PATHWAYS OF INSIDE MONEY LAUNDERING ROUTINELY USED IN PAKISTAN

ACTION RESEARCH OPINION: PATHWAYS OF INSIDE MONEY LAUNDERING ROUTINELY USED IN  PAKISTAN - BY OF POWERFUL PEOPLE, THAT HARVESTED PANAMA (N) & SWISS BANKS (Z) SCANDALOUS FINANCIAL CORRUPTION AND CRIMNALITY FINANCING ORTHOGONAL TO PAKSTAN IDEOLOGY. 

LAWS OF NATURE WILL RECKON THE PREVALIED  CORRUPTON, THE 'HAVE-NOT'  WILL SEE IT, WHEN JUSTICE NOOSE WILL BE TIGHTENED.

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Source: DAWN, SUNDAY EDITION, MARCH 26, 2017 

BLACK INTO WHITE: INSIDE MONEY LAUNDERING – KHURRAM HUSAIN

Tell me. ”Munaf Kalia, challenged his interrogator immediately after his arrest, “who is not involved in this?” The question hung over the ensuing investigation into money laundering by the Forex largest company of Pakistan. The answer came three years later when involved were acquitted of all charges. “Politicians, ministers, generals, businessmen, tell me who is not a user of our services?”

  That was 2008, the heady year of catastrophe. The financial system had nearly collapsed, with the stock market shut and banks and bank seeing withdrawals, so rapidly that fears of a large-scale run the likes of which we have never seen in our history were rising. The country’s foreign exchange reserves dropped from what was touted only a year earlier as “record high” to such a precautious level that the government had to approach the IMF for an emergency lifeline. And the government launched a massive crackdown against illegal Hawala traders, money changers who engaged in the illegal transfer of foreign exchange into and out of the country, though in those days almost all the traffic was outbound.

  Investigators estimated that Khanani and Kalia (K&K) – of which Kalia was a Director – held between 25 to 30 percent of the hawala market at that time, and had transferred close to 104 billion rupees in the 13^th month leading to their arrest. Press report speculated that these transfers were responsible for depleting Pakistan Foreign Exchange reserves, forcing the country to seek an IMF bailout, but the estimated amount would not be sufficient to bring the economy to its knees.

What those transfers end, and the subsequent investigation of the enterprise did reveal though was far and wide the web of money laundering is spread within Pakistan economy,  how central it is to its normal functioning.

FLUSH WITH CASH

   Pakistan has one of the world’s highest cash-to-bank deposit ratios. The amount of the money that swirls around the economy in cash is more than one third of total bank deposits. It is fractured relationship with neighbors has also helped create an informal payment system and a large overland trade designed to bypass normal customs channels. Finally, capital accumulation domestically finds it is difficult to locate investment opportunities within the country due to rigid nature of industrial system which has not changed much past three decades, creating a built-in incentive to accumulate assets outside the country.

For K&K, all these constraints were an opportunity. Their headquarters housed more than 35 servers dedicated to processing money transfer requests received through a network of up to 4000 branches and franchises around the country. They had their own software house located in a five-story building with hundreds of employees, dedicated to building and upgrading money transfer software that would connect their branch network across Pakistan with thousands of other branches and franchises spread around the world. Whenever the amount of money travelling through their system approached the regulatory limit allowed to them as a registered ‘A’ class exchange company, the system would automatically route the transfer through their parallel hawala operation. They sold the software to other companies in addition using it themselves. 

   For the regulator, the biggest clue that large amount of money are being routed to the parallel hawala network is when the spread between the kerb rate and the market rate, meaning the exchange rate advertised for a particular currency and the rate which is actually being sold, begins to climb. Throughout 2017 the spread climbed, reaching almost 10 rupees by the time the law closed in on K&K. Where the dollar was advertised for 70 rupees, it was going for 80 rupees in the market and upwards of 85 rupees in the hawala market.

Contrary to popular market misconception hawala actually uses the banking system exclusively. The theory about hawala transfers says  that no physical movement of money is required since funds coming to the recipient currency are settled against funds going out to the country from where the funds are remitted. So remittances coming to Pakistan from UAE, for example, would be taken by a hawala trader there, and the requisite amount of rupees would be issued by that traders’ agent in Pakistan.

But the theory describes a system as it would operate in ideal situation. There would be a total lack of any physical movement of funds in a hawala operation between two countries, only if the total flow between both of them was exactly equal.

  In practice the flow funds changes from time to time, and more often than not, does not match between the sending and receiving countries. This money will accumulate in some nodes of traders system, while it depletes from others, necessitating a periodic squaring of accounts between various nodes in the system. This squaring  takes place daily.

   Funds sent abroad are also sent via a bank account, usually opened in the name of exchange company as well as large array as well large array of benami accounts, accounts open in someone’s name but operated by other people, which they use for their hawala operations. In the case of K&K the central node in their system was Al-Zarooni Exchange, located on Naif Road in Dubai, which receives funds from across the world. The sender would be issued a code which he would take to any K&K branch or franchise anywhere in the world and obtain their funds, accordingly. Once cleared their position would be deleted.

  Their paid up capital, or the ceiling they were allowed so legally transact under the terms of their license, was 25 crores daily. But the funds landing with Al-Zarooni far in excess. By 2005 the US Treasury department claimed that the K&K enterprise was moving “billions of dollars” annually on behalf of a global clientele. When he was arrested in a sting in 2015. Altaf Khanani was laundering money for an American Law enforcement agent and charging him 3 percent commission.

  In Pakistan the commission varied, depending on how dirty the money was. Simple tax-evaded wealth could move out for a nominal fee, but funds connected with narcotics kickbacks or extortion could command fee as high as 20% of the amount being transformed.

CHANNELS OF DECPTION

   Exchange companies are only one way to transfer funds, into or out of the country without arousing the authorities’ suspicious. The State Department has estimated that 10 billion dollars are laundered out of Pakistan every year, meaning to channels through which to move the quantity of money would be numerous.

    There are numerous ways that money accumulates in an economy like Pakistan. III gotten proceeds of powerful individuals are only a small amount of total. By far the largest amount of black money accumulates outside the country in the form of mis-declaration of trade. Exporters will routinely understate  the amount shown in their Letter of Credit (LC) opened with a bank, preferring to receive the rest into an offshore account.

   Likewise, importers routinely undertake the value of consignment they are importing to avoid custom duties and remit the balance through an exchange company or from offshore accounts held abroad. Accounting to estimates of reported trade between Pakistan and China, the difference between Chinese and Pakistan reported data of all exports and imports between the two countries is as high as 5 billion dollars, which is slightly more  than half of the reported trade deficit between the two countries.

   When poring through K&K servers, law enforcement also came across examples of importers who had mis-declared the value of their import consignments by about 50 percent. This volume of accumulation of black money will always require powerful channels for the movement of these funds, for which variety of pathways have been carved out over the decades.

MAKING EXCEPTIONS

One of the most straightforward of pathways is also the most direct. A simple loophole in the Income Tax Ordinance of 2001 deals specifically with unexplained income or assets. This is the infamous section III  which empowers the tax collector to treat as taxable all the income and  assets for which no satisfactory explanation is offered by the tax payer, but in subsection 4, it creates an exception.

That subsection applies only to individuals, not companies and reads thus;

“Subsection (1) does not apply – (a) to any amount of foreign exchange remitted from outside Pakistan through normal banking channels that is uncashed into Rupees by a scheduled bank and a certificate from such a bank is produced in that effect.”

This simple loophole means anyone can bring in any amount of foreign exchange into the country, provided it “is encashed into Rupees by a scheduled bank” immediately upon arrival and the funds thus received cannot be treated as taxable.

But there is slight problem with Section 111(4). It provides some measure of protection from the tax authorities, but not from law enforcement. So if the funds being brought can be demonstrably commenced with illicit activity, such as narcotic exports or kickback, the transfer can be frozen and investigation can begin under another law known as the Foreign Exchange Regulation Act. There are a number of crises on record with the most recent being a 65 million dollars transfer that was coming from Malaysia purportedly for investment into “a newly launched housing colony in Karachi” which was frozen by the State Bank after the Bank filed a Suspicious Transaction Report (STR).

These transactions in this market cannot brook exposure or delays. Section 111(4) provides some sanctuary to the small remitter who might be receiving one or two million dollars from time to time, but for the large players it can present risks.

  This is where the trade related money laundering comes in.  This is one of the oldest and most widely used channel for illicitly moving money across national jurisdictions, as well moving illicit money out of the country. The mechanism is simple: I own a company in Pakistan, and in possession a large sum of money, but I want to move out of country without arousing suspicion. So I register a company in Dubai of which a family member could be the ultimate beneficial owner.

The Dubai company bills my company for a “service”  that I have purchased for example software or a consultancy or brokering services in locating an expert client for my “product”. Against that bill I make a payment. Or alternatively my Dubai  company “sells” me a container, and charges me outlandishly large sum for it, Which I pay through an L/C. I can import and export a fictitious cargo (the container itself could be full of junks) but the L/C provides a safe and ready way to transfer the funds out of the country without arousing undue suspicion.

  The only suspicion that would come into play would be when the cargo undergoes customs valuation. Export consignments are typically not valued by customs. A simple goods declaration form is enough for export. Import consignments undergone valuation, but once they are looking primarily for under-invoicing, an over invoiced (whose real purpose is to allow the funds to go abroad) passes quite easily, especially by considering Customs staff is incentivized to maximize revenue through customs’ duties, which are a function of consignment’s value.

  It is next to impossible to figure out how much money comes in or leaves the country under this mechanism. Empty containers leave the country regularly due to a large trade deficits that Pakistan runs, which results in containers accumulating within the country so the cost of containers is low, and the cost exporting “trash” is not very large.   .

Trade related money laundering works better for those who have large sums to send or receive. It is more cumbersome than a straightforward remittance,  but offers the benefit of being immune to regular scrutiny. The only party that can intercept this form of money laundering is the customs authorities who at the moment are neither tasked nor incentivized for this purpose.

  The pathways to move money in or out of the country are numerous, and given the size of informal sector in Pakistan, the volumes in this stealthy enterprise are also substantial. All manner of black money whether illicit or tax evaded, utilizes these channels, so the number or type of stakeholders are also diverse, something Munaf Kalia alluded, when challenged his in interrogator to “tell me who is not involved in this business”.

TIGHTENING NOOSE

 Since at-least 2012, governments around the world are under coming under increasing pressure to choke off illicit pathways of money transfers since they are used extensively for terror financing funds and moving funds from criminal activity. The regulators framework is being tightened and pressure to prevent the formal banking system from being used for illicit movement of funds is mounting. The State Bank has warned that “a tightening regulatory landscape governing cross border money transfers in the US (which has increased compliance costs for Banks and Money transfer operators”) could end up with implications with Pakistan’s Banks, especially their ability to interact with the outside world through correspondent banking relationships.

 Mostly recently, a long-standing demand from the Financial Action Task Force (FATF) to move more visibly and vigorously against Indi- duals and entities designated as terrorists under UN Resolution 1267 saw a flurry of activity in February, when Hafiz Saeed was placed under house arrest, and the Government announced his name along with an associate was being scheduled to Fourth Schedule of the Anti-Terror Act.

  The move was reportedly triggered, by a warning from the Asia Pacific Group,  a subgrouping of the FATF, that the continued freedom of the movement and fund raising by individuals designated as terrorist by the United Nations could have consequences for Pakistan banking system. The warning was repeated in the latest State department report titled International Narcotic Control Strategy Report that in Pakistan, that “UN designated groups continue to able to solicit donations openly without apparent government reaction” and “Pakistan does not fulIy implement UN sanctions obligations uniformly against all designated parties.”  

  In the years since the report has been issued, this was the first time that explicit mention of this was made, indicating that the country’s financial system’s vulnerability to misuse for illicit purposes, including terror financing, is becoming a growing concern. The next meeting of the FATF to assess the steps taken by Pakistan against these designated individuals is in June.

Determined actions against UN designated parties is not the only area where Pakistan law enforcement  and judicial authorities have struggled to meet the challenges posed by the illicit payments system, including money laundering Hawala traders get netted by the FIA in raids, but the prosecution inevitably falls through.

CRIMES AND MISDEMEANOURS

  Last year the FIA conducted a series of raids in Peshawar’s currency market near Yadgar Chowk, arresting 45 people and seizing documents which they claimed showed active Hawala operations. But a perusal of court cases against Hawala dealers shows that they inevitably received bail. In some case bail is granted because the court said that the prosecution needs to establish that the funds seized during the raid were proceeds of crime. In another case, the court said that the prosecution failed to connect the arrested individuals with “the commission of the alleged offence.”

  In another interesting judgement, the Sindh High Court found that “the offence of money laundering will only be attracted if the money’s, assets, property etc are acquired through the proceeds of crime… and there is attempt to in effect hide the illegal source from there the funds came.” This, the court said, means it is necessary to undertake  an investigation “to identify a suspicious transaction and then work backward to see if [it] may have arisen out proceeds which are the fruits of predicate offense.”

 The courts are widely interpreting the Anti Money Laundering ACT to mean the money laundering can only said to have taken place when  the funds in question can be shown to be “proceeds of crime.” The channel through which the funds may have moved, whether hawala or deliberate mis-declaration of a cargo’s value, therefore stands beyond the reach of the law.

  Pakistan’s financial system is increasingly caught in this three way bond. First is tightening global regime that seeks to aggressively squeeze the space in the banking system that illicit actors and designated terrorist can use to advance their purposes. Second, a large thriving informal sectors and large pools of tax evaded wealth, that make illicit channels for the movement of funds salient to the operation of economy. And finally, a legal appearance that cannot distinguish between the illicit movement of funds and the movement of illicit funds.

                 The writer is a member of staff.                      

He tweets to Khurram Hussain.