In recent news, the Federal Investigation Agency (FIA) has made further arrests of those suspected to be involved in hawala/hundi businesses. Market sources say police reports have also been filed against the clients of those hawala/hundi operators, who in the case of most recent arrests happen to be traders and commercial importers based in Karachi and Lahore. These are no doubt important developments, but such crackdowns are not enough.
Cracking down on hawala/hundi is paramount, especially in light of Pakistan’s FATF saga where the choking of terrorists financing and money laundering is top priority. It is also important to increase the flow of much needed official remittances through the formal sector, where some bankers estimate that about $10 billion of workers’ remittances – honest earnings of hard-working Pakistanis - is being channeled through hawala/hundi operators because remitters lack awareness of formal channels and because hawala/hundi channel offers better currency conversion rates.
Why doesn’t hawala/hundi business thrive across the Atlantic? It is not only because low cost instant transfer formal foreign exchange business thrives across the Atlantic. Or merely because their respective central banks do not sit like a hawk micro managing every dollar flowing through the banking channels. It is also because under invoicing, smuggling, untaxed money or income earned through illegal means does not thrive (relative to GDP and population) in those economies as is the case in South Asian and developing economies like Pakistan. It is the market of corruption that creates a demand for hawala/hundi.
It is very easy to nab a few traders and hawala/hundi operators. But it is very difficult to reform the FBR’s customs arm to ensure that under invoicing does not take place, because it entails putting your own house in order. In the last few years, there have been many news reports of action being taken against hawala/hundi operators, but hardly any positive developments (save for Weboc’s automated green & red channel system) that have helped curb the mammoth size of under invoicing.
There is no denying that under invoicing ought to be curbed, but the concerns of traders also need to be listened to. Traders very well argue that smuggling made possible with or without the Afghan transit route, forces them to under invoice their goods to remain competitive in the market.
If they don’t under invoice and lessen the burden of taxes, smuggled goods will throw them out of the market. In that vein, equal focus needs to be given to fixing FBR’s customs, highway levies force and border control agencies; without implicit support of these bodies - whether by being inefficient in their duty or by looking the other way — smuggling cannot thrive.
Smuggling, however, is not the only reason why under invoicing happens. Take the case of steel industry, where a few notable steel industry manufacturers are known to import steel coils and other raw material at zero or much less duty (compared to duty paid by commercial steel importers) on the premise of re-exports post value addition.
That value addition never happens. Instead, supported by flying invoices, those steel coils and other raw materials are dumped in local market, putting commercial steel importers at a disadvantage since they have paid all the duties.
Eventually, commercial steel importers under invoice their imports so as to remain competitive, and consequently, this under invoicing also creates a demand for ‘money transfer without money movement’ aka hawala. Similar demand for hawala is being created by other sources of grey and black income, checking which also demands a wholescale record keeping of assets, including proper real estate valuation, as has been long argued frequently by Shabbar Zaidi, the noted tax practitioner.
Arresting hawala/hundi operators is solving only one aspect of the equation. Failure to address other aspects of the equation will mean that once the current wave of crackdown subsides, new operators and new ways of circumventing the law will emerge.
The black/grey economy is far more creative than most people think! Without changing the ecosystem that creates a demand for hawala, arrests will only achieve so much.
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