Countering financial crimes & FATF

Huzaima Bukhari & Dr. Ikramul Haq

In recent days, Federal Board of Revenue (FBR) has taken many steps to enforce internal accountability mechanism to uproot corruption/malpractices within the organisation. The steps like making Chief Commissioners as ‘IRS Ombudsman’ and establishing ‘Integrity Management Cell’ (IMC) to facilitate general public/taxpayers for filing of complaints against corrupt practices of officers/officials of FBR are laudable. However to avoid conflict of interest, an independent watchdog is necessary that can effectively combat tax frauds, money laundering, terrorist financing and other financial crimes. Prosecution should also be independent and not through the same agency where crime is committed in connivance with the insiders or otherwise.

FBR has issued clear warning on its website and through newspaper [Can’t Hide Any More: Avail Yourself Of Last Chance] to those who are filers but not declaring correct facts or NTN (National Tax Number) holders but failed to file tax returns or unregistered withholding agents not filing statements/returns to do so by December 8, 2020, the date will not be extended. They can no longer deceive the nation and tax authorities as FBR claims to have their complete data.

While FBR is determined to chase all non-compliant citizens, the Directorate General of Internal Audit (Inland Revenue), according to a report, FBR’s DG of internal Audit detects massive tax evasion in 6 months, Business Recorder, November 17, 2020, “has detected massive tax evasion cases of nearly Rs. 1,300 billion during investigations conducted during the last six months of 2020-21, reflecting serious loopholes and irregularities in the working of income tax, sales tax, and federal excise departments of the FBR”. The report [“2020-21” is a typographical error], sadly reflects on the performance of Inland Revenue Service (IRS) and Customs for failing to counter huge pilferages, due to lack of trained manpower, capacity, facilitates, tools or connivance. Some glaring facts given in the report are summarised below:

• Cases of non-filing of income tax returns by persons showing sales tax turnover of Rs. 50 million and above. Non-filers and withholding tax agents using fake persons for the purpose of evading income tax. The impact of revenue loss is around Rs. 500 billion in this area alone.
• Manipulation in the system of Pakistan Revenue Automation (Pvt) Limited (PRAL) causing revenue loss of around Rs.10 billion to the national exchequer. Cases of Rs.11 billion involving bogus sales tax registered persons.
• Transactions with estimated revenue loss of Rs.10 billion within the steel sector.  
• Loss of revenue of Rs. 15 billion caused by different units abusing SRO 1125 as exporters. Billions of rupees evaded by importing finished fabrics misusing the same SRO [it could not be possible without the connivance of Customs authorities].
• Large-scale tax evasion and frauds in withholding tax regime.

Time will tell whether revenue leakages of Rs. 1300 billion, as reported in the news story, are bona fide or not, and how much recoupment of revenue losses is made by FBR’s officers. Cases of “mega tax frauds” are frequently leaked to Press by FBR officials, but subsequent remedial actions are not made public. Press reporters, who publish these stories, as fed by FBR officials, seldom do follow-ups. These should be mandated by editorial board/editor of the newspapers. The version of those allegedly at fault is also not taken, so story remains one-sided, violating the basic norm of journalism, not to publish anything without taking the response/viewpoint of other party or parties involved/blamed.   

In majority of tax frauds, the parties are the official(s) and the taxpayer(s) directly or through their tax advisers. Cases where unilateral tax fraud is committed are rare, such as using fictitious bank account(s) to obtain fake refunds. Even in such cases, bank officials are in collaboration with tax officials. It is thus imperative that in all tax fraud cases, the National Accountability Bureau (NAB) is informed by FBR to initiate proceedings against the tax official [public officeholders as defined in section 5(m) of National Accountability Bureau Ordinance, 1999] and the other beneficial party, booked as partner in financial crime.

The Supreme Court of Pakistan on January 9, 2020, questioned the FBR’s counsel why PRAL was not made a department and why is it working as a private company? A three-member Bench, headed by Chief Justice of Pakistan, observed: “Why does the FBR not design software itself?” FBR’s counsel contended that the company and not the government was paying all the employees working in PRAL. The Supreme Court clubbed the case of PRAL with suo moto case of ISAF (International Security Assistance Forces) Container and informed FBR that they wanted to take this matter to its logical end. Further details are available in ‘ISAF containers scam: FBR preparing new report’, Business Recorder, January 28, 2020. 

In Dismantle containers’ mafia, Business Recorder, September 14, 2018, it was specifically mentioned:

“It is a matter of great regret that at the cost of the country, massive tax evasion continues unabated and many tax advisers, even though being instrumental in it, are now advising the PTI government how to improve things! The repeated vow by the Prime Minister, Imran Khan, of collecting Rs. 8 trillion…..counter tax evasion, loot and plunder of national wealth continue unabated due to unholy alliance amongst unscrupulous tax advisers, greedy businessmen and corrupt tax officials. The evasion and corruption of billions of rupees to the national exchequer is not possible without the connivance of this trio”.

“It is a disturbing reality that containers—both inbound and outbound—are not scanned in Pakistan. In importation, the collector-businessman mafia deprives the nation of billions of rupees in the form of evaded duties—Customs, Sales Tax and Federal Excise Duty, wherever applicable. These goods then remain outside the purview of income taxation as well. This is the main cause of generation of underground economy. Customs mafia is not ready to accept simple technological reforms of scanning of all the containers and baggage”.

While the ISAF Container Case pertaining to 2007-2010. remained a mystery, another mega scam, according to a report, surfaced where the Customs Intelligence Department “unearthed a network of top officials involved in large-scale misdeclarations of description and value of imported goods in over 900 containers causing losses worth billions to the national exchequer”—see detail comments in Tax frauds, corruption & NAB, Business Recorder, February 7, 2020.

It was claimed in the report of a newspaper: “The corruption in customs department has become so vivid at the collectorate level that DG Customs Intelligence Muhammad Zahid had sent several letters to FBR Chairman Shabbar Zaidi for taking action against the involved officials….A special report on fraud at Customs Station, Torkham was also sent to the Chairman of FBR on December 6, 2019….However, no action was taken against those officers involved in the corruption”.

FBR or any other institution cannot clean its own house by making committees and issuing instructions to refrain from malpractices/corruption or asking taxpayers/citizens to file complaints. Why would the dishonest in their ranks and files take any action against those whom they serve and mint millions every month at the expense of the state. The decision of Prime Minister of December 10, 2019 to lodge a crackdown against tax evasion in cigarette industry and other sectors by reactivating Inland Revenue Enforcement Network (IREN) also failed to bring desired results. Now, the FBR is given powers to monitor money laundering, benami transactions and regulate transactions by jewelers, real estate agents, accountants etc [Designated Non-Financial Business and Professions (DNFBPs)] under amended anti-money laundering (AML)/Counter Financing of Terrorism (CFT) laws without providing training and facilities to perform these functions and ignoring the global standards of monitoring through an independent body and not through self-regulation to those who are most vulnerable for money laundering etc!

On January 28, 2020, the Supreme Court directed the Chairman FBR to restart inquiry against an officer in an illegal tax refund matter. The three-member bench, headed by Chief Justice of Pakistan, ordered FBR to complete its inquiry against DC Sales Tax in refund of taxes. The Apex Court passed strict observation: “How is an officer being cleared and another punished having committed the same offence”. It was reported in the Press that the Honourable Chief Justice of Pakistan expressed his disappointment and asked, “Why are you people not telling the truth to the court…..“don’t play games, we know you will produce an old inquiry (before the court). Why don’t you catch an officer involved in misconduct?” On earlier hearing of the case on January 7, 2020, the Supreme Court expressed its disappointment with FBR over the delay in investigation of undue tax refund.

The above are just a few instances of malpractices and corruption in FBR. Numerous cases were reported and documented in articles published from 2008-2019, some of which are as follows:

1. Dismantle containers’ mafia, Business Recorder, September 14, 2018
2. Performance audit of FBR, Business Recorder, July 6, 2018
3. The FBR and revenue losses, The News, February 25, 2018
4. Sordid story of tax frauds-III, Business Recorder, February 3, 2013.
5. Sordid story of tax frauds-II, Business Recorder, February 2, 2013.
6. Sordid story of tax frauds-I, Business Recorder, February 1, 2013.
7. Allying with tax evaders, Business Recorder, January 25, 2013.
8. Recouping tax losses, Business Recorder, July 13, 2012.
9. FBR in dire need of restitution, Business Recorder, July 29, 2011.
10. Rampant corruption and crippled system, Business Recorder, February 7, 2009.
11. Enough of Revenue losses!, Business Recorder, May 12, 2008.

Now in 2020, the same sordid stories keep on resurfacing in IRS and Customs, when the Prime Minister continues showing his determination to uproot corruption and mafias causing loss of billions of rupees. Way back in March 2015, the NAB forwarded several recommendations to FBR “to plug loopholes” that are the main cause of massive tax evasion and other irregularities. These recommendations, prepared by NAB’s Prevention Committee on FBR, were worth considering but nobody in FBR even talks about it, what to speak of briefing the Prime Minister about the same and its implementation. The one recommendation was that ‘Automated Income Tax System’ in the FBR should be fully functional, so that doors of corruption and misuse of authority by the tax collectors should be stopped, to increase the volume of revenue in the economy. This critical goal remains unfulfilled till to date.

The matter of corruption is not restricted to FBR alone. All government departments are inflicted with this malaise. The recent case of abuse by government officials of funds of Benazir Income Support Programme, now renamed as Ehsaas, meant for the needy testifies to the grave malady we are faced with. We need all-out reforms in all institutions to make them efficient and transparent, manned by competent people who can deliver.

It is high time that report of Tax Reform Commission of 2016 is made public, its recommendations debated and after taking input of all stakeholders, they should be implemented. The same ought to be the case with other reports relating to anti-corruption efforts that are now part of official dusty shelves. All these should be implemented without any further delay.

A forensic audit of FBR’s affairs by a team of competent professionals in this field should be the starting point of telling the nation that the coalition Government of Pakistan Tehreek-i-Insaf (PTI) really believes in accountability and is serious to uproot the causes of corruption. If an agency itself is not transparent and free of corruption even in posting and updating data of income tax returns, registered sales tax persons, refunds etc on monthly basis, how can it enforce tax obligation fairly and fearlessly, monitor DNFBPs and apply laws relating to money laundering, terrorist financing and prohibition of benami transactions?

The Prime Minister needs to quit rhetoric and take some concrete steps in this direction or we will never be able to uproot the cancerous growth of corruption, tax evasion, and all forms of rent-seeking. For this, fundamental structural reforms are needed in all institutions with an independent national watchdog and prosecution agency to monitor all financial crimes for our own sake, not under pressure of Financial Action Task Force (FATF). Searching and appointing only honest persons without effective internal and external checks, prevalent in many countries, will never work to make our institutions effective and free of malpractices and corruption.

The moment has come for the Prime Minister to understand that tax frauds by deceitful businessmen with the help of their unscrupulous advisers and staff, rent-seeking, plundering of national wealth and loan sharking by corrupt politicians, organised crimes like money laundering, terrorist financing by mafias; cannot be countered by constituting committees and sub-committees of the departments that are part and parcel of the problem.

For dismantling unholy alliance between robber barons and state functionaries, money launderers and financiers of terrorists, Pakistan needs a special national agency [Financial Crime Monitoring Bureau] an independent watchdog for all financial crimes, including tax frauds, money laundering, and financing of terrorism and passing the evidence after inquiry to an independent and competent National Prosecuting Agency to take them to task in special speedy trial courts where judges have expertise in anti-money laundering and combating financing of terrorism (AML-CFT) laws to deliver judgements swiftly but following Article 10A of the Constitution of Islamic Republic of Pakistan. This will help us to meet all the conditions of FATF and come out of grey list in February 2021.

The complete blueprints of Financial Crime Monitoring Bureau and National Prosecuting Agency have been communicated to Hammad Azhar, Federal Industries and Production Minister and focal person for FATF. In case, Pakistan fails to implement these, then with the present fragmented structures and the incompetent institutions to monitor AML/CFT as explained in ‘Pakistan’s Archaic Approach to Addressing FATF Mandates’, Business Recorder, November 16, 2020, the FATF and world community will not take us seriously knowing how weak and incompetent as well as how discredited our existing institutions are, and the way these are used/abused for political victimisation and favouring/protecting the financiers of every ruling party and winning “supporters” for military dictators in the past.  

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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are member Adjunct Faculty of Lahore University of Management Sciences (LUMS).