Half-hearted endeavour
Huzaima Bukhari & Dr. Ikramul Haq
The present National Assembly, which takes great pride in completing 5-year tenure first time in the history of Pakistan, miserably failed to pass anti-money laundering bill for the last many years. On September 8, 2007, anti-money laundering law was promulgated in the form of a Presidential Ordinance. The Anti-money Laundering Ordinance, 2007 [hereinafter “the Ordinance”] that came into force immediately prescribes rigorous imprisonment of one to 10-years, a fine of up to Rs one million and forfeiture of property for the offence. The 33-page Ordinance describes in detail the punishment for the offence of money laundering, investigation of doubtful accounts and transactions, and the process for the forfeiture of money and property and management of forfeited money.
According to the Ordinance, a person shall be guilty of the offence of money laundering if he acquires, converts, possesses or transfers property or render assistance to another person for acquisition, conversion, possession or transfer of, or for concealing or disguising the true nature, origin, location, disposition, movement or ownership of property that was proceeds of crime. The property that can be forfeited under this new law includes property or assets of any description, whether corporal or otherwise, movable or immovable, tangible or intangible, and includes deeds and instruments wherever located.
The government under the law would form a national executive committee headed by the Finance Minister or the Prime Minister’s finance adviser to evolve a strategy and further improve the law to combat money laundering by coordinating with law-enforcement agencies. The other members of the committee would be the Prime Minister’s senior adviser on foreign affairs, law justice and human rights, Ministers for Law and Justice and Interior, the Governor of State Bank of Pakistan and Chairman of Pakistan Securities and Exchange. The Ordinance also allows investigators to collect information of any doubtful accounts with financial institutions, money exchanges and transactions by stockbrokers and to hold such accounts for two months for investigations.
The ‘Anti-money Laundering Bill’ has been pending with the National Assembly for the last two years. One fails to understand why it could not be passed. According to the worthy members, who are part of a rubber stamp parliament, the reasons are best known to the Prime Minister Secretariat and power that matter in the land as there were clear indications to keep it pending. Interestingly, the bill was still pending before the National Assembly Finance and Revenue Standing Committee, when all of sudden the Government decided to promulgate it without any debate in the parliament or in public. This is in clear violation of democratic procedures and public policy. It is claimed in Press that the Ordinance was issued to meet international commitments and obligations because in case of the government’s failure to put in place a system to check illegal money laundering by the end of the current year, the country’s banking system could have been discredited. There was, in fact, no desire on the part of the government or legislators to enact any such law. Its promulgation in no way means that the government is serious in implementing it too. The only reason it has been promulgated is to meet deadline fixed by European Union and certain other international organizations that all countries should have such laws before the close of 2007. Now we can satisfy them that there is something on paper. This is true with many other laws where the State lacks complete political will for enforceability. This is not only a half-hearted endeavour but a self-contradictory action.
The worthy Prime Minister on whose advice President has promulgated this Ordinance perhaps conveniently ignored that the Government itself provides a free hand to money launderers assuring them that no question would be asked by the tax authorities if they remit their ill gotten-money from outside through banking channels and surrender the foreign currency to the State Bank and get Pakistani rupees as encashment. In the Income Tax Ordinance 2001, promulgated on the dictates of IMF on 13 September 2001, a special provision [section 111(4)] has been inserted facilitating the money launderers to remit (laundered is more appropriate term) their ill-gotten money through banking channels without any fear of punishment. This scheme presumably announced as a measure to bring huge foreign funds to Pakistani economy succeeded immensely as foreign reserves of Pakistan crossed the US$ 14 billion mark in the wake of this facility. This scheme has been used liberally and cleverly by the Pakistani drug syndicates and tax dodgers to launder their money through State patronage. In the presence of this law can anybody take the Government seriously in promulgating so-called anti-money laundering ordinance? On the face of it both the laws contradict each other.
Money laundering is particularly damaging to economic and social fabric of developing countries, leading to potential increase in crime and corruption, impending damage to reputation of financial institutions and markets, reduction of foreign private investment, possible destabilisation of financial markets and weakening of financial institutions, loss of tax revenue and loosening control over economic policy. In Pakistan, the banks, insurance companies, non-banking financial institutions, investment companies, money transmitters and real estate agents are all targets for money launderer. The financial institutions inadvertently or otherwise support money laundering by providing means to convert cash into different types of financial instruments, to convert the currency of one country into the currency of another and to transfer funds to other financial institutions.
The various governments in Pakistan have never bothered to unearth laundered money rather always joined hands with the tax evaders and money launderers by providing them unprecedented concessional schemes to whiten their ill-gotten wealth. In this society the huge ill-gotten money accrue through land transactions, drug trafficking, and suspicious transactions involve money laundering.
Large-scale tax evasion and the existence of a large black economy while resulting in loss of revenue to the State, tends to reduce the built-in elasticity of a fiscal system to the extent that the tax evaded income is spent on goods and services that help to generate inflationary pressures and raise the prices of real property. In the context of the prevailing grave challenge to combat terrorism, coupled with money laundering crises, and the problem of ever-growing black money, (which according to official and independent experts is around Rs. 2.5 trillion, about 70 % of the total economy), there was an urgent need to launch a well-thought for anti-money laundering law to block this huge money becoming a lethal weapon in the hands of mafias who now control economy as well as the governments. However, it was important before launching such a law to identify the sources of generation of black money, which the government has failed to do. If such sources are not eliminated, the money laundering will keep on unabated no matter how stringent laws we make.
Judging from different studies quoted above and reports published in print media from time to time, Pakistan’s underground economy has the following salient features:
- Since 1979 (courtesy Gen. Zia’s legacy of speed money culture and its following by all the subsequent governments, notably that of Benazir Bhutto and Nawaz Sharif), Pakistan’s underground economy has developed at a surprising rate. Its large size ranging between 22% to 35% of GDP is a cause of great concern for both the official and independent economists.
- Its manifestations are very wide. It is not only large and all-pervasive but also exists in daily life of every Pakistani. It includes production of fake and substandard goods, smuggling, the “black society” economy, illegal business of sexual transactions and contraband toxicants, massive infringement of copyrights, interloping, tax evasion and avoidance with the active collaboration of tax officials, money corruption and rent seeking [exchange of power for money] activities of government officials, plundering of bank loans, just to name a few and significant ones.
- Massive migration towards big cities confirms that a huge population of Pakistan is directly engaged in underground economic activities. The large-scale mobility of people is also a contributing factor in generating underground economy e.g. huge demand of local private houses to accommodate the mobile population.
- The active participation of government officials is the most disturbing feature of Pakistan’s underground economy. The rent-seeking activities of the government functionaries emerge in an endless stream. They are the single most important catalyst for accelerating the growth and sustainability of underground economy. The State has miserably failed to check rampant corruption amongst their officials. They have emerged as the most powerful mafia whose control over the underground economy is now invincible.
Why has Pakistani become a paradise for money launderers? The reply is simple: underground economy has been evolved so rapidly over a period of last 20 years that it has benefited everybody. There were multiple factors leading to this phenomenon, most notably the State-sponsored corruption and deliberate tolerance to malpractices. Pakistan by all means has a soil, which proved to be very suited for the propagation of an underground economy since the very early days of Independence when allotment mafia came into existence and many notorious elements turned rich overnight. They are still dominating the ruling structures as money power they enjoyed without putting any effort in achieving it.
During the last 15 years, money launderers in Pakistan hardly needed any international channel for money laundering. All the support from the State was available at home. The recurrent appearance of amnesty schemes and money whitening instruments/modes shows that the State has conceded the failure of its tax machinery in performing its main function of collection of taxes. This nation has become addicted to easy money and such schemes/instruments have become a routine matter for them. The people being hooked on ill-gotten wealth/income for the last many years know for certain that after every two or three years, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less the amount than what they were required to pay under the normal income tax/wealth tax regime. It is a tragic situation where the entire State apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who have been paying their taxes honestly at much higher rates than those offered to tax evaders (ranging between 5 to 10%) under such Schemes.
If the government is really sincere to curb money laundering, it must announce Compulsory Public Disclosure of Assets Scheme requiring the following to make their assets and liabilities public:
- High ranking civil and military officials
- All the MNAs and MPAs
- Judges of the superior and subordinate courts/members of Tribunals
- Businessmen/Directors of all the companies who availed loans exceeding Rs.10 million from any financial institution
- Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc
The above privileged classes of society should act as examples for others. Their declarations can inspire the common people to pay their taxes honestly and it will help encourage voluntary compliance. The State needs to wage an all-out war against burgeoning money power and corrupt politico-administrative structures. This war must start from the mighty classes, as suggested above, which alone can ensure proper and voluntary tax compliance in the country.
In the wake of promulgation of Ordinance, the government needs to develop a permanent structure in all the institutions specifically Federal Board of Revenue (FBR), Federal Investigation Agency (FIA), Securities and Exchange Commission of Pakistan (SECP) and State Bank so that the money laundering issue can be effectively tackled. Special courts should be established and judges having expertise in financial and banking matters should be appointed, to hear money-laundering cases. The judges of such courts must be especially trained in the fields of accountancy, and money laundering. There is an urgent need for introducing policy and structural changes in the banks. It is unfortunate that ‘Benami accounts’ are widely accepted in the public and private sector banks. Presently, there are 28.8 million accounts with the Pakistani banks, out of which 14.8 million were opened against personal names whereas only 432,916 are liable to pay taxes. The State cannot tap the real potential of revenue potential unless stringent measures are taken to combat money laundering and eliminating parallel economy through proper documentation. This will automatically broaden the tax base, besides freeing the society of many evils.
There is a need for a wider plan to document the entire economy once and for all. The present government must remember that half-hearted measures, typical of promulgating anti-money laundering ordinance will not yield the desired results. The firmness, political will, consistence and steadfastness must be shown to counter money launderers, terrorists and tax evaders. Our survival now lies in freeing the society from the clutches of the corrupt. The Government has, therefore, to plan in terms of a well-thought-of anti-money laundering-cum asset seizure measures to draw upon the huge reservoir of black money. Swift action is to be taken to combat money laundering, seize money and property arising out of corruption, tax evasion and narco-arm-trade. Tolerance to money laundering is a suicidal path leading to self-annihilation.
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The writers (huzaimaikram@gmail.com) are social researchers, legal historians, authors, tax advisers and members of Visiting Faculty of Lahore University of Management Sciences (LUMS). They work for a multi-disciplinary law firm, HUZAIMA & IKRAM (www.huzaimaikram.com).