THE government and the State Bank of Pakistan have seemingly learnt a few lessons from the recent gold imports fiasco and are working together to address it’s root causes with input from all stakeholders.

In a recent meeting with exchange companies, central bankers discussed some of the ideas that these companies had shared earlier with the SBP to ensure transparency in gold imports. The Trade Development Authority of Pakistan has also held brainstorming sessions, both in-house and with gold importers, wherein the issue of misreporting was analysed thoroughly.

“Our own finding also show that imports of gold against fake export documents has to be blamed for a sudden drop in exports of jewelry in FY14 followed by a total plunge in FY15,” says a senior official of the ministry of commerce.

“Our own findings also show that imports of gold against fake export documents have to be blamed for a sudden drop in exports of jewelry in FY14 followed by a total plunge in FY15,” says a senior official of the ministry of commerce

Between FY09 and FY13, forex earnings through jewelry exports ranged between $300-$800m sending signals that efforts being made for promoting export of this non-traditional item were paying off. But then happened the inevitable. Exports fell below $325m before nose-diving to just less than $10m in FY15.

It was inevitable “because between FY09-FY13, exports of jewelry was growing not entirely because of genuine shipments,” says a Karachi-based exporter who ventured out of jewelry exports back in 2013.

“I know of many cases in which ill-gotten money stashed overseas was whitened via gold imports. Against this, jewelry export documents were being faked to justify future imports.”

Industry sources say that most of the times, officially imported gold consignments were too small compared to boastful quantities of fake exports of jewelry and that initially raised alarm bells. They also say that gold imported in the garb of other items or smuggled from neighbouring India was being smuggled out to Pakistan to Iran and, at a lesser scale, to Afghanistan.

Everything went smoothly for years. But when the army launched Zarb-e-Azab drive to flush out militants in early 2015, spy agencies suspected that money involved in gold imports (and fake jewelry exports) was being used to promote militancy. And, then TDAP, Customs and SBP sprung up into action, insiders say.

The arrest of model girl Ayan Ali on charges of currency smuggling and nabbing of Altaf Khanani in the US for his alleged role in large-scale Hawala transfers, opened up a Pandora box. Officials say Pakistani and the US authorities are now minutely examining everything and anything that may have even the remotest link with terror financing. “Gold imports for money laundering (as jewelry exports as a cover) is one of them,” says a senior SBP official.

Market sources say a local bank is known for declining opening of LCs for gold imports and subsequent (fake) jewelry exports since 2013 when gold import was banned only to be restored after a year reportedly on pressure from the vested interest.

These sources say it was the nexus of currency smugglers, fraudster gold importers, fake jewelry exporters, currency speculators and unscrupulous elements in exchange companies that can be held responsible for frequent speculative attacks on the rupee in last three years, often attracting SBP warnings and stricter rules for forex companies.

In a recent meeting at SBP, head of Exchange Companies Association of Pakistan Mr Zafar Pracha revealed that according to the Association’s guesstimates $15bn had been transacted in 2015 through Hawala or Hundi, adding that the actual volume could be larger. In that meeting, too, the issue of gold imports as a means of money laundering was discussed, sources privy to the meeting say.

Whereas forex companies believe that by allowing them to officially finance gold imports, the misuse of import facility by money launders can be checked, central bankers simply say it was out of the scope of the business of these companies. But they agree that in practice, gold importers seldom get dollars from banks to finance their import LCs and arrange the same on their own. This is where things take a nasty turn. Gold importers don’t buy dollars unofficially at a higher rate from exchange companies, no records of which are maintained, market sources reveal.

This benefits forex firms in that they can sell huge amounts of dollars at higher than the prevailing market rates and earn big undisclosed income. Besides, it also encourages them to buy dollars from those forex hoarders and speculators who have amassed hard currencies out of their tax-evaded, undeclared income in rupees.

Whereas in the last two fiscal years, a plunge in exports of jewelry brought to the fore the irregularities in declaration of form E ( an export document) compelling authorities to sift through gold import data, this year’s import stats are also dodgy, market sources say.

According to Pakistan Bureau of Statistics, officially recorded imports of gold rose 25pc year on year during July-November FY16 to $11.2m. But insiders say actual imports were far too large, amounting to hundreds of millions of dollars.

Customs officials have been sifting through dossiers of imports’ documents to find out how much of gold was imported through mis-declaration and Coast Guards and other agencies are alert to avoid smuggling of gold into the country by fish-boat smugglers, a senior Coast guards official told this writer. “We’ll have to deal with the gold smuggling issue for so many reasons and one of them is that some of those involved in it are also suspected of terror financing by unfriendly neighbouring countries.”

Published in Dawn, Business & Finance weekly, January 11th, 2016