminal activity and participate or assist the movement of funds to make the proceeds appear legitimate, is money laundering.

The Financial Action Task Force (FATF) identifies it as the processing of criminal proceeds to disguise their illegal origin. The main purpose of FATF is to devise an intergovernmental response for curbing money laundering and combating the financing of terrorism. It monitors the government’s financial activities to track any misappropriation related to money laundering regulations and can suggest financial sanctions against countries that do not obey international regulations and policies.

Pakistan resorted to some comprehensive anti-money laundering measures in the early 2000s. But in June 2018, Pakistan was included in the ‘grey list’ issued by the FATF. Most of the reports and indexes of the international organizations rank Pakistan as one of the worst countries having a poor Anti-Money Laundering/Combating Financing of Terrorism strategy. As per Basel Institute on Governance report of 2017, Pakistan ranked worst 46th country among 146 countries on money laundering. There are no penalties by being in the ‘grey list’; but there would be detrimental effects on the Pakistani market. Banks would be the first to suffer by this as International financial institutions would be reluctant to conduct business with the Pakistani counterparts. It would deter investment. Even international banks can pull their business out of Pakistan as a result of it. It may causing problems for oversees Pakistanis as well.
To tackle this menace, mainly NAB, ANF and Directorate General (Intelligence and Investigation Inland Revenue) of FBR have been assigned the task with FIA in the driving seat. After Mr. Bashir Memon took over as DG FIA, who is known for his professionalism and uprightness, this organization has singled out this crime. As the FATF deadline is coming closer day by day, the DG FIA has taken this task on war footings. Apart from corporate crime circles and commercial banking circles in FIA, a special unit called FATF Compliance Unit has been established by him solely for this purpose.  Interestingly this unit has been established in the Counter terrorism Wing (CTW) of FIA. A country wide crackdown has been started on such hubs of money laundering. Despite immense political and other pressures, FIA has been successfully pursuing the high profile cases of fake bank accounts.

Before analyzing the A.M.L initiatives, it is essential to understand how money laundering is being carried out through both the traditional and modern ways. Money laundering involves three basic steps to disguise the source of illegally earned money and make it ready for usage as white: placement, in which the money is introduced into the financial system, usually by breaking it into many different deposits and investments; layering, in which the money is shuffled around to create distance between it and the perpetrators; and integration, in which the money is then brought back to the perpetrators as legitimate and “clean” money.

Causes of money laundering

 

TAX evasion is one of the main reasons for money laundering. Many elites in Pakistan avoid paying taxes. They usually bribe the tax office employees to either show their tax status as “paid” or to not notify he tax authorities of the fact that the tax has not been paid. The rich people a small chunk of the tax amount as bribe. They also bribe the concerned officials of the Anti-money laundering organizations to allow the transfer of large amounts of cash abroad and label the same as “clean” without paying the applicable tax on it, by either reporting an incorrect amount of transferred cash or not reporting it at all. Hence, money laundering proceeds in two ways, i.e., by evading taxes and by transferring cash to foreign banks successfully for the sake of getting property abroad. Another reason is the Bribery and Corruption of our politicians and bureaucrats. They promote this crime either by becoming directly involved in money laundering; making offshore properties, drug trafficking, smuggling, corruption, misappropriation of funds, bribery, etc. or by taking bribes from those who are involved in such crimes. It is not only politicians but also personnel in the administrative and anti-corruption departments who have been found guilty of taking bribes from money launderers, who have been allowed to take huge amounts of cash out of the country and, in return, took bribes from them. Thirdly the weak financial regulations on the part of government are increasing risks of money laundering. The failure of banks in detecting the laundered money is quite alarming. Similarly our geographical and demographic composition including porous nature of international borders, law and order scenario can as be quoted as reasons in this regard.

Methods of money laundering
Structuring of Money (also known as smurfing) is the process where large amounts of money is divided into multiple small transactions, often spread out over many different accounts, to avoid detection; and the use of currency exchanges, wire transfers and “mules” or cash smugglers to move money across borders. By investing in mobile commodities such as gems and gold, they easily move the same to other jurisdictions.
Hundi has been a major channel of money laundering in Pakistan. Through this method, overseas nationals send remittances to their relatives, friends, family, etc. It works as a credit transfer or IOU and transfers money without actually moving it from one region to another. As a result, neither the government nor the economy notices the transfer. Although Pakistan has made this method of money transfer illegal, there are still many Hundi operators working in the country surreptitiously.  Allegedly some foreign exchange companies use this process to hide their taxable earnings from the government.
Money laundering through realestate
The purchase of real estate with cash is a classic money laundering method. There are different ways used for it such as use of third parties to buy real estate, manipulation of property values, structuring of cash deposits to buy real estate, rental income to legitimize illicit funds, overseas-based criminals investing in real estate, purchase of real estate to facilitate other criminal activity, renovations and improvements to property, use of front companies, trust and shell companies to buy properties, Use of professional facilitators or gatekeepers.
Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.
Terrorism financing
Terrorists require money to finance their activities. The sponsorship is provided by money launderers, drug traffickers, and sometimes politicians and the elite of society, who support them in a disguised manner. Nonetheless, funding from foreign anti-state elements overshadows all other sources of terrorist funding. In case of Pakistan, many foreign intelligence agencies have been found to be involved with terrorists and to have financed anti-state elements. Now, in such cases, all the money that the terrorists receive is actually “laundered” money, because it is kept hidden and neither its original source nor its destination is revealed to the government by the financiers. Hiding the source and channels of money is essential for the terrorists to continue financing their activities without being traced by law enforcement agencies.
Drug trafficking
Pakistan and its neighboring countries, Iran, Afghanistan, and India, have a high volume of opium cultivation and trade origins. Drug trafficking within these countries, as well as across their boundaries, takes place regularly because the borders, especially the Afghanistan–Pakistan, Iran–Pakistan, and Iran–Afghanistan borders, are not strictly protected and monitored. Drug traffickers move the drugs across the border and get cash in return from the drug lords, who are pursuing their activities furtively in Pakistan as well as in its neighboring countries. The cash movement is usually unreported and is surreptitiously carried out, which is in itself money laundering.

Laundering through trade involves under- or over-valuing invoices to disguise the movement of money. For example, the art market has been accused of being an ideal vehicle for money laundering due to several unique aspects of art such as the subjective value of art works as well as the secrecy of auction houses about the identity of the buyer and seller.
Cash-oriented businesses: In this method, a business typically expected to receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash. In such cases the business will usually claim all cash received as legitimate earnings. Service businesses are best suited to this method, as such enterprises have little or no variable costs and/or a large ratio between revenue and variable costs, which makes it difficult to detect discrepancies between revenues and costs. Examples are parking structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, and casinos.
Shell companies and trusts: Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner. Normally they use the slang term rathole, though that term usually refers to a person acting as the fictitious owner rather than the business entity.
Round-tripping: Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation. A variant on this is to transfer money to a law firm or similar organization as funds on account of fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation.

Bank control: In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.
Casinos: In this method, an individual walks into a casino and buys chips with illicit cash. The individual will then play for a relatively short time. When the person cashes in the chips, they will expect to take payment in a check, or at least get a receipt so they can claim the proceeds as gambling winnings.

Other gambling: Money is spent on gambling, preferably on high odds games. One way to minimize risk with this method is to bet on every possible outcome of some event that has many possible outcomes, so no outcome(s) have short odds, and the bettor will lose only the vigorish and will have one or more winning bets that can be shown as the source of money. The losing bets will remain hidden.

Black salaries: A company may have unregistered employees without written contracts and pay them cash salaries. Dirty money might be used to pay them.

Tax amnesties: Criminals often take advantage of such schemes in order to legalize their unreported assets and undisclosed cash before tax authorities.
Transaction laundering: In this method, a merchant or trader knowingly processes illicit credit card transactions for another business. It is a growing problem and recognized as distinct from traditional money laundering in using the payments ecosystem to hide that the transaction even occurred (e.g. the use of fake front websites). It is also known as “undisclosed aggregation” or “factoring”.

Criminals controlling porous borders: Cash is smuggled across the borders of Iran and Afghanistan, as well as through airports. For this, smugglers try to evade the security checks to launder money and they also bribe authorities or someone in the surveillance team to let them move the cash abroad. FIA has recently taken strict legal and disciplinary action against its own staff for alleged involvement in currency smuggling.
Conversion of bribe into foreign currency: It is the novel way to do money laundering by converting the Pakistani rupees into foreign currency of higher value such US Dollars or Euros.
Agricultural income: Since Pakistan has almost nil agricultural tax on Agni production so traditionally people claim huge sums of money as profits earned through agricultural activities.

Shrines income: Pakistan has a strong attachment towards religion and related religious activities. They visit the shrines of holy saints and offer alms and other cash amounts as charity there. Except few shrines under the control of Auqaf Department, there are thousands of such shrines whose income along with its source is not known. It is alleged that criminals use the name of such shrines to do money laundering.

Antiques income: Criminals show their illegal money as an outcome of sale proceeds of some antiques either discovered by them or received through inheritance.

Income from unregistered business: It’s a pity that most of the Pakistan’s economy is undocumented and the criminals take advantage of such situation by declaring their illegal wealth as an outcome of some unregistered business. The classic example is that of businesses involving service provision.
Prize bond money: This is the most ideal way of money laundering.  The corrupt Politicians, Government officers and other criminals show their ill gotten money as an outcome of Prize bond draws.
Income shown from the Tax exempted areas such as FATA and PATA: The criminals show their illegal money as proceeds of income from businesses carried out in the tax exempted areas such as erstwhile FATA and PATA.

Illegal banking under the garb of legal banking: Some bank officials carry out this practice by showing the dirty money in someone else account instead of the original culprit. The recent high profiles case of fake bank accounts involving some top politicians is a classic example of it.

Afghan transit trade: The Pakistani trade community always blamed the Afghan Transit trade as a source of money laundering for criminals. In a rare incident, expensive boating equipment meant for high seas were booked through this Transit trade ignoring the fact that Afghanistan is a country without any sea.

N.G.Os: The criminals register phony N.G.Os to show that either they collected funds through community participation, donations or simple fund raising.
Foreign remittances and wire transfers: This is a very safe way of laundering the dirty money as Government has encouraging policies for foreign remittances and wire transfers.

Phony Game Shows or Prize schemes: Nowadays many launderers use TV Channels or other media platforms and even different organizations to hold phony game shows or prize schemes to show their money as an outcome of the same.

From the above situation, it is clear that the curbing of money laundering will cause a major decline in other relevant criminal activities such as drug trafficking, smuggling, and the financing of terrorism—because all of these crimes are financed by money laundering activities, To end this disease from society, Strong legislation, effective implementation of laws, strengthening the rule of law, the creation and collaboration of A.M.L. agencies at the national and international levels, strict security effective monitoring at aerial, sea and land borders, enhanced accountability of politicians and elites, and strict implementation of tax laws is required.

The author is an Assistant Director in the Federal Investigation Agency. He regularly writes about different social issues including HR, gender issues, cyber, white collar and other organized crimes. The author can be contacted at shahidilyas1@gmail.com