Pakistani wealth worth billions is said to be concealed in the international financial system, including foreign banks and several safe havens with the identity of depositors hidden behind many layers of legal cover. Dubai, the Virgin Islands, the Cayman Islands, the Isle of Man, Luxembourg, Singapore, Mauritius, etc., are said to have fast become major money-laundering centres for Pakistanis holding illegitimate funds.
This ill-gotten money is normally invested in these centres through the use of trusts or by establishing front companies registered in such locations. Therefore, identifying the individuals who are the actual owners of these funds becomes even more difficult.
Dubai which serves as the hub of hundi/hawala operators who enable the swift movement of funds from one place to another very efficiently, and at nominal cost has become relatively a safer centre for parking such ill-gotten wealth for Pakistanis. The Western financial markets because of greater scrutiny of monetary flows into and out of these markets are no more considered as safe.
Dubai has become a favourite of our money launderers because the city easily hides illegal wealth invested in property and in gold and diamonds with hawala operators relocating funds to other global destinations freely. Part of the laundered money is sent back home in the shape of white foreign exchange shown as earnings from ghost trade with Dubai, informal trade with India and also as part of workers' remittances.
Some of these whitened resources are invested into our stock market and the regularly floated Euro and Sukuk bonds, much of it through trusts and structured companies.
While one would ardently hope that the latest amnesty scheme announced by the government would encourage Pakistanis who have stashed their ill-gotten wealth in centres like Dubai, the UK and offshore havens as well as in the domestic real estate to declare their unreported income and assets and bring their money into the tax net after paying a 5 percent (for local liquid assets) and 2 percent (for foreign cash assets) one-off penalty. Assets/fixed property abroad at 3%; dollar accounts can be declared and kept abroad at 5% penalty. The deadline for availing the concession would expire on June 30, 2018.
In view of the fact that almost all the amnesty schemes announced over the last 70 years or so, have miserably failed to yield the desired results, the latest attempt too, on the face of it, appears to be more of an exercise in futility.
But the government appears confident that this time things would be different because of the ongoing tightening of controls by the very same foreign financial markets that had over the years encouraged inflows of black money into their financial system with no questions asked.
Still, it would be advisable for the government that would succeed the present incumbent to focus more on the problem of black money accumulation in the domestic market by attacking the very sources of such money. Unscrupulous people use both legal and illegal means to earn black money. The illegal versions include drug trafficking, gambling, smuggling, cartels, evasion of all forms of income and sales taxes and excise and customs duties, bribes earned from arranging award of contracts or procurement deals, etc.
Some of the other means of making black money include: hoarding and black marketing; exploiting the labour laws; free market economy sans regulations; capital intensive electoral system; policies formulated by government and the manner of their implementation; the institutional configuration through which these systems operate; flawed regulatory and control laws; feeble administrative capacities for checking regulatory violations or other illegalities; cumbersome official procedures that induce delays in commercial transactions thereby incentivising corruption for fast-tracking processes; and a deficient system for penalising such indiscretion, etc.
The nature and extent of influence of such factors get reflected in the type and volume of transactions breeding black money, limiting the efficacy of government policies to curb such pursuits. Large-scale corruption schemes are only feasible if there's a way to hide and spend the proceeds.
Cases from Azerbaijan and Brazil to FIFA and Malaysia have shown how corrupt networks are able to open bank accounts, transfer funds across borders and acquire prime real estate and luxury goods in global capitals. Since 2014, a global anti-money laundering body called the Financial Action Task Force (FATF) has been assessing whether countries' measures to stop dirty money are actually working in practice - whether they are effective - in addition to the extent to which laws are in place on paper.
To date, it has assessed about 50 countries across the world. As the Effective-O-Meter shows, average global anti-money laundering effectiveness stands at just 40 percent. This means that most countries fail to prevent corrupt individuals and their professional enablers from stealing money and getting away with it, at enormous cost to citizens. Overall, just seven countries score above 50 percent: the USA, Spain, Italy, Switzerland, Australia, Portugal and Sweden. However, even these relative high-scorers are below the 70 percent mark.
For most of our history, the UK has remained the most attractive place for unscrupulous Pakistanis to park their ill-gotten black wealth. Therefore, it would not be out of place here to take a deeper look at what is happening in the UK by way of tightening legal controls against inflow of black money into its financial system. In the UK, investigators from the Financial Conduct Authority (FCA) and the National Crime Agency (NCA) have recently launched a review of the activities of Britain's high street banks following revelations about a multi-billion dollar money laundering scam that MPs described as a national disgrace and scandal.
The case follows a three-year probe by Latvian and Moldovan law enforcement agencies investigating the suspected laundering and transfer of at least $20 billion out of Russia between 2010 and 2014. The investigation is ongoing, but the investigative reporting platform Organized Crime and Corruption Reporting Project (OCCRP) has written that the funds could be linked with corrupt state contracts, tax evasion or embezzlement of state funds. However, this has not been confirmed. Anonymous sources allegedly shared data with the OCCRP suggesting that almost $740 million of the suspected criminal money passed through banks with a presence in the UK.
The complexity of the case shows that money laundering is not as easy to identify and combat as many assume. The UK's role in the Global Laundromat was just a snapshot of the full picture, given the transnational nature of the scheme. Moreover, it is worth noting that the UK has taken, or is in the process of taking, some concrete steps to try to address some of the vulnerabilities in the system that money launderers exploit.
Indeed, the Laundromat case 'appears to point to an overwhelming failure of basic management on the part of the British banks themselves'. The accusations were levelled at HSBC, the Royal Bank of Scotland - in which the UK government has a 73% stake - Lloyds, Barclays and Coutts. These banks were facing questions over what they knew about the scheme and 'why they did not turn away suspicious money transfers'. However, the exact context is not yet clear. The accusation indicates an assumption that the transfers themselves looked suspicious at the time to the banks, and yet they waved them through anyway.
The EU's Fourth Money Laundering Directive seeks to tighten some of the perceived weaknesses around due diligence requirements for potential money laundering 'enablers', particularly Trust or Company Service Providers (TCSPs), entities used to form companies or other legal persons.
A particular vulnerability has been the previous vagueness around whether customer due diligence should be required when Trust or Company Service Providers (TCSPs) register a company on behalf of someone else. Given that this may be a 'one-off transaction' and there may be no further oversight of the business once it is established, this does not necessarily trigger customer due diligence as it is not seen as initiating a 'business relationship'.
The UK will continue to be vulnerable to money laundering, and the government is aware of some of the vulnerabilities it faces and has initiated measures to combat them. However, these will only be as good as their implementation, as well as the level of knowledge held by supervisory regimes and law enforcement on how the vulnerabilities work.