INTRODUCTION
“The money screamed across the wires, its provenance fading in a maze of electronic transfers, which shifted it, hid it, and broke it up into manageable wads which would be withdrawn and redeposited elsewhere, obliterating the trail. ” Nest of Vipers by Linda Davies We have all probably been guilty of hiding a little money, either away from the tax man, the ‘better half’, or both, but with the increase of sophisticated technology and today’s opportunity for global banking, money laundering is becoming much harder to detect.
However, nobody could have anticipated the devastation or foresee the repercussions that resulted from failure to detect this criminal infiltration. “Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source and/or destination of money and is a main operation of underground economy. ” In the past, the term “money laundering” was applied only to financial transactions related to organized crime. Today its definition is often expanded by government regulators (such as the United States Office of the Comptroller of the Currency), “To encompass any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting.
As a result, the illegal activity of money laundering is now recognized as potentially practiced by individuals, small and large business, corrupt officials, members of organized crime (such as drug dealers or the Mafia) or of cults, and even corrupt states or intelligence agencies, through a complex network of shell companies based in offshore tax havens.
The increasing complexity of financial crime, the increasing recognised value of so-called “financial intelligence” (FININT) in combating transnational crime and terrorism, and the speculated impact of capital extracted from the legitimate economy has led to an increased prominence of money laundering in political, economic and legal debate. In many jurisdictions, money laundering is seen as an “activity based” offense. The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin.
This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source. Illegal arms sales, smuggling, and the activities of organized crime, including for example drug trafficking and prostitution rings, can generate huge sums. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimize” the ill-gotten gains through money laundering. When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved.
Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention. As money laundering is a necessary consequence of almost all profit generating crime, it can occur practically anywhere in the world. Generally, money launderers tend to seek out areas in which there is a low risk of detection due to weak or ineffective anti-money laundering programmes. Because the objective of money laundering is to get the illegal funds back to the individual who generated them, launderers usually prefer to move funds through areas with stable financial systems.
HISTORY ACT OF MERCHANTS IN CHINA
It is very debatable as to how long the process of money laundering has been occurring for. In his book Lords of the Rim, historian Sterling Seagrave describes how, more than 3,000 years ago, merchants in China hid their wealth for fear that rulers would take the profits and assets they had accumulated through trade. The techniques he describes-converting money into readily movable assets, moving cash outside the jurisdiction to invest it in a business, and trading at inflated prices to expatriate funds are used today by sophisticated money launderers. From this perspective a primitive form of money laundering and indeed tax evasion was established, in that money was hidden, moved and invested despite the fact that someone else had a claim. Since then the principles of money laundering have not changed, but the mechanisms have.
The term “money laundering” is said to have evolved from the Prohibition era in the United States. Many methods were devised to disguise the origins of money generated by the sale of then-illegal alcoholic beverages. Following Al Capone’s 1931 conviction for tax evasion, mobster Meyer Lansky transferred funds from New Orleans slot machines to accounts overseas. After the 1934 Swiss Banking Act which created the principle of bank secrecy, Meyer Lansky bought a Swiss bank where he would transfer his illegal funds through a complex system of shell companies, holding companies and offshore accounts.
IN ORDER TO FACILITATE TRADE
However it is also known that money laundering was developed in order to facilitate trade. In many countries the networks that are now dominated by criminals were set up within approximately the past twenty or so years by international traders who were unable to operate due to exchange control measures and a system of customs inspection that resulted in traders operating their businesses entirely offshore. In the case of some countries, which still have strict currency transaction requirements a similar development of laundering occurs.
GAMBLING AND “LAUNDERIES”
One laundering method was legal gambling via slot machines: this could efficiently transform giant volumes of coins into easily movable currency. Another business so employed was laundries, and from this particular aspect of the trade, the term “laundering” emerged.
The reason that laundromats were favoured for use in this activity was that all money which went into the business was in the form of coins deposited into the machines. Seeing as there was never any tally of the money kept at the time of deposit, the operators of the business could add extra money, gained from illegal activities, on top of the days books, making it seem as if the money were gained through the legitimate operation of the business. Not to mention the fact that the term “to launder” means to make clean, and when one launders money, they are turning what was illegally gained money, into money which would be thought of as legal and lawfully acquired.
In the US it is known that prohibition and a restriction on gambling made large amounts of cash for those prepared to break the embargoes, which led to a dramatic increase in financial crime. Several mechanisms were used to disguise the origins of the large amounts of money generated by the import and sale of alcohol and other rackets such as gambling, of which some was illegal. Ironically, one of the methods of concealing the source of the money was legal gambling. Criminals received payment in cash, often low denomination coins, which created an immediate problem over what to do with that money. If the coins were put into the bank, the questions would be asked, therefore, opening a cash business was the obvious thing to do.
Slot machines and laundries were a suitable business, so according to the rumour, which may or may not be true, the term ‘money laundering’ was invented. From here criminals moved into businesses where the returns were greater. They formed law firms, accountancy practices, bought banks, film studios, engineering concerns and even governments. If they did not buy the whole organization, they bought, or in some other way obtained the co-operation of someone within the company.After September 11, 2001, money laundering become a major concern of the US Bush administration’s war on terror, although critics argue that it has became less and less an important matter for the White House.
Based in Luxembourg, Clearstream, “a bank of banks” which practice “financial clearing”, centralizing debit and credit operations for hundreds of banks, has been accused of being a major operator of the underground economy via a system of un-published accounts; Bahrain International Bank, owned by Osama bin Laden, would have profited from these transfer facilities. The scandal prompted Andre Lussi, Clearstream CEO, to resign on December 31, 2001; several juridical investigations were opened; and the European Commission was interpelled by European Members of Parliament (MPs) Harlem Desir, Glyn Ford and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the 10 June 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way.
The international response to the underground economy has been co-ordinated by the Financial Action Task Force on Money Laundering (“FATF”, also known by its French acronym of “GAFI”), whose original 40 principles form the basis of most international responses to money laundering activity. A further 8 principles, designed to counteract funding to terrorist organisations, were added on June 30, 2003 in response to the September 11, 2001, with another added 22 October 2004, to form what are now known as the “40 + 9” principles of anti-money laundering and counter-terrorism funding (AML/CTF). Compliance with, or a movement towards compliance with, these principles is now seen as a requirement of an internationally active bank or other financial service entity. Several FATF-style regional bodies exist, such as the Asia Pacific Group on Money Laundering.
MONEY LAUNDERING AND GLOBALIZATION
Criminals are now taking advantage of the globalization of the world economy by transferring funds quickly across international borders. Rapid developments in financial information, technology and communication allow money to move anywhere in the world with speed and ease. This makes the task of combating money laundering more urgent than ever. The deeper “dirty money” gets into the international banking system, the more difficult it is to identify its origin. Because of the clandestine nature of money laundering, it is difficult to estimate the total amount of money that goes through the laundry cycle. Estimates of the amount of money laundered globally in one year have ranged between $500 billion and $1 trillion.
Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem governments have pledged to address. There have been a number of developments in the international financial system during recent decades that have made the three F’s-finding, freezing and forfeiting of criminally derived income and assets-all the more difficult. These are the “dollarization” (i. e. the use of the United States dollar in transactions) of black markets, the general trend towards financial deregulation, the progress of the Euromarket and the proliferation of financial secrecy havens. Fuelled by advances in technology and communications, the financial infrastructure has developed into a perpetually operating global system in which “megabyte money” (i. e. oney in the form of symbols on computer screens) can move anywhere in the world with speed and ease.
THE NATURE OF MONEY LAUNDERING
Money laundering involves transforming money from crime (“dirty money”) into money that (a) Has the appearance of coming from a legitimate source, and (b) Makes the criminal origin of the money difficult to trace (“clean money”). Effective money laundering enables criminals to remove themselves from their criminal activities, making it is harder to prosecute them, and confiscate their proceeds. Laundering money also enables criminals to enjoy the benefits of their crimes including investing their profits for future criminal activity.
The hawala method of transfer of funds is, in short, an informal method of debt settlement, built upon a mutual trust of each party to the transaction. Transfers of hawala funds are facilitated through an informal value transfer system by active hawaladar brokers, who maintain relationships of absolute trust between each other, so they are in a position to broker and execute swaps of value between themselves with the minimum amount of administrative records and avoiding local bureaucratic controls.
In Hussain and Ali [2005], Lord Justice Hooper described the detail of the process as follows (at paragraph 25 of the judgement): “Hawala banking is an arrangement by which individuals (or intermediaries who have collected money from individuals) deposit money, usually in the form of modest amounts of cash, with a hawaladar in, for example, the UK to be remitted to beneficiaries abroad, commonly in the country from which the remitters’ families originate, for example Pakistan. Effective anti-money laundering laws make it easier to detect and investigate money laundering activities by establishing links between criminal activity and the funds generated from that activity.
CAUSES OF GLOBAL MONEY LAUNDERING ILLICIT DRUG TRADE
The production and transit of illegal narcotics and psychotropics is the single biggest criminal activity in the world in terms of cash flow. Strictly speaking, there are three major divisions in terms of production, with heroin production concentrated in the states encompassing the so-called ‘golden triangle’, methamphetamine production concentrated in the industrial entres of some of the region’s largest states, and marijuana production occurring sporadically across the region.
It is heroin and methamphetamine which represent the lion’s share of drug earnings. Of the three drugs, the greatest growth in terms of production and consumption is exhibited by methamphetamine, reflecting the susceptibility of the drug trade to changing fashions in consumer markets. It is important to recognise that profits from the production of and sale of drugs do not revert directly to the producer. Like any other which requires secondary processing and distribution, as well as financial manipulation and re-investment, the trade in illicit drugs produces income at each stage of the business.
Rather than accepting the stereotype of a number of monolithic ‘cartels’ to whom all profits revert, it may be more useful to consider the likelihood that the proceeds of drug-related crime – like the proceeds from other trafficking crimes – are increasingly dispersed with the growing globalisation of the drug market. While it is true a number of large (often ethnically based) networks control different portions of the drug production market in the region, contributions to processing and transit at different locations in the region add to the distribution of proceeds from these crimes across a large number of jurisdictions and a wide variety of individuals.
Of particular importance in the money laundering cycle are those jurisdictions whose largest cities provide a significant level of financial services to an international market, and those jurisdictions whose ports provide criminals with considerable ‘value added’ in the smuggling of contraband (or of illegal proceeds themselves).
PROSTITUTION
Prostitution, and the additional cross-border trafficking in women and children which accompanies it, continues to be a problem across the region. In Southeast Asia, domestic prostitution operations are augmented by the illegal migration, forcible transport or sale of individuals from one part of the region to another.
This situation has been exacerbated by the current economic crisis, according to observers, as the effects of economic recession force more to seek an income from the sex trade either at home or abroad. While some are led by economic necessity into the trade, others are kidnapped, sold by their families, or otherwise compelled to co-operate with traffickers. International ‘sex tourism’, a phenomenon in which wealthy foreign men travel from outside the Asia Pacific to countries with widespread prostitution and child-sex problems, attracts much of the attention associated with prostitution in the region. However, it is important to note that prostitution aimed at domestic markets accounts for a considerably higher degree of revenue than the international trade, despite its lower profile.
CORRUPTION
A recent study dealing with approaches to corruption from an international perspective notes that it is difficult to treat the issues of corruption and organised criminality as separate problems, as corruption often provides the necessary cover for other criminal activities. This is particularly true in cases where those perpetrating criminal acts are individuals or groups with a high degree of integration into the legal economy and legitimate society. The same study subdivides the issue of corruption into four separate areas, as follows: a. Bribes and ‘kick-backs’: payments demanded or expected in return for being allowed to do legitimate business. The payment becomes the license to do business.
Those who make the payments are allowed to compete or win contracts. b. Election/campaign corruption: illegal payments made at the time of elections to ensure continuing influence. c. Protection: officials accept payments (or privilege) from criminal organizations in exchange for permitting them to engage in illegitimate businesses. d. Systemic top-down corruption: national wealth is systematically siphoned off or exploited by ruling elites. 21 Any attempt to quantify the funds derived from corruption which are then laundered to appear of legitimate origin (or to remain hidden from view in foreign accounts and investments) faces the same problems of data and methodology described above.
However, there is considerable anecdotal evidence to suggest that corruption in all forms remains a significant ethical, political and fiscal problem in the world. Five of the states possessing the ten largest economies in the region – and most of those comprising the leading economies in Southeast Asia – have been repeatedly assessed as exhibiting significant levels of corruption by the leading independent international review of corruption perceptions. In several states of the region, including one current high-profile case, effective money laundering legislation has been watered down or challenged on procedural grounds in order to exclude public sector corruption from the ist of predicate crimes.
Asia were allegedly channeled into the electoral process in North America, highlights the ‘global’ nature of a regional problem and potential implicates private and public-sector actors in a number of states. Another incident, in which one state launched an internal investigation into the finances of the outgoing national government, yielded the conclusion that as much as $100 million of public funds in that state had been diverted to European accounts and investments over two decades by elite members. As much as $4 billion more was alleged to have been laundered and presented as ostensibly legal private holdings inside the country.
Systemic corruption takes on a different hue where the cloak or pretence of legality is practically abandoned in favour of widespread state involvement in activity which would by any reasonable international standard be considered criminal. Two individual governments in Southeast Asia, subject to increasing scrutiny over its role in the international heroin trade, are alleged to condone tacitly – and on occasion to be directly involved in – the production and trafficking of illicit drugs. Several other states in Southeast Asia exhibit similar characteristics, albeit to a lesser degree and with the mitigating circumstance of underdevelopment which of necessity compromises the strength of government forces versus those of the traffickers. In several cases, the constitutional ability of the armed forces to engage in commercial activity serves as the starting point for involvement in criminal activity.
SMUGGLING
One of the biggest revenue items in non-drug smuggling activities is of course the arms trade. Here the armed forces may again play a crucial role, blurring the distinction between states and criminal actors in some cases. Even in those jurisdictions where civilian control of the military is well established, the size of the armed forces and its access to weaponry may encourage such activity, especially where accounting and inventory standards may be more easily exploited.
This has been most clearly highlighted in the international arena in the case of states in the former Soviet Union, where illegal arms sales have formed a significant component of the economic base of the armed forces and of individuals within the services. 27 However, in a number of the larger military establishments of Southeast Asia, similar practices are suspected, and in a number of cases have been uncovered.
FRAUD
Fraud, taking a wide variety of forms, is a fast-growing source of criminal revenue in the region, abetted through the augmentation of traditional methods with newer avenues of fraudulent behaviour such as credit card fraud or internet stock promotions. The expansion of new stock markets on the Asian mainland is a particular source of worry, as the growth of these markets has been unmatched to date with adequate supervisory and regulatory structures. 9 In the better-established stock markets of the region, numerous cases of fraud have also come into the spotlight in recent years, as the economic crisis has forced previously hidden transactions into view. Credit card fraud has seen remarkable growth in both reported incidents and scale, particularly on the East Asian mainland and in the region’s leading financial centres.
TAX EVASION
While it is probably impossible to assess with much accuracy the amount of legitimate tax revenue which goes unreported in the region, it is also likely that. It is true that criminal organisations avoid taxation, primarily for the reason that the source of revenue itself is illegal. But individuals whose public profile is far less dramatic than that of a Mafia ‘don’ also practice tax evasion to a great degree.
In the United States, an estimated 15% of personal taxable income goes unreported, and this figure is estimated to be amongst the lowest rates of evasion in the OECD. Far higher degrees of tax evasion are found in Mexico, Brazil, Indonesia and other large developing economies. These funds are often concealed through the use of offshore financial centres and other money laundering techniques familiar to high-profile criminals.
TERRORISM
A controversial area of focus for counter-terror experts is the global network of informal money-transfer systems (known in some countries as hawalas), which have long been popular with overseas workers sending home remittances.
They have come under particular scrutiny since September 11th, but have not been banned in most countries. Experts say hawalas are extremely hard to regulate and still offer one of the cheapest ways for poor people to send money abroad. Nikos Passas, an expert on financial crime at Northeastern University in Boston, says hawalas have had too much attention, given the wide range of fund-raising and transfer methods used by terrorists. He and other experts contend that terrorist networks today are more likely to use money-laundering methods (such as falsified trade documents) for funds transfers. “Trade is not transparent,” according to Mr Passas, making it an attractive outlet for terrorist groups.
Other experts agree, pointing, for example, to the falsification of documents by terrorist groups to launder money in Africa. Even though terrorist/narcotic organisations have become more careful and skilled in their transfer of funds across the borders, some still use the banking system. Often camouflaged through real business deals. This make it difficult to detect and to prosecute. The reports on money laundering to the Financial Crime Police “Okokrim” has exploded. Money is also laundered through “legitimate” store fronts as for example restaurants and groceries. These also function as employers for other organisation members. Total money laundering reports to “Okokrim”:
Even though terrorist/narcotic organisations have become more careful and skilled in their transfer of funds across the borders, some still use the banking system. Often camouflaged through real business deals. This make it difficult to detect and to prosecute. The reports on money laundering to the Financial Crime Police “Okokrim” has exploded. Money is also laundered through “legitimate” store fronts as for example restaurants and groceries. These also function as employers for other organisation members.
HOW MUCH MONEY IS LAUNDERED PER YEAR?
By its very nature, money laundering occurs outside of the normal range of economic statistics. Nevertheless, as with other aspects of underground economic activity, rough estimates have been put forward to give some sense of scale to the problem.
A 1996 estimate of the International Monetary Fund reveals that ‘money laundered annually amounts to 2-5% of world GDP (between 800 billion and 2 trillion US dollars in today’s terms). The lower figure is considerably larger than an average European economy, such as Spain’s. ’ Using 2002 statistics, these percentages would indicate that money laundering is US$193 billion. The lower figure is roughly equivalent to the value of the total output of an economy the size of Spain. One of the most serious microeconomic effects of money laundering is felt in the private sector. Money launderers often use front companies, which co-mingle the proceeds of illicit activity with legitimate funds, to hide the ill-gotten gains.
In the United States, for example, organized crime has used pizza parlors to mask proceeds from heroin trafficking. These front companies have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates. In some cases, front companies are able to offer products at prices below what it costs the manufacturer to produce. Thus, front companies have a competitive advantage over legitimate firms that draw capital funds from financial markets. This makes it difficult, if not impossible, for legitimate business to compete against front companies with subsidized funding, a situation that can result in the crowding out of private sector business by criminal organizations. Clearly, the management principles of these criminal enterprises are not consistent with traditional free market principles of legitimate business, which results in further negative macroeconomic effects.
Financial institutions that rely on the proceeds of crime have additional challenges in adequately managing their assets, liabilities and operations. For example, large sums of laundered money may arrive at a financial institution but then disappear suddenly, without notice, through wire transfers in response to non-market factors, such as law enforcement operations. This can result in liquidity problems and runs on banks. Indeed, criminal activity has been associated with a number of bank failures around the globe, including the failure of the first Internet bank, the European Union Bank.
Furthermore, some financial crises of the 1990s — such as the fraud, money laundering and bribery scandal at BCCI and the 1995 collapse of Barings Bank as a risky derivatives scheme carried out by a trader at a subsidiary unit unraveled — had significant criminal or fraud components.
LOSS OF CONTROL OF ECONOMIC POLICY
Michel Camdessus, the former managing director of the International Money Fund, has estimated that the magnitude of money laundering is between 2 and 5 percent of world gross domestic product, or at least $600,000 million. In some emerging market countries, these illicit proceeds may dwarf government budgets, resulting in a loss of control of economic policy by governments. Indeed, in some cases, the sheer magnitude of the accumulated asset base of laundered proceeds can be used to corner markets — or even small economies.
Money laundering can also adversely affect currencies and interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher. And money laundering can increase the threat of monetary instability due to the misallocation of resources from artificial distortions in asset and commodity prices. In short, money laundering and financial crime may result in inexplicable changes in money demand and increased volatility of international capital flows, interest, and exchange rates. The unpredictable nature of money laundering, coupled with the attendant loss of policy control, may make sound economic policy difficult to achieve.
ECONOMIC DISTORTION AND INSTABILITY
Money launderers are not interested in profit generation from their investments but rather in protecting their proceeds. Thus they “invest” their funds in activities that are not necessarily economically beneficial to the country where the funds are located. Furthermore, to the extent that money laundering and financial crime redirect funds from sound investments to low-quality investments that hide their proceeds, economic growth can suffer. In some countries, for example, entire industries, such as construction and hotels, have been financed not because of actual demand, but because of the short-term interests of money launderers.
When these industries no longer suit the money launderers, they abandon them, causing a collapse of these sectors and immense damage to economies that could ill afford these losses.
LOSS OF REVENUE
Money laundering diminishes government tax revenue and therefore indirectly harms honest taxpayers. It also makes government tax collection more difficult. This loss of revenue generally means higher tax rates than would normally be the case if the untaxed proceeds of crime were legitimate.
RISKS TO PRIVATIZATION EFFORTS
Money laundering threatens the efforts of many states to introduce reforms into their economies through privatization. Criminal organizations have the financial wherewithal to outbid legitimate purchasers for formerly state-owned enterprises. Furthermore, while privatization initiatives are often economically beneficial, they can also serve as a vehicle to launder funds. In the past, criminals have been able to purchase marinas, resorts, casinos, and banks to hide their illicit proceeds and further their criminal activities.
REPUTATION RISK
Nations cannot afford to have their reputations and financial institutions tarnished by an association with money laundering, especially in today’s global economy. Confidence in markets and in the signaling role of profits is eroded by money laundering and financial crimes such as the laundering of criminal proceeds, widespread financial fraud, insider trading of securities, and embezzlement.
The negative reputation that results from these activities diminishes legitimate global opportunities and sustainable growth while attracting international criminal organizations with undesirable reputations and short-term goals. This can result in diminished development and economic growth. Furthermore, once a country’s financial reputation is damaged, reviving it is very difficult and requires significant government resources to rectify a problem that could be prevented with proper anti-money-laundering controls.
SOCIAL COSTS
There are significant social costs and risks associated with money laundering. Money laundering is a process vital to making crime worthwhile.
It allows drug traffickers, smugglers, and other criminals to expand their operations. This drives up the cost of government due to the need for increased law enforcement and health care expenditures (for example, for treatment of drug addicts) to combat the serious consequences that result. Among its other negative socioeconomic effects, money laundering transfers economic power from the market, government, and citizens to criminals. In short, it turns the old adage that crime doesn’t pay on its head. Furthermore, the sheer magnitude of the economic power that accrues to criminals from money laundering has a corrupting effect on all elements of society.
In extreme cases, it can lead to the virtual take-over of legitimate government. Overall, money laundering presents the world community with a complex and dynamic challenge. Indeed, the global nature of money laundering requires global standards and international cooperation if we are to reduce the ability of criminals to launder their proceeds and carry out their criminal activities.
MONEY LAUNDERING AND PAKISTAN
“The ugly face of black money emerges in the corridors of power, political as well as administrative. ” In fact, Pakistan has been the worst victim of money-launderers as during the last 30 years, the successive governments showed an extremely benign attitude toward corruption, drug trafficking and tax evasion.
The government, on the one hand, introduced laws to counter money-laundering, and, on the other, floated schemes to allow the whitening of black money. All the same, various governments successively introduced novel schemes to declare untaxed and illegal money. They used this ‘weapon’ to win political rivals, to please their allies and to strengthen their rule. Also, CBR (Central Board of Revenue; responsible for the collection of federal taxes) has never bothered to unearth laundered money, rather always joined hands with the tax evaders and money launderers by providing them unprecedented concessional schemes to whiten their ill-gotten wealth.
These schemes were announced by the governments on the recommendations of CBR’s wizards in the name of improving tax collection! In its early years, Pakistan was not considered a favorable center for money-laundering. But certain developments in the recent past have contributed to a climate conducive for money laundering. The first one was the presence in the 1970s of a large expatriate community exceeding one million, particularly in the Middle East, who relied on non-formal banking facilities to remit their foreign earnings to Pakistan.
The other developments are “the burgeoning drug addiction”, an almost non-existent problem in the late 1970s, which emerged into a major one with alarming figures of 3. 1 million drug addicts out of which 1. million were heroin abusers; the introduction of schemes, which provided opportunities and facilities to do so without much fuss; the promulgation of the Economic Reforms Ordinance 1992 which aimed at attracting foreign exchange into Pakistani banks; the introduction of yet another scheme under which any Pakistani citizen can buy government-owned real estate auctioned by a government agency and no questions as to the source of funds will be asked from the buyers of plots as per decision of the government. Thus, Pakistan turned into a heaven for money-launderers.
METHODS OF MONEY LAUNDERING IN PAKISTAN
The principal methods used for money-laundering in Pakistan are as follows:
- Hawala/Hundi. Mostly used by expatriates to remit money to Pakistan.
- Bearer Investment Schemes. In existence for the last two decades providing an attractive opportunity for money-laundering.
In addition, the money to be laundered is mostly invested in real estate. Various other methods in vogue are: over/under invoicing of imports and exports; bogus imports/exports; double invoicing; currency smuggling; money declared as proceeds of agriculture (since the agricultural income is exempted from tax)/poultry; and bank loan methods.
THE SOURCES AND MAGNITUDE OF MONEY-LAUNDERING
The underground economy is the main source of black money. It consists of illegal business and financial activities such as drug trafficking, smuggling, insider trading, illegal arms sale, organized crime, bribery, embezzlement, extortion by force, computer fraud schemes, etc. In Pakistan, the banks, insurance companies, non-banking financial institutions, investment companies, money transmitters and real estate agents are all targets of money launderers.
The financial institutions, inadvertently or otherwise, support money laundering by providing means to convert cash into different types of financial instruments, to convert the currency of one country into the currency of another and to transfer funds to other financial institutions. The latest turn in the process of money-laundering is the replacing of gemstones as a tool for laundering money. The Western intelligence community has claimed that some very powerful terrorist groups are engaged in using gemstones, diamonds, tanzanite, and other commodities to store and launder money for terrorist activities across the globe.
According to US Drug Enforcement Administration March 2002 Brief, Pakistan is not considered a major center for international money laundering activity. However, Pakistan-based traffickers are extensively involved in the production and transportation of opiates and hashish. This suggests that drug proceeds are laundered within the country. Another study estimates that ‘approximately $ 2 billion are transferred each year through the Hundi system alone. ’ According to the UNDCP report, the domestic heroin market in Pakistan is around Rs. 35 billion (1994 figures) per year and turnover of the heroin industry is 5 % of the 1992-93 GDP and 20-25 % of the total estimated “parallel” economy. [Quoted in Ijaz Hussain]
The same report estimates that ‘most of the foreign exchange in the “parallel” currency market was utilised to import foreign goods and for flight of capital during the 1980s. Unofficially funded imports or smuggled goods (through the Afghan transit trade, baggage rules, and diplomatic bonded warehouses among others) constitute 10 % of the official imports. Revenues generated from the sale of illicit drugs were estimated at $ 1. 5 billion in 1992.
Drugs earnings averaged $ 1 billion per year during 1985-91. According to a conservative estimate, Rs. 600 billion is generated every year by the parallel economy. Add to this, the black money generated through smuggling in goods and narcotics trade that is between Rs. 00 billion and Rs. 500 billion. This makes a whooping Rs. 1000 billion. And, according to ‘official and independent experts, ever-growing black money is Rs. 1. 8 trillion, about 70 % of the total economy. ’ These rough estimates suggest the sheer volume of laundered money in Pakistan.
THE STATE OF LEGISLATION REGARDING MONEY-LAUNDERING
Since its inception, the Pakistani state has been infected with corrupt practices. Hence, the laws were also enacted to deal with it. Pakistan is not deficient in laws and regulations, which purport to combat and eradicate the twin menaces of corruption and money laundering. In fact they are quite numerous and comprehensive.
There is nothing wrong with the laws but the manner and the method with which they are applied is defective. The only way is to apply the laws even-handedly and impartially. This shows the need and importance of the rule of law in Pakistan. Our country is passing through the worst crisis of resource mobilization manifesting it in the huge budgetary deficits. Revenue has to be collected and all measures both stringent and persuasive have to be taken in that direction. The government has, therefore, to plan in terms of a well-thought-of anti-money-laundering cum asset seizure legislation to draw upon the huge reservoir of the drug and untaxed money.
In the context of the prevailing grave challenge to combat terrorism, coupled with money-laundering crises, and the problem of ever-growing black money, there is an urgent need to launch a well-thought for anti-money laundering law to block this huge money becoming a lethal weapon in the hands of Mafias who now control the economy as well as governments. It’s clear that all this requires more and more regulations and legislation endowing the government with more and more free hand to control the already heavily controlled economy.
After the gory events of September 11, 2001, the government of Pakistan too has given extraordinary importance to the task of countering money-laundering. The State Bank of Pakistan, Securities and Exchange Commission of Pakistan, and other financial institutions are paying more and more attention to the issuance and implementation of rules and regulations to stop the laundering of money. But, the overall situation in this regard is not satisfactory.
The SECP (Securities and Exchange Commission of Pakistan) and Governor State Bank of Pakistan, perhaps, are not aware of the fact that even today when the Pakistani government, under tremendous pressure from the US and other states, is introducing anti-money laundering law, the CBR is committed to giving a free hand to money launderers assuring them that no question would be asked if they remit their ill-gotten money from outside through banking channels and surrender the foreign currency to the state and get Pakistani rupees as encashment.
The CBR in its letter no. F4(34)/ITP/2002 dated 29-02-2002 reaffirmed that “the Department would adhere to its policy of not probing the foreign remittance” brought into Pakistan by any “person. In the Income Tax Ordinanace 2001, promulgated on the dictates of IMF on 13 September, 2001, a special provision [section 111(4)] has been inserted giving a free hand to money launderers, that no question will be asked to them if they remit (laundered is more appropriate term) their ill-gotten money from outside through banking channels and surrender the foreign currency to the State Bank of Pakistan and get Pakistani rupees as encashment.
A REVIEW OF THE TAX AMNESTY SCHEME
It is believed that more than half of the estimated black money is still in the country. The tax amnesty scheme launched by the present government of General Pervez Musharraf has proved more successful then any such scheme launched by different governments during the last over 40 years.
The scheme aimed at widening the tax net through providing yet another opportunity to the tax evaders to whiten their untaxed concealed assets has yielded about 105 billion in tax as about 88000 persons made declarations of over 103 billion rupees till June 30, 2000. There are indications that deadline may be extended upto Sept 30 in view of the demand from relevant circles. The TAS 2000 was described by the government spokesman as most successful amnesty scheme in the country’s history, as the total tax recovered under the 1958, 1969, 1976 and 1997 schemes amounted to just rupees one billion. The most recent scheme of 1997 had fetched only rupees 141 million. The results of TAS 2000 are far better than expected by the Ministry of Finance and even the Central Board of Revenues who always make inflated claims about such Schemes.
Even they were expecting declarations to the tune of 60/70 billion of concealed money. Amnesty taxation, to begin with was initiated during the regime of Ayub towards the end of 1958. As a result of the amnesty scheme of 1958, 71,289 declarations of excess income were filed by 266,183 taxpayers. Since Ayub’s martial law was the first in the history of Pakistan response by 72,289 taxpayers as against total taxpayers numbering 226,183 was significant. However, in 1969 during the second spell of martial law under Yahya the number of excess income declarations fell from 71,289 to 19,600 only. Amnesty taxation scheme was thereafter tried under the civilian dictatorship of Bhutto in 1976, with disastrous results.
Thereafter, amnesty taxation scheme was also introduced during the regime of Zia without any worthwhile success. Even during the regime of Benazir amnesty taxation scheme did not make any worthwhile contribution to the national exchequer. Non payment of taxes in consequence of concealment of income and non-declaration of correct valuation in respect of tangible and intangible assets is ingrained in every society including that of Pakistan. However, in developed countries of the west, where the state is committed to the social, economic and political welfare of its people, the desire to conceal income is minimum because of the commitment of the state to act as a social welfare institution.
On the other hand, in the underdeveloped countries of the third world where majority of the governments are either headed by dictators and monarchs or unrepresentative rulers, response of the people to the financial requirements of the state is rather insignificant because the states are not welfare by any stretch of imagination. Pakistan always had the problem of black or untaxed economy, but the situation has assumed alarming proportions during the last two decades. According to research study conducted by the Pakistan Institute of Development Economics (PIDE) the size of overall underground economy has grown from Rs. 15 billion in 1983 to 1215 billion in 1997 — at the rate of about 40 per cent as against 4 per cent in case of formal economy.
In view of this size of black economy the declarations of Rs. 103 million cannot be called satisfactory. When India came up with its voluntarily disclosure of income tax scheme in 1997 with a hefty tax rate of 30 per cent over Rs330 billion was declared as hidden income, and income tax of Rs. 100. 5 billion was paid in January 1998. We should try to find out how Indians achieved these results. In view of the size of black economy the Independent economists are not satisfied with these results as according to them less then 10 per cent of the untaxed concealed money has been declared despite being the lowest ever cost of whitening of black money.
According to them only that hidden wealth has been declared which was mostly invested in the real estate and which could no more be concealed because of the ongoing property survey. Tax evaders still believe that the tax authorities devoid of any professional competence and lack of commitment will not be in a position to unearth hidden income and investments in other fields. Moreover a major portion of untaxed concealed money with estimated to be over Rs1500 billion has fled out of the country because of the corrupt political governments during the last 10 years provided full facilities for such transfer of money without any charge in the form of foreign exchange bearer certificates.
It is however believed that more than half of the estimated black money is still in the country kept and invested in different forms other than real estate and the authorities should hire some professionals to device innovative methods forcing the custodians of such illegal money to declare it. The deadline of TAS may be extended upto September or even upto Dec 2000 with whitening charges at 15 per cent. The response of tax evaders and owners of black money will largely depend on how vigorously and determinedly the government carries out its surveys and how it gets hold of the tax evaders.
CURRENT SITUATION
The removal of the restrictions and controls on capital movements and the emergence of a global market for credit, foreign exchange and securities have undoubtedly facilitated the international laundering of the proceeds of criminal activities. The size of the phenomenon is difficult to gauge, but certainly considerable.
The authorities of the leading countries have defined a set of measures that should be embodied in all their legal systems in order to make prevention and repression more effective. The aim is to achieve uniform behavior in the face of the phenomenon. International organizations are seeking to take more direct steps, in the first place with respect to countries that appear reluctant to introduce anti-money-laundering provisions into their legal systems. The effectiveness of such provisions is reduced by the tolerant attitude towards money laundering in some countries, the so-called off shore centers, a classification that stretches to include independent territories and states in various continents.
The protection offered by banking secrecy that is impenetrable even for criminal investigators, shortcomings in legislation or the lack thereof, problems in cooperating with local judicial authorities and difficulty in supervising intermediaries make it particularly easy in some financial centers to launder money of illicit origin.
In the case of branches and subsidiaries of international banks located in such centers, the controls of the parent bank and the supervisory authorities are sometimes made impossible or at any rate difficult. Since 1992 the Bank of Italy has adopted a restrictive stance to Italian banks setting up establishments in some off-shore centers; no new establishments have been authorized. The choice of such financial centers for the laundering of illicit proceeds is also due to factors that in any case attract financial resources and intermediaries, including particularly favorable tax regimes.
The use of electronic money in all its various forms has attracted the attention of supervisory authorities to the vulnerable points these new instruments introduce into the system of defense against money laundering. The nature, speed and volume of transactions tend to hinder the detection and reconstruction of anomalous financial operations. The greatest concern arises in connection with the issue of electronic money by financial businesses not subject to supervision. Awareness of the seriousness of the problems has stimulated the renewed drive by the international community to react in several directions with measures aimed at fighting the circulation of funds deriving from criminal activities at the level of supervision and tax harmonization.
CONCLUSION
It is our considered view that special investigative techniques such as controlled delivery, electronic surveillance and undercover operation should be included in domestic laws with a view of strengthening enforcement of money laundering laws and to intensify law enforcement efforts in detecting money launderers and prosecute them. This action will, however, not eradicate traditional investigation techniques but will supplement detection efforts.
As global communications and world trade agreements are increasing due to technological development, the ability to investigate money laundering cases is something that will continue to challenge law enforcement officers for the foreseeable future. It is therefore, important that as criminals employ modern technologies to assist their criminal activities, there is a need to enact new laws which allow law enforcement agencies to use such modern technologies in their investigating techniques.
Money laundering techniques will make progress as technology advances. We should make joint efforts worldwide to establish anti-money laundering laws and systems. We must also combat money laundering through training and exchange of information among countries. Additionally, each country should continue to work closely with its international partners in bilateral and multilateral assistance agreements to promote further actions to effectively address money laundering and other criminal activities and to win the fight against money laundering.
RECOMMENDATIONS
Criminalizing the laundering of the proceeds of serious crimes and enacting measures to seize and confiscate the proceeds of crime. Requiring financial institutions to identify all clients, including any beneficial owners of property, and to keep appropriate records. Requiring financial institutions to report suspicious transactions to the competent national authorities and to implement a comprehensive range of internal control measures. Financial institutions must play their role in dealing with the problem. This involves establishing financial transaction reporting systems; customer identification; record keeping standards; and, a means for verifying compliance.
Building the necessary framework for permitting the agencies involved to exchange information among themselves and counterparts in other countries. Establishing international treaties or agreements and to pass national legislation that will allow countries to provide prompt and effective international cooperation at all levels.
