Effective money laundering law needed

Money laundering is particularly damaging to economic and social fabric of developing countries, leading to potential increase in crime and corruption, potential damage to reputation of financial institutions and markets, reduction in foreign private investment, possible destabilisation of financial markets and weakening of financial institutions, loss of tax revenue and loosening control over economic policy - Dr Tariq Hassan, Chairman Securities and Exchange Commission of Pakistan (SECP).
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, very rightly stressed that "we must undertake necessary groundwork to provide a platform for smooth implementation of the anti-money laundering legislation.
Pakistan has been the worst victim of money launderers as during the last 30 years, the successive governments showed an extreme 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.
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.
It is heartening to know that the SECP and other regulating agencies are providing institutional support to the government for developing the necessary framework on money laundering issue.
The objectives of anti-money laundering coincide with the objective of SECP ie, 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 instil 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.
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 the 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 along with 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 PKR 50,000.
Pakistan needs to develop a permanent structure in all the institutions specifically the Central Board of Revenue (CBR), Federal Investigation Agency (FIA), 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' [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 really done by a person without using his own name (ie benami), but in the name of another.
Details of such transactions and tax implications are discussed in detail in Sree Meenakshi Mills Ltd v Commissioner of Income Tax, AIR 1957 SC 49,66] and are widely accepted in the public and private sector banks.
Presently, there are 28.8 million accounts with the banks, out of which 14.8 million were opened against personal names whereas only 432,916 are liable to pay taxes.
The CBR has 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 wizards in the name of improving tax collection! In Pakistan the money accrues 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 CBR.
The CBR, according to all available data and indicators, is one of the most inefficient, and corrupt departments of the government.
It is in fact ruled by a band of mediocre, corrupt, power-hungry and sycophants. The CBR, responsible for the collection of federal taxes, has miserably failed to introduce any tax intelligent computerised 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.
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 a 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.
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 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 SROs, the CBR's stalwarts 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.
A conservative estimate is that Rs 600 billion is generated every year by the parallel economy.
Add to this, the black money generated through smuggling in goods and narcotics trade 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.
The SECP's Chairman and the Governor of the 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 CBR is allegedly giving a free hand to money launderers reportedly 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 CBR in its Letter No F.4(34)/ITP/2002 dated 29-02-2002 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 on nearly 4 million, mostly young, but also many terrorist organisations which threatens 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.
Our country 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.