Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
The real estate sector is an attractive sector for money launderers. Criminals who build their fortune using illegal means such as human and drug trafficking, corruption, tax evasion, exploit real estate. They conceal their illegitimate earnings, disguising their identities and laundering funds. Financial Action Task Force (FATF) is considering revision of the existing Risk-Based guidance and asking for public consultation because proper monitoring of this sector is a dire need of the hour so that illicit movement of funds generated can be curtailed.
According to FATF press release, in June 2021, the sixth Plenary agreed to review the relevant guidance and formed a Project Team of FATF delegations and private sector representatives to consider necessary changes and gather relevant information. Therefore, the guidance paper for the public consultation reflects the work and discussion of the Project Team as well as members’ input of relevant case studies and data on the real estate sectors Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) supervision and practice.
The FATF sought input and comments on the following:
- The details and specific guidance to practitioners, as well as additional aspects of guidance that may merit consideration and are not currently addressed.
- Specific business cases of real estate sector ML/TF risks and threats, and measures put in place by the private sector to address them so that the guidance could be more helpful and practical.
- Terrorist financing threats as identified by the sector practitioners.
Pakistan is one of those jurisdictions that is considered a haven for organised criminals, many engaged in predicate crimes, and launders using the domestic real estate for moving proceeds of crime offshore via formal and informal channels.
After being placed on the grey list and agreeing with a twenty-seven-points action plan in 2018, Pakistan tried to address the concerns of FATF related to all sectors. After being frequently pressurised by FATF and international bodies regarding regulations of Designated Non-Financial Businesses and Professions (DNFBPs), Pakistan tried to address those concerns by amending the Anti-Money Laundering Act, 2010 [AML, 2010] through the Anti-Money Laundering (Second Amendment) Act, 2020, which received the assent of the President on September 22, 2020.
Through an amendment, section 6A was introduced in the AML, 2010 which delegates powers to the Federal Board of Revenue (FBR) to regulate Designated Non-Financial Businesses and Professions (DNFBPs), namely real estate agents, jewelers, dealers in precious metals and precious stones, and accountants, who are not members of the Institute of Chartered Accountants of Pakistan or the Institute of Cost and Management Accountants of Pakistan. Subsequently, FBR being a regulator of the DNFBPS exercised power conferred under AML, 2010 and introduced regulations, namely, ‘Federal Board of Revenue Anti-Money Laundering and Countering Financing of Terrorism Regulations for DNFBPs, 2020’ [“the said Regulations”] through SRO 924(1)2020 dated September 29, 2020, to regulate DNFBPs. Although we have highlighted in our various articles that the regulations issued by the FBR are generic and need to be redrafted to address the potential risks related to this sector, no notice has been taken till today. We further highlighted in our writings that the Regulations must be in line with the FATF risk-based guidelines and international best practices requiring measures against high-risk countries, but most countries known as offshore havens with strict secrecy laws are classified as either medium risks or low risks. How can one cope with those offshore jurisdictions rated medium or low risks while performing due diligence? As for reliance on third parties regarding the performance of Customer Due Diligence (CDD), this must be done according to specific guidelines to protect data privacy and data breaches.
FBR needs to issue additional guidelines that identify high-risk areas for money laundering and combating financing of terrorism, drug trafficking, and other financial crimes throughout the country where criminals exploit real estate sector proceeds. Real estate businesses are exposed to other risks that money launderers and financiers of terrorism frequently exploit including the worth of real estate assets, operational format, number of offices and locations, offshore offices, size of overall staff, etc. These issues must be addressed through comprehensive guidelines, before issuing any type of notice for compliance.
Since our existing AML-CFT regulatory and operational framework does not align with the existing risk-based guidelines, FATF is now requiring consultation to update them. As we are already in the FATF programme and trying to be placed on the white list again, it is an ideal time that we should present our comments and suggestions highlighting the way forward of addressing the potential risk and their mitigating strategies as per Pakistan’s point of view. Admittedly our existing regulations are generic and are silent about the role of different players in the real estate sector. Therefore, we need to convey to FATF the issues we are facing and how our generic regulations would address their concerns related to real estate professionals such as traditional, exclusive and non-exclusive buyer and seller representations (including those in the same transactions), number of agents representing buyers and sellers, national and transnational representations, financial settlement and real estate brokerage etc.
The Mutual Evaluation Report for Pakistan released in 2019 already raised concerns that there is no licensing requirement for real estate agents and no information related to the size and make-up of the real estate sector is provided. Similarly, it also highlighted that the Federation of Realtors of Pakistan is a Statutory Regulatory Body (SRB) but real estate agents are not required to join it and its legal basis is also unclear. Now after amending the AML, the powers to regulate this sector are conferred with FBR, which in fact is a questionable step. Pakistan needs to come up with solid suggestions to address apprehensions related to regulatory bodies, reasonable measures to verify identity of beneficial ownership including purpose and nature of ownership.
Pakistan, being a responsible state, needs to act immediately. The global watchdog has already raised concerns about our poor understanding of the AML-CFT risks. We also need to address all shortcomings in the existing regulatory and operational framework so that we can prevent launderers from injecting their illicit funds into our financial system.
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 recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions