Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
International trade networks can attract criminals and terrorists financiers who exploit the interconnected supply chains to launder the proceeds of crime or finance terrorism. Recognising trade-based money laundering is difficult, particularly when there is a lack of understanding of this technique—FATF/Egmont Trade-based Money Laundering: Trends and Developments, December 2020
The Financial Action Tax Force (FATF), in its reports of 2006, 2008, 2012 and 2020, has highlighted that trade-based money laundering (TBML) has not received the attention it deserves. A case study of TBML mentions that one Pakistani exporter used the over-invoiced amount to settle the US operator’s outstanding account with his Pakistani counterpart and additionally got benefit of 20% VAT rebate on the higher prices of the exported goods. In this case, rather than simply wiring the funds to his Pakistani counterpart, the US operator convinced a Pakistani exporter to over-invoice a colluding US importer. By “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”.
The above typical case of TBML and many others, not unveiled yet, are taking place in Pakistan for decades [details are available in Mahmood, Z. and R. Mahmood (1993), “Under-Invoicing of Imports: A Case Study of Pakistan”, The Pakistan Development Review, 32, Part II, Winter 1993, Riaz Haq, How Pakistan corrupt elite use trade misinvoicing to launder money, Daily Times, May 2, 2018].
In January 2019, Customs Wing of Federal Board of Revenue (FBR) took major steps to curb TBML. In a magazine, author Mark Ford claimed: “The bulk of Pakistan’s TBML concerns centre on under-invoicing, mispricing and misdeclarations in trade with China. Officials estimate that Pakistan loses up to the equivalent of US$3 billion a year in trade-based financial crimes in which Chinese goods are involved”.
The worldwide trade systems are exposed to wide range of risks and vulnerabilities that can be manipulated by the terrorist financiers, money launderers and other organised criminal networks. As per statistical review 2020, issued by the World Trade Organization (WTO), the volume of global trade in goods alone is worth US$19 trillion. The figure for commercial services was US$ around 6 trillion in 2019. In view of sheer volume and massive gaps for inconsistent application of customer due diligence across jurisdictions, subjective pricing or multiple-layered trade cycles, lack of expertise in ascertainment of description and value etc, FATF’s recommendations require each state to identify, assess, and understand their Money Laundering (ML) and Terrorist Financing (TF) risks. Every State is mandated under FATF’s regime to implement preventative and mitigating measures that commensurate with the identified risks. These measures also include threats and vulnerabilities linked to TBML/ML.
The criteria to implement an effective system to combat TBML requires an assessment of the input provided by various means such as intelligence reports, suspicious transaction reports (STRs), threat assessments, investigation outcomes, economic and social indicators as well as the level of the threat and existing vulnerabilities to the respective nations.
The State Bank of Pakistan (SBP) through FE Circular No. 04 of 2019 dated 14th October 2019 provided a framework to counter TBML and Financing of Terrorism (CFT). The overall framework by SBP addresses the key focus areas by asking the authorized dealers (AD) to maintain screening procedures of customers, their identification and monitoring of trade transactions with related parties, risk profiling of customers and AD itself, verification of valuation of underlying contracts related to import and exports of goods and services, screening of goods to ensure that items being traded are as per relevant trade policy and procedures, identification of dual use of goods including reporting of suspicious transactions within seven days of determining of their suspicion. This framework, however, cannot be called a comprehensive document to address the TBML challenges. It mainly focuses on the risk arising from international trade through formal channel. The SBP has not touched the vital areas that are more vulnerable to TBML methods used in this region. Our regulatory and enforcement authorities hardly understand dynamics of informal trade what to speak of countering the same.
Pakistan is still entangled in overcoming conventional ways of TBML, such as discrepancies between invoices, difference between shipment sizes, routing of shipment involving number of countries with multiple unconnected subsidiaries, erratic payment method, high risk goods, cash payments etc. Our geographic location and nature of economic activities demand strict measures against TBML/CFT. At present our main challenges are dealing with alternative remittance system, informal trade through Iran, lapses which are the source to abuse Afghan Transit Trade and countering the Chinese schemes for TBML.
These challenges are massively impacting our economy. Through alternative remittance system, transactions are settled via bank to bank wire transfers, cash couriers, trade, mobile payments—just to mention a few. Largely, our bank officials are not adequately trained to identify the different typologies used for wire transfers to identify the suspicion of transactions. Asia Pacific Group in their mutual evaluation report of October 2019 highlighted that the SBP: “does not have a clear understanding of the ML and TF risks unique to the sectors it supervises. The State Bank of Pakistan is improving its understanding and is implementing a risk-based approach including conducting regular on-site and thematic AML/CFT supervision activities”.
In addition to alternative remittance system, Pakistan is also exposed to Chinese trade-based money laundering schemes. Due to growing trade relations between Pakistan and China after China Pakistan economic Corridor (CPEC), there is always a threat of movement of funds using Chinese schemes such as Fei-Chien and Hui-Kaun that facilitate an underground financial system. In most cases criminals involve Fei-Chien for overseas business investments, trade-based value transfers etc. Pakistani authorities need to identify the volume of trade through Fei-Chien and trained staff to understand the difference between alternative remittance system and Fei-Chien, so that they can identify and counter transactions involving these methods.
Afghanistan–Pakistan Transit Trade Agreement (also known as APTTA) is another source of TBML. Our authorities have failed to control massive smuggling through so-called APTTA, negatively impacting our revenue generation through customs and border protection activities. Mostly goods imported under APTTA never cross the borders. In recent sugar and wheat crisis in Pakistan, opposition parties in Pakistan blamed the government for its weak controls to stop this malpractice, which they themselves never bothered to counter.
Our successive governments and even SBP through its framework to control trade based money laundering could not fully comprehend the condition mentioned in FATF guidelines for TBML. Moreover, threshold for reporting of transactions to FBR is quite unrealistic. Moreover, SBP requires that authorized dealers need to report suspicious activity within seven days which seems quite difficult for the large financial institutions that process a great number of transactions every day. This process requiring comprehensive investigation—from generating an alert, its investigation and conclusion—is a time consuming exercise which can take up a lot of resources. SBP needs to realize this factor—its responsibility includes issuance of detailed guidelines as per international standards which on the one hand can build the confidence of investors and on the other ease the burden on financial institutions.
Pakistan’s law enforcement agencies need to enhance their understanding and knowledge of risks related to TBML so that they can properly investigate the issues assigned to them. The APG’s mutual evaluation report has highlighted the fact that our LEAs have poor understanding of AML-CFT risk posed to different sectors. This observation was further confirmed by our Prime Minster while addressing various international forums that “we lack expertise to investigate white-collar crimes”.
The way forward to overcome all these issues is setting up an independent entity with sole purpose to deal with all types of financial crimes (a blueprint of the entity is listed in a recent book coauthored by us [Pakistan Tackling FATF: Challenges and Solutions] including ML-TF for collection and consolidation of all reports and issuance of guidelines to each sector. The entity could also share information with law enforcement agencies and seek international cooperation to counter organized crimes which are not only impacting our economy but also ruining our image in the global community.
Huzaima Bukhari and Dr. Ikramul Haq are lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions.