Amnesty not justified

According to Press reports, the Finance Minster of Pakistan, during his visit to the Karachi Stock Exchange on January 21, 2012, "approved the Securities and Exchange Commission of Pakistan (SECP) proposal on revamping the Capital Gains Tax (CGT), which among other clauses will allow investors to inject money without declaring the source of income till June 30, 2014".
This is an outrageous violation of the Anti-Money Laundering Act, 2010, as well as our international obligations to enforce strict anti-money laundering measures in financial institutions and security markets. Pakistan is signatory to the United Nations Convention Transnational Organised Crime, Article 7 of which, covers money laundering.
In terms of section 5 of the Anti-Money Laundering Act, 2010, the Finance Minister is the Chairman of 'National Executive Committee to Combat Money Laundering'. This Committee is under legal obligation to (a) meet regularly to develop, co-ordinate and publish an annual national strategy to fight money laundering; (b) determine offences existing in Pakistan that may be considered to predicate offences; (c) provide guidance and sanction in framing of rules and regulations; (d) make recommendations to the Federal Government for effective implementation of law and framing of national policy to combat money laundering; (e) issue necessary directions to the agencies involved in the implementation and administration of this law; (f) discuss any other issue of national importance relating to money laundering and (g) undertake and perform such other functions as assigned to it by the Federal Government, relating to money laundering".
It is simply shocking that our Finance Minister has failed to fulfil his legal obligations under the anti-money laundering law. The worst example of state-sponsored money laundering facility in Pakistan is through section 111(4) of the Income Tax Ordinance, 2001, which says that no question will be asked about the source of money if received through banking challans. The funds generated through unlawful activities [underground economy] or informal untaxed economy can easily be whitened by Pakistanis, courtesy services of exchange companies who arrange "remittances" by taking Pakistani rupees plus a premium.
The immunity announced by Finance Minister is meant for "big players" on the stock exchanges to fleece the small investors in the name of boosting "volumes". In fact, they would enhance their "profits" as fund managers of tax evaders, drug barons, terrorists and plunderers of national wealth. The immunity, to be legalised by April 1, 2012, is confirmed in press release issued by SECP. It says, "In view of the official but undocumented gains accrued prior to the imposition of the CGT, an investment window will be provided till June 30, 2014 whereby investors will be able to invest in the stock market such undocumented gains. This will allow investors to invest in the stock market". This immunity is in conflict with section 3 of the Anti-Money Laundering Act, 2010 defining the acts that constitute "money laundering". It is pertinent to mention that section 2(f)(vii)(a) of this Act covers all kinds of instruments traded at the stock exchanges.
Neither the Chairman of SECP nor the worthy Finance Minister has bothered to note that the kind of facility they are offering is in gross violation of the law of the land and international treaties to which Pakistan is a signatory. According to a study, "it is widely accepted that securities markets and stock exchanges in particular, are rife with money laundering". The involvement of money launderers at the stock exchanges of Pakistan can be seen in various issues of the Money Laundering Bulletin, a magazine specifically dealing with different aspects of the problem or at the official website of International Money Laundering Information Network. It is not comprehensible that the Chairman of SECP and Minister of Finance are not aware of it.
The United Nations Office on Drugs and Crime in one of its reports has revealed that "criminals, especially drug traffickers, may have laundered around $1.6 trillion or 2.7 per cent of global GDP in 2009 alone". The UN report 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 and drug trafficking". It aptly applies to the situation prevailing in Pakistan, and yet our top economic managers are giving legal cover to this undesirable process.
A leading tax adviser of Karachi, while commenting on this immunity, aptly noted: "Such immunity can make Pakistan the world's biggest money laundering country." Suppose an individual invests Rs 500 million in stocks in Karachi Stock Exchange and the very next day asks his broker to sell all the stock and give him a cheque for the sale proceeds, he will have legal funds of half a billion rupees, laundered without any hassle or cost! The second important question, he has raised, is why this "favour" for the stock exchanges only where less than 25 IPOs were floated from 2008 to 2011. He asks why this kind of amnesty is not announced for the construction industry where elasticity of labour is about 0.7% (second highest after agriculture) - at least this would create much needed employment opportunities in the country.
The problems of tax evasion and money laundering have always been tackled faultily by all successive governments - civil and military alike. Their policies of appeasement not only failed to tap untaxed resources, but also proved that the State is captive in the hands of criminals. Those possessing ill-gotten wealth control everything - economic resources, politics and government machinery. It is a tragic situation where the State apparatus is subservient to those who are tax cheats, criminals, corrupt and crooks.
One of the worst consequences of the "policies of appeasement" is the destruction of the moral fabric of society. These policies put integrity at a discount and place a premium on vulgar and ostentatious display of wealth. The faith of the common man in the dignity of honest labour and virtuous living stands shattered. Why has the Pakistani underground economy evolved so rapidly since 1977? This question baffles every concerned citizen; however, there is no single and adequate answer to it. There were multiple factors leading to this phenomenon, most notably state-sponsored corruption and deliberate tolerance to money laundering.
Pakistan by all means has a soil, which is very well-suited for illegal gains since the very early days of independence, when the allotment mafia came into existence and many notorious elements turned rich overnight. They now control all spheres of life, and stock exchanges are no exception. Their real strength is money power through which they can bend and bribe anybody. The decision of January 21, 2012 confirms it beyond any doubt.
The country cannot recoup financially, unless the foundations of corruption and rent-seeking are destroyed. Policies of appeasement towards criminals, plunderers of the national wealth and tax evaders must be abandoned without any further delay. Unless the State shows determination and sternly cracks down on the underground economy, the citizens will never pay their taxes. Acts like giving amnesty to the big fish in the stock trade dissuades them from having faith in the system. Such steps will not only further tarnish the already rouge image of Pakistan as a haven for money launderers but is also going to increase the woes of the honest and law abiding citizens in general and that of the taxpayers in particular.
(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Tax and Pakistan), are Adjunct Professors at Lahore University of Management Sciences)