Pakistan: ML/CFT challenges in trade

Huzaima Bukhari, Dr. Ikramul Haq

Trade is used as an ally for money laundering by misdeclarations of goods, under-invoicing and over-invoicing—Justice Ayesha Malik, paper read at International Judicial Conference 2012.

The Financial Action Task Force (FATF) in its document, FATF study ‘Trade-based Money Laundering [June 23, 2006] highlighted ‘Case Study 3’ [page 11] that unfortunately after passage of 15 years presents a recurrent pattern posing a daunting challenge for the officers of Pakistan Customs Service (PCS) and Inland Revenue Service (IRS) of Federal Board of Revenue(FBR). It confirms that one of the reasons for our continuance in grey list since 2018 and before that exits and re-entries [Pakistan was on FATF grey list from 2012 to 2015, when it completed an IMF programme and also raised funds from international bond markets] are not merely because of politically-motivated, as usually pleaded. It is largely due to inactions on the part of successive governments to uproot the twin menaces of money laundering (ML) and combating terrorist financing (CFT). It is worthwhile to mention that Pakistan became member of Asia/Pacific Group (APG) in 2000.

For the general readers, it is recommended to visit [http://www.apgml.org/] that provides that “APG  is an inter-governmental organisation, consisting of 41 member jurisdictions, focused on ensuring that its members effectively implement the international standards against money laundering, terrorist financing and proliferation financing related to weapons of mass destruction”.

The Case Study 3 has the following facts:

• “An alternative remittance system (ARS) operator (e.g. a “hawaladar”, hawala broker) in the United States wants to transfer funds to his Pakistani counterpart to settle an outstanding account.
• The US operator colludes with a Pakistani exporter, who agrees to significantly over-invoice a US importer for the purchase of surgical goods.
• The US operator transfers funds to the US importer to cover the extra cost related to the over-invoicing.
• The Pakistani exporter uses the over-invoiced amount to settle the US operator’s outstanding account with his Pakistani counterpart.
• The Pakistani exporter additionally benefits from a 20 percent VAT rebate on the higher prices of the exported goods.

            Source: Information provided by the United States.

Commentary—in this case, rather than simply wiring the funds to his Pakistani counterpart, the US operator convinces a Pakistani exporter to over-invoice a colluding US importer. Using the international trade system, the US operator was then able to transfer the funds to settle his account using the trade transaction to justify payment through the financial system”.

Six years after the above-quoted case study, in International Judicial Conference 2012, the speakers in Group-II invited to speak on the issue of issue of “Terrorism & Money Laundering” included amongst others, Justice Ayesha A. Malik, Judge Lahore High Court, Ms. Katja Lillian Hamilton Samuel, Barrister-at-Law, Co-Editor of Counter-Terrorism: International Law and Practice, Ashtar Ausaf Ali, then Advocate General Punjab, H.E. Dr. Syed Ebrahim Reisi, then First Deputy Head of the Judiciary of the Islamic Republic of Iran,  who later became Head of judiciary and now elected President of the country in 2021, Shahid Hamid, Senior Advocate of the Supreme Court, who recently wrote his autobiography, Treasured Memories  and last but not the least, one of us i.e. Dr. Ikramul Haq, Advocate of the Supreme Court

The papers presented in the 2012 Conference and others since 2018 highlighted the issue of ML/CFT in trade. These are available on the website of Law & Justice Commission of Pakistan [http://ljcp.gov.pk/nljcp/home#1]. These papers highlighted, which are still prevalent “three main methods by which criminal organisations and terrorist financiers move money for the purpose of disguising its origins and integrating it into the formal economy”.

• through the use of the financial system;
• involving the physical movement of money (e.g. through the use of cash couriers); and
• by physical movement of goods through the trade system.

In recent years, FATF/AGP has focused considerably on the first two methods and the third one still needs to be given much deserved attention. In Pakistan’s case, after real estate sector trade is the second most important but highly neglected area from the perspective of ML/CFT. Way back in 2012 Justice Ayesha Malik, in her presentation, specifically highlighted the need of updating customs laws, systems and practices which would eventually lead to fighting the threat and instances of trade-based money laundering (TBML). On this issue, see a detailed article at: https://www.thenews.com.pk/tns/detail/775196-fatf-pakistan-and-tbml.

This link to read the papers presented in International Judicial Conference 2012 is: http://ljcp.gov.pk/Menu%20Items/Reports/LJCP%20reports/IJC2012/Conference%20Report%202012.pdf

The PCS and IRS need to study the above and many other articles published in this newspaper [Taliban, Americans, terrorism & drug trade, Business Recorder, June 25, 2021, FATF: challenges & solutions—I, Business Recorder, January 8, 2021, FATF: challenges & solutions—II, Business Recorder, January 9, 2021, Hidden agenda & “deal” with Taliban—I, Business Recorder, September 11, 2020 and Hidden agenda & “deal” with Taliban—II, Business Recorder, September 13, 2020,] and the book, Pakistan Tackling FATF: Challenges and Solutions. FBR must provide its officials proper training in the areas of ML/CFT. There is also a dire need to form a joint task force of all federal and and provincial agencies, dealing with these issues causing considerable threat to national security and tarnishing the image of the country. As suggested in the articles and the book mentioned above, there should be an apex body, National Crime Bureau, to monitor and ensure fair trial with incontrovertible evidence of the individuals or groups involved in heinous crimes—from tax evasion to money laundering, from all kinds of financial crimes to  financing the terrorists. All these pose potential threats to our revenue generation, economic growth and national security.   

It is the responsibility of the lawmakers to frame prudent laws on the basis of best international practices. The role of the judiciary is to ensure that executive has competent prosecutors and trained judges so that an effective justice delivery system is ensured for meeting the challenges of ML/CFT. It is not only essential to come out of grey list in June 2022 but also for our own benefit by undertaking fundamental reforms for prompt and effective dispensation of justice. In the absence of such a system, laws alone, as we hurriedly amended in recent years, to come out of the grey list, have proved counterproductive. These are abused by unscrupulous elements in agencies while the criminals are roaming around fearlessly.  

The Government and all political parties must take it up as a national agenda, sit together and engage experts to prepare effective/actionable legal framework after proper debate in the Parliament. We also need fundamental structural reforms in all areas of governance to make institutions efficient and accountable. The existing anti-terrorism and anti-money laundering laws need to be updated taking into account the sophisticated methods adopted by money launderers, terrorists and their financiers. It must be remembered that the need of the hour is global cooperation to uproot the menaces of ML/FT through mutual legal assistance and sharing of data by all the member governments. Pakistan must end its isolation and fulfill its global responsibility by forging effective collaboration with the countries of the region, especially Golden Ring countries after the withdrawal of United States and its allies from Afghanistan as it is leading to sudden resurgence of militancy, cross-borders and domestic terrorist attacks. These are posing multiple challenges, requiring holistic and not fragmented approach to deal with them, particularly TBML in a predominant cash economy.        

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The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). They have recently coauthored with Abdul Rauf Shakoori, Pakistan Tackling FATF: Challenges and Solutions.