‘Need to revise definition of our money laundering’ Shabbar Zaidi, Senior Partner & Chairman A.F. Ferguson & Co.

BR Research recently sat down with Shabbar Zaidi, Senior Partner and Chairman A.F. Ferguson & Co. The discussion was aimed at attaining more clarity on the money laundering law in Pakistan, the misalignments, and the need to have the law corrected. Below are edited excerpts from the conversation.

BR Research: You have been raising your voice on the prevalent Anti Money Laundering Act in Pakistan. Why do you think the current definition of money laundering is too aggressive and needs to be reconsidered?

Shabbar Zaidi: The anti-money laundering regulations got intensified after the 9/11 incident. The first thing to understand is that the financing of terrorism and money laundering are two different subjects. So, when we are talking about financing for terrorism, it maybe from money which is not being laundered.

And nowadays, when we talk about money laundering, it needs to be viewed separately from financing of terrorism. The anti-money laundering regulations were introduced in Pakistan in 2010 through the Anti-Money Laundering Act 2010. And then came the Anti-Money Laundering Regulations 2015. But before we go any further, let us first understand what is money laundering.

Money laundering means the launder of the proceed of crime as untainted money. There are two things that happen. Firstly, there has to be proceed of crime, and secondly, it has to be projected as clean money.

If you go back to the English law, which is the parent law, there are two laws. There is a Proceed of Crime Act (POCA) which has nothing to do with money laundering. That includes the hold of property which is the property of crime. But money laundering is the second stage that comes after the proceed of the crime. However, in Pakistan there is no Proceed of Crime Act.

My personal understanding of our money laundering act is that it is not money laundering act but is actually Proceed of Crime Act. We have mixed the two acts as money laundering act. That is the fundamental issue.

BRR: So you are essentially saying what Pakistan currently has in place is a one step thing, whereas it needs to be in two steps for it to be considered money laundering?

SZ: Yes. And this strategy is not right. To hold a proceed of crime is a different thing. And committing money laundering is another. The problem is that the Section 3 of AML Act which defines money laundering, is in essence defining proceed of crime.

BRR: So in your view, there needs to be a line drawn between money laundering and proceeds of crime?

SZ: What I want to say is that firstly, Section 3 should be understood as a Proceed of Crime Act and the public should know that it has nothing to do with money laundering. Only if proceed of crime is used for money laundering, then it should be considered as money laundering. First, the agencies like the Financial Monitoring Unit (FMU), monetary unit of money laundering, FBR and others should consider that there should be an authority to deal with procession of crime which can or cannot be the State Bank of Pakistan.

At the moment, you have placed everything under the FMU and it assumes that there is a financial transaction and it mostly involves foreign exchange. So, there is a presumption that there is some flow of money outside or inside of Pakistan which results in this.

BRR: Going by this principle, could tax evasion be equated to money laundering?

SZ: We need to revise the definition and the related law. Now, the problem that is arising is that when we say crime, we have included tax concealment as a crime. What happens internationally is that the tax evaded will only be considered money laundered when it is projected as clean money. Untaxed money itself is not money laundering.

Secondly, we have many provisions in the Income Tax Ordinance, which are contradictory. Among these we have a ‘No Questions Asked’ provision. This means there are many income tax provisions where an income tax officer cannot ask a question if there is money coming from outside of Pakistan. So, if you are talking about money laundering law in a practical sense, you have to draw the line where you will use the ‘No Questions Asked’ provision especially in Section 1114.

BRR: You said that all transactions that come under tax evasion should not be construed as money laundering. But what if someone runs an XYZ company and evades tax and uses that money for terror financing?

SZ: It will be evasion of tax and financing for counter terrorism but not money laundering. As I have already explained that they are two different things. Money laundering is something different from counter terrorism. So, if you evade tax and use it for counter terrorism that is a different subject.

BRR: So, that should mean that the person will be caught for counter terrorism as against money laundering?

SZ: Yes, when you say every tax evasion is money laundering and you have built up the counter terrorism in the same way, you have mixed up two things. Money laundering means that there has been a crime and the money is projected as white money.

BRR: So, the Anti Money Laundering law should be confined to money laundering only and the rest is to be looked after by other laws?

SZ: The Indian definition is very clear. It says, “whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or actually involved in any process or activity connected with the proceeds of crime and projecting it as an untainted property ...”. The second part is very important where it says, “and projecting it as an untainted property”.

BRR: What is your view on the capacity of our institutions meant to deal with these issues?

SZ: No tribunals have been set up for money laundering yet. The money laundering custodian should be the FMU. This gives rise to a very fundamental question. The SBP is technically our financial regulatory authority. But at the moment it is considered a different kind of body.

The entire system is being monitored by the FMU. For example, you are including tax evasion, which means every case of concealment will go to the FMU. So, even if a crime has been done, the FBR has to prove it through its investigation. You can punish him for tax evasion but how will you convict him of money laundering? In our country, this line has not been drawn.

BRR: As you said it is a global phenomenon and the counter terrorism has also become heightened. So what are the other countries doing?

SZ: This is a current thing. In England, anti-money laundering regulations will be introduced from September 2017. They are entirely changing the law and have also introduced a new EU directive.

They are deciding the method of handling money laundering. What I am trying to say is that this process needs a regular look after.

BRR: Who will be responsible for this looking after?

SZ: Ministry of Finance.

BRR: And do you think the Ministry of Finance currently is in the right frame of mind?

SZ: Being in the right frame of mind is not the concern. The matter I am stressing upon is that if you want to implement such a major law in Pakistan, you should take it seriously and align everything.

BRR: What do you think of the remittances? On one hand, people are saying the increase in remittances is actually the black money being whitened and on the other hand the PRI is saying that average ticket size is too small for it to be used for money laundering.

SZ: I think there isn’t a very close link of money laundering with remittances. But we have to align our foreign exchange system. We have to study all the foreign exchange laws, for instance tax exemption with reference to money laundering.

There is a clash between laws. For example, the tax whitening law goes contrary to the tax evasion law. This is a big confusion for the businessmen of Pakistan. He doesn’t know what money will be considered as money laundered and what can be brought inside the country.

BRR: What are the mechanisms of domestic laundering?

SZ: In that case, you tend to show the transactions that never happened. In commodity transactions, you increase the volume of sales. So, technically you have turned your money into white money.