Critical analysis under FATF’s guidelines
Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Real estate sector is considered among the most vulnerable areas that are used for providing legal cover to funds generated through illegitimate activities. Drug traffickers, money launderers, corrupt officials exploit this business segment to hide their illegitimate earnings, disguise their identities and laundered funds.
The Asia Pacific Group (APG) in its ‘Ist Follow-up Report of Mutual Evaluation Report of Pakistan (September 2020) noted as under:
“In 2019, Pakistan issued AML/CFT Regulations for DNFBPs and AML/CFT Rules for CDNS and Pakistan Post to impose AML/CFT obligations on these sectors, including the obligations for FIs and DNFBPs specified in R.1. However, as no penalties for non-compliance with these instruments have yet been specified, they cannot be considered ‘enforceable means’ within the FATF definition. As such, the deficiencies with respect to these sectors have not been addressed, which is significant given CDNS, Pakistan Post and real estate dealers were identified as highly vulnerable sectors to ML/TF in the 2019 NRA. In addition, the application of simplified due diligence for branchless banking is not consistent with Pakistan’s assessment of TF risk. However, this deficiency is considered minor due to the controls put in place by Pakistan, including electronic identity verification and transaction limits”.
The above report further noted:
Pakistan was rated PC in the MER for R.29. The 2019 MER found that Pakistan’s FIU, the Financial Monitoring Unit (FMU), was not able to access detailed tax records. It also found that FMU could not spontaneously or upon request disseminate information and the results of its analysis to provincial police counter terrorism departments (CTDs), which are the designated TF investigation authorities. CTDs could access FMU information and financial intelligence during a TF investigation but only with permission of the court. Given the high risk of TF in Pakistan, significant weight was given to this deficiency. 23. Since the 2019 MER, Pakistan has amended the Income Tax Ordinance, 20013 , which now allows FMU to have access to tax records and information maintained by FBR. In addition, provincial CTDs have been designated as investigation and prosecution agencies under the Anti-Money Laundering Act, 2010, which FMU can now disseminate information to them without a court order.
The recommendations contained in Para 55 of Ist Follow-up Report of Mutual Evaluation Report of Pakistan (September 2020) highlighted the following:
“The 2019 MER found that there was no designated AML/CFT supervisory authorities for DNFBPs. Since the MER, Pakistan has issued AML/CFT Regulations for DNFBPs and in accordance with the AMLA, has by way of SRO appointed the following AML/CFT supervisors for DNFBPs: DNFBP Sector Supervisor Accountants The Institute of Chartered Accountants (ICAP) and the Institute of Cost and Management Accountants (ICMAP) for their respective members. SECP will be the ultimate regulator and supervisor of ICAP and ICMAP until further orders. FBR will be the regulator and supervisor for remaining categories of accountants, dealers in precious metals/stones (DPMS), real estate agents, lawyers and Pakistan Bar Council through Ministry of Law and Justice. Each of the designated supervisors will be responsible for developing their own risk-based supervision mechanism for their sectors”.
Pakistan tried to address concerns of AGP and those of Financial Action Task Force (FATF) by amending the Anti-Money Laundering Act, 2010 [AML, 2010] through Anti-Money Laundering (Second Amendment) Act, 2020, that received assent of President on September 22, 2020. Section 6A of AML, 2010 delegates powers to Federal Board of Revenue (FBR) to regulate Designated Non-Financial Businesses and Professions (DNFBPs), namely real estate agents, jewellers, dealers in precious metals and precious stones, and accountants, who are not members of the Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management Accountants of Pakistan.
In exercise of powers conferred under AML, 2010, FBR made regulations, Federal Board of Revenue Anti-Money Laundering and Countering Financing of Terrorism Regulations for DNFBPs, 2020’ [“the said Regulations”] through SRO 924(1)2020 of September 29, 2020, ‘to regulate the above-mentioned DNFBPs.
“Real Estate Agent”, as defined in Regulation 2(n), “includes builders, real estate developers and property brokers and dealers when execute a purchase and sale of a real property, participate in a real estate transaction capacity and are exercising professional transactional activity for undertaking real property transfer”.
According to data given by FBR on special request, the total number of “Real Estate Agents” registered with it are only 16,000 plus (excluding builders and developers) and return filers for tax year 2020 are around 10,000. It is worthwhile to mention that according to a report, the World Bank estimates the size of Pakistan’s real estate assets “between 60 and 70 percent of its total wealth” (around 300 to 400 billion dollars). FBR’s enforcement in this sector is absolutely hopeless as the number of income tax filers prove. There are numerous associations of real estate agents in each city of Pakistan and their directory is available at a website.
The FBR must get data from real estate regulatory authorities, one established for Islamabad Capital Territory (ICT), and others by provinces and from websites of private parties to enforce the said Regulations without any delay. Weak enforcement of FBR is evident from the number of registered “estate agents” and those filing returns.
The AGP in its various MERs highlighted the fact that illicit funds from predicate crimes are generally laundered through domestic real estate, precious gems/jewelry, and the financial sector. Criminal proceeds are also moved offshore via formal and informal channels. The AGP’s MER for Pakistan further highlights that there is no licensing requirement for real estate agents and no information is provided related to size and make-up of the real estate sector. Similarly, it also highlighted that Federation of Realtors of Pakistan is a Statutory Regulatory Body (SRB) for the sector, but real estate agents are not required to join the federation and its legal basis is unclear.
Subsequent to promulgating the Regulations, FBR while exercising its power as a statutory regulatory body unilaterally registered all tax return-filing real estate dealers as DNFBPs and directed them to provide full details of their clients and property transactions after completing customer due diligence along with questionnaire which needs to be submitted online within seven days. Non-compliance or partial compliance of the same would attract action as per law. These data are being sought by FBR to address the requirements of FATF as reported by the leading newspaper DAWN.
Now keeping in view the historical background of Pakistan’s compliance with FATF, it shows that it remains questionable in all sectors and this deficiency was also highlighted in mutual evaluation report 2019. Despite remaining on the grey list thrice, we never made serious efforts to streamline our issues.
Initially the successive governments in Pakistan were reluctant to introduce anti-money laundering (AML) laws. The Anti-Money Laundering Ordinance issued in 2010 was not in accordance with international standards. On objections of the FATF, the then government replaced the ordinance with Anti-Money Laundering Act, 2010, which was also criticized by the watchdog. However, our legislators and concerned authorities did not bother to timely rectify the issues identified in our AML laws. It is worth mentioning that Pakistan was placed twice in the grey list after implementing AML Act, 2010, meaning thereby that its efforts to streamline its issues with FATF were not convincing to global bodies. Initially, we tried to satisfy the global watchdog through issuance of generic regulations by the Securities Exchange Commission of Pakistan in 2018 but the same failed to serve the purpose. Subsequently, APG’s Mutual Evaluation Report of 2019 and its follow-up further exposed weaknesses in Pakistan’s compliance regime and even put us at the risk of being placed in the blacklist. This, ultimately, forced the coalition government of Pakistan Tehreek-i-Insaf (PTI) to introduce changes in the existing laws to bring them at par with international standards.
It is unfortunate that even after an unsuccessful attempt in February 2021 to come out of grey list, the newly-introduced laws, rules and regulations also are not according to international standards, and at many levels are in contrast with the principles of independence, ultimately leading to conflict of interest. Moreover, delegating powers to multiple bodies and committees with overlapping jurisdictions and scope which are run by politically exposed persons is a real threat and risk for our system.
Now, in the light of historical background, a regulation of real estate sector through FBR is questionable. Our policy makers need to understand that tax collection and compliance with financial crimes regulations are two different segment for which FBR officials lack the training to deal with investigation of white-collar crimes. This fact can be realized through the questionnaire shared by the FBR officials with real estate professionals. Was there any need to send a complicated, lengthy and ambiguous questionnaire to those who are already active taxpayers? Secondly, this questionnaire seems to be helping tax officials more to meet their targets and broadening their tax base rather than streamlining their affairs with Anti-Money Laundering (ML) and Countering of Financing of Terrorism (CFT).
The action of FBR requiring the registered taxpayer to disclose information of their clients is a breach of confidentiality. Law requires reporting of only suspicious transactions through Suspicious Transactions Report (STR) and/or any transactions which violate the currency reporting threshold, should be reported in the form of Currency Transaction Report (CTR). Asking the details of each and every client from real estate brokers is violation of the principle of confidentiality which could lead to unrest in the business sector and among the general public, especially those having legitimate declared sources to invest in real estate.
Additionally, real estate sector is not adequately formalized in Pakistan and majority of real estate professionals are not well qualified. The questionnaire is too complex to understand and complicated for the non-technical person. It is also worth mentioning that the questionnaire does not make any sense as many queries are related to real estate activities, product and services, nature of client relationship, geographic reach, mitigating controls, policies and procedures, customer due diligence identification of high risk clients and situations, filing STR and CTR, internal controls, training and audit seem drafted without knowing of the specific industry practice. For example, a questionnaire about the product and services, for information sought by the FBR, a regulator of DNFBPs can ask for the risk rating parameters and the risk assessment of the product and services offered by the real estate sector but it cannot poke its nose in their financial payments.
In case of any violation, the real estate agents as defined in the Regulations can require information under the law. Moreover, without proper guidance from FBR, it is not understandable how these sectors will address risks related to customers, products, and services in absence of any formal classification mechanism in place. It is necessary that before sending this questionnaire, FBR must define real estate products, their criteria for addressing potential risks and a matrix for rating their risk.
Similarly, some questions related to geographic reach are ambiguous as well. FBR is interested to know if real estate entity has presence in high risk jurisdictions and involved in activities with countries or areas of concern, and if so, at what percentage. However, there is no mention of countries referred as high risk or areas of concern in the regulation as well as guidelines issued by FBR. Though there is mention of Counter Measures for High Risk Jurisdiction Rules in the AML-CFT guidelines issued by FBR for dealers in precious metal and stones, however, these rules state that Financial Monitoring Unit will publish the list of High Risk Countries on their website. As yet there is no specific mention of the list except FATF website link referring to High Risk Jurisdiction subject to a call for action – February 2021. There is no mention of those countries which are not listed by the FATF as countries with strategic deficiencies, or call for actions but are considered offshore havens for criminals to hide their funds.
Again, FBR is keen to know from the real estate professionals about transactions related to areas of concern or the border areas of Khyber Pakhtunkhwa and Balochistan as well as south Punjab as to what was the value of those transactions. Is it really the mandate of FBR being regulator of this sector? It appears that FBR is compromising the confidentiality of business sector and trying to meet their revenue targets in the name of streamlining this sector. Additionally, no distinction is provided for low, medium or high-risk jurisdictions within the country for the sale and purchase of real estate. Specifying the name of this area will help to curtail economic and development activities. Additionally, real estate investor and developer will stop investing in these areas to avoid compliance and confrontation with their regulators.
Moreover, FBR needs to issue additional guidelines that identify high risk areas for ML and CFT, 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.
FBR officials are keen to know if real estate professionals are maintaining compliance program including the policies and procedure, however, there is no mention in the law or threshold specifying the entities and individuals responsible for maintaining the compliance program, appointing compliance officer, and audit program. Interesting factors pertain to customer due diligence and beneficial ownership, enhanced due diligence and simplified due diligence that are also generic and need to be redrafted in view of the potential risks exposed by this sector. Current regulation does not serve the purpose.
The Regulations as per guidelines of FATF and internationally-accepted standards require 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? About reliance on third parties regarding performance of Customer Due Diligence (CDD), this must be done according to specific guidelines to protect data privacy and data breaches. Before asking information about CDD, FBR should ascertain that the data access and the reports generated must be traceable, auditable with activity logs to avoid any ambiguity, and any exclusion must be specifically covered in the policy document.
The questionnaire is circulated to already “Tax registered” DNFBPS which again means that the regulator is mainly exercising its might on already registered ones. The ones who are out of the tax ambit are still free from such obligations and the questionnaire overall seems to be in contrast to government’s amnesty scheme introduced earlier this financial year. FBR needs to move with the aim to streamline issues pertaining to DNFBPs which on the one hand address FATF action plan and on the other, generate economic activity in Pakistan. Measures like this will serve no purpose but will create disquiet in the business community.
These generic regulations, poorly drafted, do not meet the standards provided in guidelines issued by FATF and MER by AGP. The only way to come out of grey list is issuance of industry specific regulations and establishing independent anti-crime agency. In the absence of these, the illicit flows of funds will remain unchecked keeping us vulnerable to ML/FT.
In a Press briefing, FATF President announced: “As all action plan deadlines have expired, FATF strongly urges Pakistan to swiftly complete its full action plan before June 2021… a fully completed action plan including three outstanding areas will be verified and then members will test ‘sustainability’…severe deficiencies still remain relating to terror financing. It means the Mutual Evaluation Report [MER] process is also ongoing simultaneously with three remaining partially complied areas.
It is worth mentioning that while in the grey list, our governments offered unconstitutional asset-whitening-schemes and tax amnesties. Even 2021 started with extension of amnesty for developers, builders and buyers of properties under ‘Prime Minister’s Package for Construction Industry’, widely publicized at the website of FBR, while the same agency is mandated to regulate “real estate agents”. It is open mockery of FBR’s role in regulating one of DNFBPs, it notified.
In June 2021, Pakistan is going to face yet another review of its remaining compliance of three action items, out of total 27 under anti-money laundering and combatting financing of terrorism [AML-CFT] mandates agreed with Financial Action Task Force (FATF) in June 2018.
After remaining unsuccessful in last review of FATF, according to a report, Mr. Hammad Azhar said: “As you have seen, today the FATF itself is saying that we are 90 per cent close to achieving this goal…the residual three points on the FATF’s action plan will be completed soon….a lot of work has been done on the three points in which we are partially compliant…Pakistan is perhaps the only country in the world that is under the FATF’s dual scrutiny“.
As shown above, our policymakers and authorities have poor understanding of FATF/AGP guidelines and to implement the global best practices to counter ML/CFT. The complete roadmap to come out of grey list of FATF and effectively counter ML/CFT is available in the E-book, Pakistan Tackling FATF: Challenges and Solutions [AA Publications, Lahore, January 2021]. It highlights all shortcomings in existing laws/regulations/enforcement to counter ML/TF, tax evasion and other financial crimes. The Government paid no heed to it and has cut a sorry figure in the last review in February 2021. The same will be the fate in June 2021, if remedial measures and concrete steps for enforcement are not taken as narrated above and in the book. FBR needs trained workforce in countering ML/CFT and get all the DNFBPs/NPOs registered and compel them, especially political parties, to file tax returns and keep prescribed records/documents under industry-specific regulations.
Ms. Huzaima Bukhari, Advocate High Court and Visiting Faculty at Lahore University of Management Sciences (LUMS), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram, a leading law firm of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals. She has to her credit over 1500 articles on issues of public importance, printed in various journals, magazines and newspapers at home and abroad.
She has coauthored with Dr. Ikramul Haq many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
The recent publication, coauthored with Abdul Rauf Shakoori and Dr. Ikramul Haq, is Pakistan Tackling FATF: Challenges & Solutions
available at: https://www.amazon.com/dp/B08RXH8W46
She regularly writes columns for Pakistani newspapers and has contributed over 1500 articles on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.
Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation andVisiting Faculty at Lahore University of Management Sciences (LUMS).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions
available at: https://www.amazon.com/dp/B08RXH8W46
He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities),, government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC). Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E – Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer. His notable publications are; Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan, Rauf’s Research on Labour Laws and Income Tax Etc. His articles includes; Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards., Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan,, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates. The recent book, coauthored with Huzaima Bukhari & Dr. Ikramul Haq is Pakistan Tackling FATF: Challenges & Solutions
available at: https://www.amazon.com/dp/B08RXH8W46