Daily Times

Money laundering is a complex type of a white-collar crime. It has far-reaching negative effects upon the economy of any country. What is money laundering? The Financial Action Task Force (FATF) identifies it as the processing of criminal proceeds to disguise their illegal origin. FATF being watchdog of governments’ financial activities to track any misappropriation related to money laundering regulations included Pakistan in its ‘grey list’ in June 2018. Let us understand how money laundering is being done in Pakistan.

Smurfing of money is a process where large amounts of money are divided into multiple small transactions, often spread out over many different accounts, to avoid detection. By investing in mobile commodities such as gems and gold, the same is easily movedto other jurisdictions.

Hundi is a major channel of money laundering in Pakistan. Overseas nationals send remittances to their relatives and friends through Hundi. It works as a credit transfer or IOU, and transfers money without actually moving it from one region to another. Allegedly, some foreign exchange companies use this process to hide their taxable earnings from government.

Physical bulk cash smuggling involves transferring cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement. The purchase of real estate with cash is carried out in different ways such as use of third parties to buy real estate, manipulation of property values, structuring of cash deposits to buy real estate, rental income to legitimise illicit funds, overseas-based criminals investing in real estate, purchase of real estate to facilitate other criminal activity, renovations and improvements to property, use of front companies, and trust and shell companies to buy properties.

Sponsorship to terrorists is provided by money launderers and other criminals who support them in a disguised manner. In such cases, all the money thatterrorists receive is actually ‘laundered’ money because it is kept hidden, and neither its original source nor its destination is revealed to government.

Pakistan, Iran, Afghanistan and India, have a high volume of opium cultivation and trade origins. Since their borders are not strictly protected and monitored, drug traffickers move drugs across the border and get cash in return from drug lords.

Laundering through trade involves under or over-valuing invoices to disguise the movement of money. For example, the art market has been accused of being an ideal vehicle for money laundering due to several unique aspects of art such as the subjective value of art works as well as the secrecy of auction houses about the identity of the buyer and the seller.

In cash-oriented businesses, typically expected to receive a large proportion of its revenue as cash, accounts are used to deposit criminally derived cash claiming it as legitimate earnings. Service businesses are best suited to this method, as such enterprises have little or no variable costs and/or a large ratio between revenue and variable costs, which makes it difficult to detect discrepancies between revenues and costs. Examples are parking structures, strip clubs, tanning salons, car washes, arcades, bars, and restaurants.

Trusts and shell companies disguise the true owners of money. Normally, they use the slang term rathole, though that term usually refers to a person acting as the fictitious owner rather than the business entity.

In round-tripping, money is deposited in a controlled foreign corporation offshore and then shipped back as a foreign direct investment, exempt from taxation. A variant on this is to transfer money to a law firm or a similar organisation as funds on account of fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation.

Since Pakistan has almost nil agricultural tax on agri production, people claim huge sums of money as profits earned through such activities. Criminals show their illegal money as an outcome of sale proceeds of some antiques either discovered by them or received through inheritance. Pakistanis visit the shrines of holy saints and offer alms and other cash amounts as charity there. Except a few shrines under government control, all such shrines’ income along with its source is not known.

An ideal way for corrupt politicians, government officers and other criminals is to show their ill-gotten money as an outcome of prize bond draws

An ideal way for corrupt politicians, government officers and other criminals is to show their ill-gotten money as an outcome of prize bond draws. Another novel way to launder money is to convert Pakistani rupees received as bribe into foreign currency of higher value such as US Dollars or Euros. Nowadays, criminals use TV channels or other platforms to hold phony game shows or prize schemes to show their money as an outcome of the same. Phony NGOs are registered by criminals to show that either they collected funds through community participation, donations or simple fundraising.

Foreign Remittances and wire transfers are very safe instruments of laundering money due to the encouraging policies of government. Criminals often take advantage of tax amnesty schemes to legalise their unreported assets. Similarly, criminals show their illegal money as proceeds of income from businesses carried out in the tax-exempted areas such as the erstwhile FATA and PATA. The undocumented economy of Pakistan results in criminals declaring their illegal wealth as an outcome of some unregistered business such as businesses involving service provision. The Afghan Transit trade is blamed as a source of money laundering for criminals. In one incident, expensive boating equipment meant for high seas were booked through this transit trade ignoring the fact that Afghanistan is a country without any sea.

Curbing of money laundering will cause a major decline in other criminal activities such as drug trafficking and terrorist financing. To end this menace, strong legislation, strengthening the rule of law, close liaison of AML agencies at the national and international levels, effective monitoring at borders, and strict accountability of politicians and the elites is required.

The writer is an officer in the Federal Investigation Agency, and can be reached at shahidilyas1@gmail.com