Crackdown against money changers

The Federal Investigation Agency (FIA), under the tutelage of Advisor to the Prime Minister on Interior, Rehman Malik, created headline news when, over the weekend, it paraded a handcuffed director of a well known registered money exchange company in front of television cameras for allegedly sending billions of dollars abroad for its clients.
The public was informed that monitoring of this 'illegal' activity was under the purview of the National Accountability Bureau (NAB), targeted for dissolution by the present government. While not denigrating FIA's investigative capacities, it is relevant to point out two critical facts.
First and foremost, the FIA must be aware that a Hawala system was thriving in this country prior to the government's decision to allow registered money-exchange companies to operate. This leads to the obvious conclusion that capital flight cannot be arrested merely by apprehending directors of such companies.
During times when Pakistan's economy was booming, the same director who was paraded with handcuffs was, in all probability, feted by the government for being the conduit for foreign currency inflow into the country. What is, therefore, required is, for the government to create an environment in which capital flight would not be attractive.
This is supported by a World Bank study titled the Money Exchange Dealers of Kabul: A study of the Hawala System, which cautions that "regulators must bear in mind that prescribing regulations alone will not ensure compliance. Policy-makers should acknowledge the existence of practical reasons, from the customer's point of view, to resort to these methods rather than formal banking channels for international payments.
As long as such reasons exist, the Hawala and other IFT systems will continue to exist." And second and equally important, the World Bank study revealed that counterparts of the Kabul Hawaladars are found in Pakistan, Iran and India as well as in the Gulf States.
The range of a single transaction, the study acknowledges, could be as high as one million dollars, the speed of transfer is 6 to 12 hours and the cost is 1 to 2 percent of the funds transferred. Documents of course are rarely maintained by the Hawaladars though the FIA is hopeful that the computers seized by them would provide all the details of the transactions.
Of significance is the fact that the World Bank study's concern is focused on ensuring that this system is not used by criminals or for money laundering and argues that "the quality and utility of the Hawala service have led some observers to suggest that the Afghan financial authorities should consider encouraging some of the Hawaladars to convert their thriving enterprises into formal banking enterprises."
It is, therefore, hoped that the FIA would focus on criminals using the Hawala system to get their ill-begotten wealth out of the country. The FIA operation, the public was told, has been ongoing for sometime, and will be extended to other cities. Reports from cities/towns around the country reveal that the money exchangers have gone underground, a fact that may well lead to a further decline in the rupee value with respect to the dollar in the coming days.
Be that as it may, few in the country would condone the action of the money changers sending valuable foreign currency abroad at a time when Pakistan is suffering from a severe foreign exchange crunch - from a high of 16 billion dollars less than a year ago to just under 7 billion dollars today.
This dramatic decline in our foreign exchange reserves is being cited as the raison d'etre for not only withdrawal of subsidies that has impacted negatively on the ability of the common man to feed his family but is also the cause for the country's top executives' frequent visits abroad seeking assistance of 10 billion dollars. However, it would be factually incorrect to pin this decline in reserves to the doings of the money exchangers alone as our imports outstrip our exports by almost a 100 percent.
Shaukat Tarin, Advisor to the Prime Minister on Finance, has stated that the government would go after politicians as well if they are found to be the clients of the money changers. Skeptics no doubt led by Imran Khan, the leader of the Tehrik-i-Insaaf, would be quick to point out that this statement is unlikely to nab the big fish for one simple reason: their considerable wealth is already banked abroad.
Business Recorder would like to draw Tarin's attention to the conclusion of the above cited World Bank report: "poorly functioning financial systems or just the deterioration in financial and macroeconomic conditions pave the way for greater recourse to informal payment systems". The cause for capital flight thus lies elsewhere and the government must turn its attention to dealing with the root cause of the problem as soon as possible.