ISLAMABAD: The Federal Board of Revenue (FBR) has tried to put the entire blame on banks for not checking massive money laundering and over-invoicing of Rs69.5 billion by solar panel importers.
In this regard, the Senate Standing Committee on Finance received further briefing from the FBR and State Bank of Pakistan (SBP) on the various reports on massive money laundering by solar panel importers.
Over the past few years, solar panels have emerged as a high-risk item for over-invoicing and TBML due to their duty/tax-free import status and the absence of sales tax on local supply.
Between 2017 and 2022, there has been a massive increase in solar panel imports, accompanied by the emergence of shell/dummy companies exploiting duty/tax-free imports for illicit financial activities.
In October 2022, the FBR initiated a comprehensive audit of solar panel importers, leading to the identification of over-invoicing in goods declarations (GDs) of 63 importers.
The total amount of over-invoicing detected was Rs69.5 billion.
As a result of the audit, two FIRs have recently been lodged against M/s Bright Star Business Solution (Pvt) Ltd and M/s Moonlight Trader (SMC) Pvt Ltd.
These two importers were involved in over-invoicing, obstruction to audit, and using illicit funds for imports in violation of the Customs Act, 1969.
The said two importers transferred a staggering amount of Rs72.83 billion out of Pakistan in connection with solar panel imports during fiscal years 2017-22. The combined over-invoicing in 2,718 import GDs amounted to Rs37.76 billion, with imported values being abnormally high.
Sales tax declarations further revealed that the solar panels, initially imported at Rs72.83 billion, were sold locally for a significantly lower value of Rs45.61 billion.
This inconsistency demonstrates clear over-invoicing at the import stage. Both importers were discovered to be located in the same building in Peshawar and their bank statements also reflected a mutual transfer of funds, thus, pointing to a business association between the two income tax records indicate that said two importers operated as fictitious entities, using illicit funds that surpassed their legitimate financial worth.
It needs an in-depth probe as to how commercial banks allowed such fictitious companies to transfer colossal funds without carrying out KYC risk ratings, that resulted in the transfers of over 72 billion out of Pakistan in violation of State Bank of Pakistan (SBP)’s regulations.
The SBP has issued “Framework for Managing Risk for Trade Based Money Laundering and Terrorist Financing” under which “Red Flag Indicators” have been communicated to the commercial banks for compliance that;(i) obvious under/over pricing of goods (significant discrepancies appear between the value of the goods reported on the invoice/EIF/MIF, EFE/MFE, advance payment voucher and the known fair market value of the goods);(ii) transhipment of goods through one or more countries/jurisdictions for no apparent economic or logistical reason;(iii) receipt of payments by the third parties that have no apparent connection with the transaction;(iv) use of front or shell companies for the purpose of hiding the true parties involved.
It is apparent that the banks failed to apply above red-flag indictors while dealing with fictitious solar panel clients/customers. In year 2020-21, the said two importers transferred import remittances worth Rs20.4 billion out of Pakistan while filing nil income tax returns, which substantiates illegitimacy of said funds.
Banks also ignored FMU instructions, as huge cash amounts were deposited in the bank accounts of the solar panel importers to obscure the origin of said funds.
In the case of M/s Bright Star Business Solutions (Pvt) Ltd, a hefty sum of Rs14 billion was deposited into the bank account through cash. In many instances, heavy amounts (10 million or above) were deposited in the bank accounts as “cash transfers” in a single transaction.
According to FMU instructions, all financial cash transactions worth Rs10 million fall under a high-risk suspected category for money laundering considerations.
Similarly, all bank accounts, in which the quantum of cash transactions exceed Rs20 million in a year, also fall under high-risk suspected category for money laundering considerations. Despite such instructions, no action was taken by the banks and the suspected company kept on operating unhindered.
Data scrutiny has also revealed fiscal fraud phenomenon viz “layering in which solar panels were imported in Pakistan from China, but import remittances, instead of being sent to China, were transferred to third countries (especially UAE and Singapore) through use of commercial invoices issued by UAE/Singapore based companies. Under the Foreign Exchange Manual, a “foreign exporter/beneficiary” can receive payments either in the country of origin of goods or in the country of shipment of payments to the goods, while commercial banks are authorized to allow payment to the beneficiary in a third country provided that bank is satisfied that the transaction is genuine and money will actually go to the beneficiary.
Commercial banks, on the one hand, did not apply due diligence while on the other, ignored heavy use of cash deposit/transaction and KYC.
Additionally, banks also allowed the transfer of payments/import remittances to third parties/countries without verifying the actual beneficiary. On the GDs and BLs, the foreign exporters of solar panels were mentioned to be of China and goods were also shipped from China. Contrarily, on the commercial invoices, the foreign exporters were mentioned to be of Dubai, China or other countries.
This contradiction in import documents warranted further verification, however, banks allowed transfers of import remittances to third countries without any verification or NOC from the Chinese exporters as appearing on the (GDs and BLs) to validate actual beneficiary, and thus, violated Foreign Exchange Regulations and SBP’s instructions vide Framework for Managing Risk for Trade-Based Money Laundering and Terrorist Financing.
In this manner (from July 2017 to 2022) Rs18 billion were transferred out of Pakistan to various countries against solar panels imported from China, the documents added.
Copyright Business Recorder, 2023
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