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Toxic tentacles of money laundering

Terrorist financing and money laundering, intrinsically linked, pose considerable threats to global peace and security

Toxic tentacles of money laundering

Common methods for transferring illicit funds include fraudulent trade invoicing; money services business (MSBs), to include unlicensed hundis and hawalas; and bulk cash smuggling. Criminals exploit import/export firms, front businesses, and the charitable sector to carry out illicit activities. Pakistan’s real estate sector is another common money laundering vehicle, since real estate transactions tend to be poorly documented and cash-based—2018 International Narcotics Control Strategy Report (INCSR), United States Department of State.

The term ‘money laundering’ implies a range of activities in banking, monetary or other economic operations, the purpose of which is to conceal the actual source of money, or assets or rights acquired by means of money obtained in an unlawful manner. In general, the term ‘money laundering’ implies every activity aimed at concealing unlawfully obtained income in a way so as to present such income as lawful proceeds. Money laundering is defined as the activity through which criminals convert the true source and ownership of such illegitimate money into legitimate money; through which money can lose its original identity forever.

The International Criminal Police Organization [Interpol] definition adopted by UNO General Assembly in 1995 states: “Any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimated sources”. Illegitimate sources may include illegal arms sales, smuggling and other crimes such as drug trafficking and prostitution capable of producing huge quantities of earning. When such type of activities generate profits, the persons or people involved must find different ways to organise/control these funds by breaking these funds into many small pieces and then invested in some legitimate source to conceal its original identity.

In Pakistani context, definition of money laundering is provided in section 3 of Anti Money Laundering Act, 2010 [AML 2010] to cover all the activities mentioned above, for which “investigating or prosecuting agency” are the National Accountability Bureau (NAB), Federal Investigation Agency (FIA), Anti-Narcotics Force (ANF) or any other law enforcement agency as may be notified by the federal government.

Terrorist financing (TF) and money laundering (ML), intrinsically linked, pose considerable threats to global peace and security — they are destabilising political and financial steadiness of many nation states. The detection of money laundering operations necessarily involves collaboration and information exchange between the financial sector and the authorities responsible for legal procedures. Without this collaboration, there is little chance that money-laundering operations could ever become known, as they are by nature hidden. In Pakistan, this collaboration is almost non-existent.

The main sources of illegitimate money in Pakistan are: smuggling of goods and people, drug trafficking, embezzlement, bribery, fraud, tax evasion and under/over invoicing. Some typical forms of money laundering are (a) transfer of money through foreign currency accounts or hundi/hawala (b) use of shell companies and/or accounts in tax havens to hide kickbacks, proceeds of over-invoicing abroad and (c) whitening of money through business projects and investment in real estate. Money launderers use many channels to control money generated from illegitimate sources such as deposits in financial institutions, investment in real estate and money markets, employment of funds in development projects and investments in government securities.

Terrorist networks get millions of dollars every year from various sources using cover-up entities, and millions are transferred outside. The United Nations Office on Drugs and Crime (UNODC) estimates that terrorists and criminals launder billions of dollars annually. The UNODC warns that “once illegal money has entered the global and financial markets, it becomes much harder to trace its origins, and the laundering of ill-gotten gains may perpetuate a cycle of crime”.

Pakistan is among the countries worst hit by TF and ML. Over $15 billion per annum are illegally remitted outside Pakistan. According to International Narcotics Control Strategy Report (March 2018), there is sufficient evidence that militant groups working against the security and stability of Pakistan generate huge funds through organised criminal activities and also get huge “donations” from “sympathisers” in and outside country. More details are available in Gretchen Peters’, Seeds of Terror, Picador, New York, May 2010 and Ikramul Haq’s, Pakistan Drug-trap to Debt-trap, Lahore Law Publications, 2001).

No reliable data of the money transferred abroad through foreign currency accounts, opened and protected under the Foreign Currency (Protection) Ordinance, 2001 and Protection of Economic Reforms Act, 1992 are available. A study by SBP in 2010, The Size of Informal Economy in Pakistan, estimated that total size of informal economy was around 30 per cent of total economy. It means that annually around 1000 billion rupees are generated in Pakistan by the parallel economy. Black money, generated through organised criminal activities e.g. kidnapping for ransom, rent-seeking, smuggling in goods and narcotics trade is about Rs1300 billion that does not appear in the study of SBP. It is well-documented in Pakistan: Enigma of Taxation [LAP Lambert Academic Publishing (2011)]. Another study—Pakistan: Drug-trap to Debt-trap [Lahore Law Publications, 2003 edition]—estimates the total figure of informal economy at US$ 150 billion.

According to latest US State Department’s 2018 International Narcotics Control Strategy Report (INCSR):“Unlicensed hawaladars continue to operate illegally throughout Pakistan, particularly in Chaman, Peshawar, and Karachi. In addition, bulk cash smuggling continues to be a problem, with authorities failing to implement adequate control measures at borders and airports. Moreover, there have been instances of staff of Pakistan’s national airline (Pakistan International Airlines) being involved in bulk cash smuggling. Pakistan’s FIU forwards a limited number of STRs to Pakistan’s Federal Investigation Agency (FIA), the agency responsible for investigating money laundering cases. In turn, the FIA lacks the capacity and resources to pursue financial investigations. Pakistan’s FIU is not a member of the Egmont Group. In 2007, Pakistan promulgated Anti-Money Law (AML) Ordinance, establishing regulations for AML and combating the terrorist financing and criminalizing money laundering. Under the Ordinance, the Financial Monitoring Unit (FMU) was created. The FMU serves as Pakistan’s FIU and is in charge of handling Suspicious Transaction Reports (STRs) and Cash Transaction Reports (CTRs). Some cases of money laundering detected by FMU are available on its website that highlights the modus operandi of the criminals.”

It is an undeniable fact that despite tall claims of the government and SBP, the provisions of AML 2010 remain eclipsed by sections 5 and 9 of the Protection of Economic Reforms Act, 1992, Foreign Currency (Protection) Ordinance, 2001 and section 111(4) of Income Tax Ordinance, 2001 that give a free hand to money launderers. The tainted money can be fearlessly invested in any legal business using these laws.

One wonders how our institutions and agencies, including SBP, have been allowing a Pakistani exchange company to help tax evaders, terrorists and criminals to launder billions as alleged in the US State Department INCSRs for the last many years. It is strange and shocking that faced with a perpetual challenge of TF and ML, our lawmakers and state institutions have been lending a free hand to the criminals through obnoxious laws. These laws facilitate people to keep undeclared and untaxed funds in foreign currency accounts and freely send funds abroad and then bring part of it through “remittances”.

Officials of Federal Board of Revenue and Federal Investigation Agency have no jurisdiction to hold an enquiry in respect of inward remittances/foreign currency accounts (see judgement of the Lahore High Court in Hudabiya Engineering (Pvt.) Ltd. v. Pakistan and 6 others 1998 PTD 34). This is the real dilemma faced by Pakistan in countering TF and ML.


The writers are lawyers and Visiting Faculty members at Lahore

University of Management

Sciences (LUMS) 

Dr Ikramul Haq

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