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Regulating Money Service Business

Huzaima Bukhari & Abdul Rauf Shakoori

The flow of illegal proceeds is a challenge for the global community. The study conducted by United Nations Office on Drugs and Crime (UNODC) states that the total volume of criminal proceeds amounts to 3.6 percent of global gross domestic product GDP, with 2.7 percent (or US$ 1.6 trillion) being laundered through different means. The International Money Fund (IMF) also estimated that the volume of money laundering in the world is around 2.5 percent of the global GDP. In order to curtail this volume, shared efforts are being made to prevent criminals’ reach to legitimate financial systems so that resources are properly used to create more revenues to overcome the challenges of unemployment, health, education etc.

In this regard, the Financial Action Task Force (FATF) has established standards to provide guidance to member nations for formulating laws and regulations to counter this menace. However, the main challenges are about movement of illicit proceeds. In this advanced era where technology has become a necessity, although various avenues have been provided to the people for easy transfer and movement of their funds, yet there are threats of their misuse.

Criminals are always on the look-out for ways to transport their proceeds of crime. Though with the passage of time banking sector somehow is trying to implement the basic requirements of onboarding their customers and implementing ‘know-your-customers’ requirements and conducting proper due diligence, but still there are challenges.

Another sector which is more attractive for criminals to use as a channel for movement of illicit proceeds is money service business (MSB). The world’s biggest challenge is operation of unlicensed MSB playing a vital role in facilitating criminals to inject their illegal proceeds in the legitimate financial system. Criminals identify and use lapses in the system so as to skip the basic due diligence measures. Moreover, offering online transfer services without having a physical presence is another challenge as these are not only difficult to monitor but also provide criminals an opportunity to evade the basic screening requirements of money laundering and combating financing of terrorism.

Pakistan also faces the issue of unlicensed MSBs. Interestingly Pakistan was one of those countries that did not have formal laws to monitor money laundering activities until 2007. Similarly, there was no mechanism available until June 2004 to monitor remittances made through alternative remittance systems; especially through unregistered moneychangers. People were free to utilize the traditional banks or an unregistered alternative remittance system. Since there were no rules or mechanisms to regulate this activity, it was not considered a crime.

The International Narcotics Control Strategy Report (INCSR) has highlighted that though it is illegal to operate a hawala without a license in Pakistan, the practice remains prevalent because of poor enforcement and lack of penalties against illegally operating businesses. Unlicensed hawala/hundi operators are common throughout the border region and are widely used to transfer and launder illicit money through neighboring countries. Common methods for transferring illicit funds include fraudulent trade invoicing.

Different newspaper stories have highlighted the operation of unlicensed money changers that are facilitating illegal transfers of foreign currencies abroad. In these circumstances, Pakistan’s has an increased responsibility to counter illegal operations of unlicensed money changers and needs to take strict action against the unlicensed ones as they are the main drivers of movement of illicit proceeds. Government should devise mechanism of registration of MSBs and their automatic renewal and rules should also be introduced to provide threshold for transfer of funds by MSB agents so that their activities can be properly monitored as well.

Pakistan is struggling to comply with FATF action plan but the global body has many times expressed concerns regarding control over risk funding of terrorist financing. Pakistan’s mutual evaluation reports (MER) issued by Asia Pacific Group highlighted anomalies regarding regulations of MSBs. Moreover, the report also raised questions regarding understanding of our public and private sector officials related to Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT). Keeping in view the fact that there is a higher proportion of undocumented economy, the execution of due diligence process can be complex and time consuming. In this regard regulators have an increased responsibility to equip their staff with professional and advanced skills so that they can play an effective role in regulating this sector. Regulators should also ensure that people involved in this sector must be aware of their responsibilities of complying with the regulations. For this, issuance of comprehensive guidance can be an effective method to educate them. This would not only help them in their day to day compliance matters with reference to Foreign Exchange Manual and Anti Money Laundering Act, 2010 but they would also be made aware of their registration and renewal processes.

The most important factor which needs to be properly watched, investigated and reported is detection of suspicious transactions and cash transaction reporting. In the wake of increasing focus of global regulators on curbing the menace of Money Laundering, Terrorism Financing and Proliferation Financing related activities, governments are required to have comprehensive AML/CFT/CPF policy entailing guidelines on risk management approach in order to identify, assess, manage and mitigate such risks.

The mutual evaluation Report has highlighted that there are no obligations for dealers of foreign exchange and licensed money changers in Pakistan to report all cash and negotiable instruments in foreign currency over the value of USD $10,000. Though Pakistan amended its Anti Money Laundering Act, 2010 in 2020 and tried to address various concerns raised in the MER, however, detection and reporting of suspicious transactions require specific expertise, therefore, regulators should issue proper guidelines highlighting the different scenarios, typologies and red flags so that quality and authenticity of reporting could be improved.

The complexity of international transactions needs to be addressed as well, due to different regulatory frameworks of various jurisdictions as well as threshold requirements; criminals always exploit loopholes. Effective monitoring requires authorities to improve communication with their counterparts in other countries as well as execute MOUs of cooperation so that proper controls can be implemented which cannot be done informally between units or international or other government agencies. Rather this will require more formal arrangements. The local agencies must be legally empowered to coordinate and exchange information with other agencies to facilitate the collection of data in order to assist financial investigations.

The only way forward is that regulators must ensure that each of the MSB should adopt the risk-based approach, implement AML/CFT program, properly train its staff, and implement internal controls and testing. Regulators must ensure that all MSBs observe licensing requirements. Moreover, all the licensed MSBs should apply customer due diligence, monitor and screen their transactions to curtail potential risks. Pakistan’s next evaluation is scheduled in February 2022 where progress will be assessed with reference to strategically important AML-CFT deficiencies. Pakistan should focus on compliance of each and every sector so that it can bid farewell to the embarrassment which it is facing since June 2018.  


Huzaima Bukhari, Advocate High Court & Adjunct Faculty at Lahore University of Management Sciences (LUMS), is member Advisory Board and Visiting Senior Fellow 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, with Dr. Ikramul Haq

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