Confiscation and recovery of assets

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

Countries should consider adopting measures that allow such proceeds or instrumentalities to be confiscated without requiring a criminal conviction (non-conviction-based confiscation), or which require an offender to demonstrate the lawful origin of the property alleged to be liable to confiscation, to the extent that such a requirement is consistent with the principles of their domestic law—The FATF Recommendation– 4, updated in March 2022

The movement of illicit flow of funds has become the biggest challenge for the international community. The global money laundering and terrorist financing watchdog, Financial Action Task Force (FATF), is trying to tighten its monitoring by introducing various guidelines to counter penetration of illegitimate funds into the global financial systems. However, the secrecy laws of various jurisdictions pose a major challenge to tracing dirty money—though the FATF is insisting that member states implement beneficial ownership guidelines to ensure transparency and identification of real ownership. Nevertheless, fear is that the economic interests of various jurisdictions, with legal grey areas commonly known as tax havens, may frustrate this initiative as well.

GDP of the infamous tax havens overwhelmingly relies on foreign investment (sic). The British Virgin Islands (BVI), a colony of the United Kingdom (UK) with less than 40,000 residents, has close to one million companies regulated by the Registry of Corporate Affairs, the main administrative body under the BVI Business Companies Act, 2004 as amended from time to time.

As per Financial Times, the total value of assets of companies registered in BVI is more than US$1.5 trillion. Similarly, various subsidiaries of the top United States (US) corporations are operating from there. Other jurisdictions such as Cayman Island, Bermuda, Netherlands, and Switzerland also offer strict secrecy laws and tax benefits to attract foreign investment (sic).

The State of Tax Justice 2021, an annual report by Tax Justice Network (TJN) reveals that the cross-border tax abuse by multinational companies and individuals hiding their assets and income in offshore tax havens caused tax losses of US$483 billion worldwide in 2021. The Report further highlights that multinational corporations are shifting US$1.19 trillion worth of profits in tax havens every year causing a tax loss of US$312 billion to governments around the world in 2021 as compared to US$245 billion losses reported in 2020. The Report further states that the tax losses caused due to hiding of assets by individuals in tax havens are US$171 billion a year.

The Report further highlights that member countries of Organization for Economic Cooperation and Development  (OECD) and their dependent territories are responsible for 78.3 percent of the losses suffered by countries around the world due to both forms of cross-border tax abuse, costing countries over US$378 billion in lost tax every year.

The Report mentions that the share of the “axis of tax avoidance” (UK, Netherlands, Luxembourg, and Switzerland) is 55% that is US$268 billion. The share of UK’s spider’s web (based on TJN it refers to the way in which UK and its Overseas Territories and Crown Dependencies operate as a web of tax havens that enable corporate tax abuse and private tax evasion—at the center of the web sits the City of London, where money is illicitly transferred after being routed through the territories and dependencies) alone in the world’s offshore tax evasion losses is 50 percent.

The Report claims that Pakistan lost around US$785 million to global tax abuse. It further reveals that tax abuse committed by multinational corporations is US$735 million whereas tax evasion committed by private individuals is US$24 million. Pakistan’s overall score stands at 55/100 whereas 0.29% share relates to global financial secrecy. Interestingly, Pakistan’s share of global tax losses is 0.00%, similarly, its share of harm inflicted on other countries by facilitating global tax abuse is also US$0.

According to the Report trading partners most responsible for vulnerability are UK, Germany, and the United Arb Emirates. On the ranking of vulnerability to illicit financial flows, outward foreign direct investment (debt) and vulnerability score for this channel are 92/100 (100 is the worst). Statistics of the social impact of tax losses in Pakistan is equivalent to 34.84% of health budget.

In the light of above and other disclosures, apart from tax evasion, Pakistan needs to improve its controls to counter the sources of money laundering and terrorist financings such as corruption, tax evasion, drug trafficking, human trafficking, over/under-invoicing, fraud, and extortion.

Unfortunately, in the last four years, our ranking as per Corruption Perceptions Index downgraded around 23 points from 117 to 140 out of 180. This happened despite introducing various laws, rules, and regulations to improve anti-money laundering, combatting the financing of terrorism (AML/CFT) framework to curtail movement of illicit flow of funds that paved the way for our exit on October 21, 2022 from the ‘grey list’ maintained by FATF.

Many commentators and analysts are considering exit from the ‘grey list’ a big achievement, ignoring the fact that we remained under increased monitoring for more than four years—it is worth mentioning that even now exit from ‘grey list’ is conditional to continuous monitoring. The effectiveness of our compliance rating is still poor, which might create hurdles for us to formally apply for the full fledge membership of FATF.

Undoubtedly, weak controls are causing Pakistan colossal tax losses. Similarly, the existing volume of financial crimes is unprecedented. Continuous decline in our ranking on the corruption perception index testifies to this reality. The only way forward is recovery of stolen assets on a priority basis to improve and implement FATF recommendations 4 and 38. We should strictly adopt and implement measures to this effect outlined in the Vienna Convention, and the Palermo Convention related to money laundering and terrorist financing. This will enable our competent authorities to freeze or seize and confiscate the laundered assets parked in various locations without prejudicing the rights of bona fide third parties as highlighted in the FATF Recommendations.  

We should also train our officials in identifying property bought through laundered funds, proceeds from, or instrumentalities used in or intended for use in money laundering or predicate offenses, property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organizations, or property of corresponding value. This will help the authorities in estimating the true value of property and tracing the origin that is subject to confiscation. It will further enable law enforcement authorities to carry out provisional measures such as freezing and seizing and preventing any dealing, transfer, or disposal of such property. We should also take steps that will prevent or void actions that prejudice the country’s ability to freeze or seize or recover property that is subject to confiscation and any appropriate investigative measures as indicated in FATF recommendation 4.

We should improve our cooperation with the global world, as well as the quality of domestic justice system so that our authorities can take up matters of confiscation and recovery of foreign assets through Mutual Legal Assistance (MLA) that should be corroborated with facts and evidence. Courts of other jurisdictions will see the credibility of evidence produced and character of the accused to satisfy themselves about the person nominated in serious financial offense, as well as decision/pronouncement by local courts, if any, regarding those issues for which specific MLA was initiated.

It is high time that Pakistan executes a special agreement with the axis of tax avoidance and the UK’s spider’s web (UK and its Overseas Territories and Crown Dependencies consider their secrecy laws for recovery of stolen assets parked in those specific locations explaining the methodologies of conviction and non-conviction-based confiscation as well as freezing, seizure, and return of assets). This will be possible only when the courts in Pakistan start implementing Article 10A of the Constitution of Islamic Republic of Pakistan in every matter presented before them. Otherwise, no one will trust us despite having agreements—at present, no one in the world accommodates our alleged politically motivated requests.

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Huzaima Bukhari & Dr. Ikramul Haq, 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).

Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions