The enigma of legalised money laundering


We need better legislation


Pakistan has entered a new era. The confusion surrounding the issue of terrorism in Pakistan has largely subsided. The APS tragedy removed many misunderstandings and gave rise to a new consensus against the killings of innocents to be unjustifiable. It is now firmly accepted that the cancer of terrorism has been damaging Pakistan more than any of the other problems and must be uprooted. The commonly accepted Islamic viewpoint is that harming or killings of non-combatants particularly women, children and elderly are non-acceptable terrorist activities irrespective of the cause or ideology.


In this context operation Zarb-e-Azb, Karachi operation or Balochistan operation are all endeavouring to rid the country of the menace of terrorism. The corrective efforts are reaching the stage where the funding sources are now being focused upon to shut down the life lines fuelling the trade of carnage. The problem with terrorist funding is that it is not done in broad daylight using legalised documented means but rather underhand methods like money-laundering are normally used to funnel the resources to fund such activities. This is a double blow for the country as not only does it deny the national exchequer the legitimate dues but also help fund the terrorism within Pakistan.


The questions we’ll visit in this write-up will include: “What is money laundering?”, “What’s the enigma surrounding it in Pakistan?” and “What can possibly be done to help remedy the situation?”


The Vienna Convention described money laundering as “The acquisition, possession or use of property, knowing at the time of receipt that such property was derived from an offense or offenses …or from an act of participation in such offense or offenses”. In simple terms money laundering is the concealment of the origins of illegally obtained funds, typically by means of transfers involving foreign/local financial intermediaries and/or legitimate businesses. The ultimate aim is to transform the funds raised from illegal/undeclared activities into superficially legitimate monetary or other assets. It is therefore the blood-line of terrorism as without financing no activity, not even terrorism, can sustain itself.


The menace of money-laundering is prevalent in almost all the countries across the globe in one form or another. However, in Pakistan the issue is much more severe due to the undocumented culture common amongst businesses, lack of legislations and the prevalent black-economy. Moreover, one will be hard pressed to find matching examples of legal facilitation for money laundering as offered in our country to the detriment of both the national exchequer and the national security.


Section 111 (4) of the Income Tax Ordinance 2001 absolves one from any clarifications, questions of origins or taxes on any funds remitted from abroad and converted in national currency, Pak Rupee. What this does effectively is to allow illegitimate businesses as well as terror financiers to convert their black monies into white (legalised) while at the same time covering the tracks of funds from origin to remittance. The issue however is sensitive due to the potential impact on foreign exchange remittances by genuine expatriate Pakistanis.


To appreciate the implications examine the case of two businesses a legitimate and another illegitimate. The legitimate corporation has to pay several fees and taxes with 32% Corporate Income Tax on its net profits at the end of its financial year. The illegal business simply uses “hawala” to funnel the funds out of the country and remit them back into Pakistan costing them anything between 2%-4% with no questions asked or taxes to be paid and a minimum “saving” of atleast 28%-30% of its net profits not to mention the other taxes and regulatory requirement costs, hence causing immense loss to exchequer. With such laws in place one wonders what is the message being give to the legitimate businesses in the country?


Recently FBR made a proposal to bring the foreign exchange remittances within the tax-net. This was shot down by the Finance Minister Mr. Ishaq Dar. Mr. Dar cited the need to maintain foreign exchange reserves to ensure a balance of payments avoiding serious current account deficits and resulting defaults. His argument was strengthened with the point that the expat Pakistanis needs to be respected for their contribution to the national economy.


While there can be different perspectives about this stance particularly on the need to contribute to the country via taxation which can be kept at a minimal in line with the volume over margin taxation policy long advocated by this writer; however there is still another way to atleast address the issue of money laundering for now.


The finance ministry can allow foreign remittances untaxed in line with its vision but introduce a requirement to provide the origins of the finances. Genuine expatriate Pakistanis working abroad and sending remittance back home would not be affected as they’ll have evidence of their income to provide at the time of sending remittance. However this would close a great loophole for big fishes using Section 111 (4) of the Income Tax Ordinance 2001 (ITO) to launder their ill-gotten monies.


Before 9/11, money-laundering in Pakistan was mostly associated with corruption. Influential people from all segments of society used to transfer their ill-gotten monies out of the country. Switzerland, Caymans’ Island, Rhodes Island and similar off-shore locations were the preferred destinations for the monies laundered. The focus on the funds routed for sectarian terrorism, ripe in Pakistan at that time was almost non-existent.


However 9/11 changed the USA’s financial system with global implications. As a result, financial institutions across the globe including in Pakistan were required to introduce additional stringent checks and allow more access to regulators or face sanctions and cutting-off from the global financial system. These developments resulted in money laundering becoming ever more difficult with even Swiss authorities agreeing to provide details of and handing over the proven money-laundered accounts’ funds in their banks and other financial institutions. Why some countries like Pakistan did not opt to take advantage of these developments and get back their monies illegally stashed overseas warrants an entire write-up. However, the laws like Section 111 (4) of ITO are from a gone era and needs to be revamped.


The prevailing national anti-terrorism sentiment can be used to launch a national drive to eradicate money laundering. For this better legislation would be needed. Moreover, serious structural reforms as recommended by this scribe before including lower tax rates, improvements in the progressive structure of the tax system as well as widening the tax base would be required to ensure this is achieved in its entirety.