Money-Laundering

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Pakistan is on top of the list of many counts, each of these could put the country in a special category considered “rogue” among the comity of nations. While in the present world environment eradicating terrorism is of the utmost priority, there are inter-linked problem areas that need to be simultaneously tackled. Among the most important is to curb, if not altogether eliminate, money-laundering.

Today Pakistan is awash with liquidity, the very legitimate reasons for the large influx of foreign exchange (FE), being 9/11 and the events immediately thereafter. The crackdown on “Hundi” payments by western governments was emulated by Arab governments, all employers were instructed to make their employees send home remittances through official channels. Official inward remittances climbed 3 times to beyond US$ 4 billion annually. As a “frontline ally” because of support in the “war against terrorism”, US Aid in the form of credit, outright grants and rental payments for use of our air bases/transit facilities added to our FE reserves, added to by other countries of the developed world. Debt-forgiveness by some countries aside, many other countries re-scheduled debt to very favourable terms, virtually making it interest free. Countries to whom our textiles (and other traditional exports) ware targetted for export eased their quota restrictions and encouraged entrepreneurs to look at economic opportunities in Pakistan. And then came the most important ingredient, the non-resident Pakistani (NRP) suddenly re-discovered Pakistan.

Previous to 9/11 and for many months thereafter the NRPs did not go beyond routine remittances to Pakistan, blue collar workers started increasingly using the official route. Both Pakistani businessmen and white-collar workers held their breath for nearly 2 years after 9/11 before their new-found insecurity in their adopted land hit them, and hard at that. With accusations of nuclear smuggling, terrorism, drug smuggling, money-laundering, human rights abuses, etc proliferating against Pakistan in the new world environment (every important visitor to Pakistan bombards President Musharraf with these questions), Pakistanis abroad became increasingly apprehensive about physical and monetary security, they began to sending part of their hard-earned savings home to Pakistan. At first it was little more than a gentle stream, later it turned into a flood.

Whether official or unofficially, most of it unofficially, money did not stay in the banks. Some of it went into the Stock Markets, a very heavy amount started a real-estate boom, a house on Margalla Road in Islamabad valued at US$ 400000-500000 now costs at US$ 2-2.5 million, if it is available. It has driven the middle class out of the property market, the poor do not even dream about it. The 5 times “great leap forward” has taken place in the span of 2 years and while not the average jump countrywide (the average increase being 2.5 to 3 times) land speculation has positive promise, making it one of the most lucrative real-estate markets in the world. Is it any surprise that other than NRPs, many other “investors” want to ride the boom in Pakistan? While most of it is destined for (and is from) legitimate transactions, what guarantee that money tainted by criminality in one form or the other is not seeking a profitable haven? Genuine investment targeting profit is welcome but one must take care that it is not from the coffers of drug smugglers, mafia funds, diverse underworld gangs, etc.

There are clear signs that Arab investment is seeking institutionalized profits in financial entities and real estate, this will enhance and sustains development, incentives must be given to divert the money flow into manufacturing also. However the large cash remittances must be monitored, countries like Singapore have for years required banks to report large inflows with suspicious origins, remittances could be tainted by criminality, corruption and/or could be illegal transfer of wealth to evade taxation. There is a very fine line between the legal and the illegal, but there must be concern about funds going to Islamic extremists, close monitoring by SBP must ensure that “hot money” does not flow into (or through) our economy, after all a lot of funds from abroad flow into Islamic religious institutions as charity. Also what about funds for permanent refugees? A fair percentage of Afghans may be genuine refugees, how and why are they owning businesses in Pakistan? Before the Afghans we got an influx of Iranian refugees when the Shah of Iran fell in 1979, they remain in business today as Pakistanis. To make matters more serious, what about their involvement in businesses and real estate even in the country’s capital? What precautions have we taken to stop illegal money from countries like Bangladesh, Sri Lanka, India, etc being invested in Pakistan to take advantage of the recent bonanza?

Whether Bangladeshi or Afghan or Iranian or Sri Lankan, etc what is the modus operandi for money laundering? A trusted Pakistani or a Pakistani entity will be employed as a “front”, with a treasure chest he will acquire real estate, shares in manufacturing companies, stakes in financial institutions, etc. Illegal money will thus become an official part of the economy. The usual practice in an underdeveloped country like Bangladesh would be to transfer surplus cash to evade taxation; corporate entities and individuals will acquire “loans” from financial institutions and transmit these through third, fourth and even fifth countries to Pakistan. These lost funds from its economy would be catastrophe for Bangladesh. As the recipient of funds Pakistan may not look a “gift horse in the mouth”, still such funds should be a matter of great concern.

Both Pakistan and Bangladesh (and other countries) must work together to ensure that money-launderers are not allowed to run riot. Prime Minister Shaukat Aziz should get into the act, as the former Head of Citigroup’s “Private Banking Unit”, mandated by Citigroup Chairman John Reid to clean out the stables after a select US Senate Committee took Citigroup to task for money-laundering, he knows a thing or two about money-laundering. For Pakistan the danger is that unscrupulous elements will use money to build up “contacts” in official circles so as to not only keep the SBP out but also intelligence agencies away from cynosure. While researching this article we were politely told to “lay off” the individual concerned, one gives benefit of the doubt to the senior bureaucrat as he must not know the background. How long before such elements burrow themselves into the bureaucracy and start dictating official policy? This is classic “white-collar” criminality! It would be prudent for our intelligence agencies to seek out those in the country who suddenly seem to be so awash with liquidity that they are buying up everything in sight, real-estate to leasing companies to telecommunications, etc. For a person with an endless supply of money, the man being “researched” for this article had no tax records in the country he lived in for 15 years, maybe his records have turned “YELLOW”!

Under Dr Ishrat Hussain, the SBP has gained a tremendous reputation, it has developed into one of the finest financial monitoring institutions in the world. What his predecessor Dr Yaqub started the SBP Governor has force-multiplied many times over. While institutionalizing impartial checks and balances he has set in such practices that even if his successor is a favourite in-law or remains drunk in office, the Standard Operating Procedures (SOPs) will be difficult to circumvent in the foreseeable future. However the SBP Governor cannot be everywhere, more importantly the SBP cannot have knowledge of everything. Therefore a coordinated effort is required alongwith other governments and their intelligence agencies working together to ensure that Pakistan does not become a haven for money-laundering.

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