Money laundering, a white-collar crime, is a process wherein illegal proceeds are made to appear legitimate after being passed through various networks. The intricate process of money laundering usually takes place in three steps – placement, layering and integration. The said three moves are integral to disguise the real but illegal source of wealth. Placement, the first step in the process, requires proceeds of crime to be moved and ‘placed’ into financial institutions that do not question their origin. Then comes layering where crime proceeds are converted from ‘cash’ into another form to avoid the tracking of such cash. Integration, the last step of money laundering, involves the integration of the crime proceeds into the economy, and this is typically done either through the creation of shell corporations or the purchase of properties.
Money laundering, undoubtedly, has had a crippling effect on Pakistan’s economy and has destabilised its financial system. The crime of money laundering encompasses an entire range of crimes that take place in the country, including tax evasion; drug and human trafficking, smuggling and corruption. These crimes are called predicate offences that generate proceeds of crimes. To give an idea of how much money is generated through such crimes, know that only in 2009, $1.6 trillion was laundered worldwide.
At the moment, Pakistan is in the ‘grey list’ of the Financial Action Task Force (FATF), an international body created to tackle international financial crimes, including terror financing and money laundering. Inclusion in the ‘grey list’ can have debilitating economic repercussions, including a discouragement of investors and a state of uncertainty for the financial institutions. This, in time, can lead to stagnancy in the stock market, thus impacting the entire capital market eventually.
Being a member of Asia Pacific Group (APG), Pakistan needed to enact legislation regarding money laundering. Therefore Pakistan had to pass the Anti-Money Laundering Act (AMLA) 2010. Despite having made several amendments in 2019 to tighten further the existing legal framework targeting Money Laundering and Terror Financing, Pakistan still faces a realistic threat of being downgraded to the mortifying ‘blacklist’. The possibility of putting Pakistan on the blacklist was identified in the Mutual Evaluation Report published by the APG in October 2019. A significant concern of the APG was that the number of investigations conducted regarding these crimes was insufficient.
Moreover, the report identified several shortcomings in the system, including a lack of effective mechanisms to combat the twin menace of terror financing and money laundering. It further pointed out multiple deficiencies in the current legal regime, such as failure to set up proper mechanisms to curb the funding of terrorism, and minimal use of ‘financial intelligence’, which is deemed crucial for combating such financing. The report more than once emphasised that Pakistan’s financial institutions lacked a proper understanding of terrorist financing. Linked to this was the observation that the central bank of Pakistan, the State Bank of Pakistan, and the Securities and Exchange Commission of Pakistan (SECP) had been unable to truly gauge the risks faced by country’s financial sectors regarding crimes of money laundering and terrorist financing.
Nevertheless, it is astonishing to note that money laundering is still a non-cognizable one despite how serious an offence it is. Resultantly, law enforcement authorities cannot investigate the crime without prior approval from a judge, and this is an impediment, given that, the seriousness of the offence calls for immediate action. Though FIA investigates the cases of money laundering, there is no referral mechanism in place. Additionally, the existence of hawala / hundi dealers pose a difficult challenge as it creates room for funds transfer to terrorist organisations. The report categorically indicates that no investigation had been initiated against these dealers by the FIA.
Currently, under the AMLA 2010, multiple agencies are empowered for the investigation and prosecution of crimes relating to terror financing and money laundering. Lack of coordination between law enforcement agencies creates an added obstacle in the proper handling of these offences. Furthermore, there is no separate legislation that deals with the confiscation and seizure of assets acquired through money laundering. As per the recommendation of APG, comprehensive legal regulations need to be enacted which provide for an adequate mechanism for the storing and maintenance of such assets/property. Court proceedings against such offences should result in proper sanctioning and substantial penalties, including confiscation of assets or property acquired through money laundering. Another challenge is the effective functioning of the Financial Monitoring Unit (FMU) of the State Bank of Pakistan (SBP) as a result of Section 216 (1) of the Income Tax Ordinance 2001. This particular section prohibits access to tax records and is critically problematic as, without such access, it is impossible to investigate tax crimes efficiently.
After being placed on the ‘grey list’ in June 2018, Pakistan was provided with an action plan of twenty-seven points. Recently, a final four-month deadline has been given to the country to ensure compliance with the action plan. This was done in a meeting of FATF that took place from 13-18 October 2019 in Paris. The country has not been given much time and is facing an uphill task of showing ‘significant’ progress in a short time. Failure to comply can result in the inclusion of Pakistan in the ‘blacklist’ along with North Korea and Iran. Therefore, it is crucial to address the deficiencies identified by the APG to comply with the FATF’s requirements.
Inclusion in the ‘blacklist’, it is feared, will lead to irreparable damage to the already weakening and unstable economy as this can result in the imposition of oppressive economic sanctions. With the current financial state of the country, when it has become excruciatingly hard to retain even the current investors let alone attracting new ones, it could spell a disaster for the country’s economy.
At this point, comprehensive legislation is required to ensure coverage of all the existing loopholes. In addition to this, stringent implementation of the law in collaboration with all the relevant bodies is needed. Even though amendments were made to the existing legal regime, their complete and thorough application remains a long way off.