Perpetual failure under AML-CFT regime

Our defective governance system has rendered the state and nation susceptible to numerous internal and external risks, eroding law and order, undermining the justice system, nurturing corruption, and ultimately jeopardizing national security.

Pakistan is amongst the nations coping with formidable governance challenges. According to ‘2022 Governance Efficiency Ranking by Solability Sustainability Intelligence’, Pakistan ranks 144 out of 180 countries, scoring just 37.3 in the overall assessment.

The consequences of poor governance are evident in Pakistan’s performance across various sustainability domains. In terms of 2022 Business Sustainability, Pakistan secured the 157th position with an overall score of 34.7.

On the Intellectual Capital Index, we were placed at 162nd position with an overall score of 22.1. In the realm of Social Capital, Pakistan attained 126th position with a score of 39.4.

As regards Resources Intensity Index, we got the 143rd spot having an aggregate score of 39.8. Our Nature Capital ranking was 128th, with a score of 35.5. Pakistan was positioned at the 140th spot, scoring 27 out of 100 in Transparency International’s Corruption Perception Index for 2022.

It was a matter of shame that we remained in the grey list of the Financial Action Task Force (FATF) for over four years, primarily due to ineffective enforcement of Anti-Money Laundering and Combating Financing of Terrorism (AML-CFT) framework.

During this period, our ranking on the corruption perception index also deteriorated. When initially placed on the list of jurisdictions under increased monitoring [commonly called ‘grey list’], our position was 117th. However, after four years, instead of showing some progress, our ranking deteriorated further to 140 in 2022.

In our various articles, deficiencies within Pakistan’s legal framework were highlighted for combating money laundering and financing of terrorism. These inadequacies were for want of ignoring international standards and best practices.

These also confirmed ineffectiveness of our compliance measures, despite removal from the grey list. Consequently, we have witnessed glaring erosion of transparency and efficiency within our financial system.

Evidence of our perpetual failure under AML/CFT regime has once again surfaced during audit by Customs Directorate of Post Clearance Audit (South), Karachi. It unearthed “a complex web of deceit and fiscal fraud involving fictitious solar panel companies, which reportedly transferred Rs. 73 billion out of Pakistan” [Solar panel imports: Rs. 73 billion illicit fund transfers detected, Business Recorder, September 9, 2023].

According to a Press report, a series of illicit financial activities were undertaken through the mechanism of over-invoicing employed by two fake companies.

In the wake of post-clearance audit. the Directorate initiated separate investigations into these companies’ affairs. They had imported solar panels from China, initially declaring value of Rs. 35 billion.

Surprisingly, they succeeded in diverting a huge sum of Rs. 73 billion abroad, primarily by inflating the invoice values—solar panels initially valued at Rs. 73 billion were eventually sold in the domestic market for only Rs. 46 billion.

Media reports indicate not only a close connection between the two companies, as evident from fund transfers between them as per bank statements, but their offices were also situated within the same premises (a commercial centre in Peshawar cantonment). Strangely, the actual scale of business and operational activity shown did not match with the declared financial capacity of the companies.

The Chairman of the Senate Standing Committee on Finance mentioned during an interview that the two entities purportedly imported solar panels from China and deposited enormous cash deposits of Rs. 47 billion in their banks. They also reportedly conducted transactions in violation of foreign exchange regulations by making payments in the United Arab Emirates (UAE) and Singapore.

Earlier, such transactions required prior permission of State Bank of Pakistan (SBP) that was removed through SBP Circular Letter No. 20of December 27, 2022, allowing banks to handle imports of all items falling under HS Code Chapter 84, 85, and specific items from Chapter 87 which was apparently taken advantage of by those engaged in trade-based money laundering (TBML)activities.

It is important to highlight that the SBP issued Circular No. 4 of 2019 on October 14, 2019, outlining a framework to manage the risks associated with TBML and terrorist financing.

Unfortunately, the banks failed to comply with requirements contained in this circular thus overlooking crucial procedures such as thorough customer screening, diligent transaction monitoring involving related parties, comprehensive customer risk profiling to check their history to determining similar line of business, and verification of prices in underlying contracts related to imports. These procedures are indispensable for effectively mitigating potential risks.

Furthermore, SBP’s circular mandates that banks adopt a risk-based approach and carry out Know Your Customer/Customer Due Diligence (KYC/CDD) procedures for their relevant clientele. Reports in the media suggest that that the bank (s) involved committed blatant violations by not acquiring fundamental information about their customers’ trading activities, leading to inadequate assessments.

Similarly, the matter of cash deposits raises serious concerns. It appears that either our financial institutions are unaware of reporting requirements, or their systems are susceptible to manipulation by criminal elements to raise alert in such unusual situations.

Section 7(3) of the Anti-Money Laundering Act, 2010 specifies that every reporting entity must submit Cash Transaction Reports (CTRs) to the Financial Monitoring Unit (FMU) immediately, but no later than seven working days after the respective currency transaction is performed. Furthermore, according to SRO 73(I)/2015 dated 21-01-2015, the minimum amount for reporting a CTR to theFMU is Rs. 2 million.

In other words, all cash-based transactions of Rs. 2 million or more, whether involving payment, receipt, or transfer, are required to be reported to FMU. Now if media reports of hefty amounts of cash deposits to the tune of billions are true, it raises concerns about the competence of regulators like SBP and FMU.

Apparently, both regulators have failed to monitor/counter grave breaches of law and regulations, purportedly committed by commercial bank(s). It is also alarming that it is not the first time that banks have been involved in such gross violations of regulations related to AML/CFT framework.

Recently, eight large banks were found allegedly involved in currency manipulations making billions of rupees, while the national exchequer suffered huge losses.

The next mutual evaluation of Pakistan by Asia Pacific Group (APG) to assess adherence to AML-CFT regulations is swiftly approaching, and numerous lingering issues have the potential to blemish our standing. This moment offers an opportunity to reevaluate our regulatory framework and its implementation strategy.

Furthermore, a comprehensive assessment of competencies of those responsible for overseeing law enforcement and regulation enforcement is indispensable. We must also probe how even the most rigorously governed financial institutions manage to elude existing laws, inadvertently or willfully abetting criminal activities and/or involving them in illegal activities. Prompt recognition and immediate rectification of these matters are imperative. Failure to do so may subject us to a replication of the ordeal endured between 2018 and 2022, but this time the repercussions and ramifications could considerably be more severe.

(Huzaima Bukhari&Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have co-authored a book, Pakistan Tackling FATF: Challenges and Solutions)

Copyright Business Recorder, 2023