Informal business — without a formal company cover — is rampant in Pakistan, with the suspected presence of just a few empty capsule firms — shell companies to veil opaque transactions.

In the capital market, insiders say, there are a few companies registered in Cayman Islands suspected to be recycling undeclared financial assets parked overseas back to the country.

Commenting on the presence of shell companies, Securities Exchange Commission of Pakistan (SECP) Chairman Zafar-ul-Haq Hijazi was at peace and advised others not to worry. “See shell companies are the concern of regulators of places where they are registered. They do not fall in our ambit of regulations. Such companies trade in capital markets indirectly through investment funds. As long as these trading companies comply with our legal requirements we are comfortable,” Hijazi said in a brief chat over the phone.

Like their counterparts elsewhere, Pakistanis with a good amount of money, Panama Papers confirmed, operate shell companies for legitimate but also possibly for purposes that they wish to hide. The term shell companies refers to business entities that exist only on paper without real employees or offices. There can be legitimate purpose to hold such entities, according to experts, but the current leaks have revealed that most of such firms are vehicles of choice for tax evaders and law busters.

“Often money — resources drawn from undeclared assets and earnings from opaque deals — is parked in accounts of shell companies in tax havens around the world. A haze of complicated layers are managed to veil the identity of owners by sponsors of shell companies to facilitate the elite loaded with unaccounted wealth,” a corporate lawyer explained.

Within Pakistan the legal framework (Company Law) covers dormant companies but does not permit shell companies. The cash economy is huge and weak governance provides sufficient space for all kinds of grey businesses

“Within Pakistan the legal framework (Company Law) covers dormant companies but does not permit shell companies. The cash economy is huge and weak governance provides sufficient space for all kinds of grey businesses. Many gel with the informal sector and manage powerful underground syndicates avoiding traceable banking channels for money transfers,” he made a point.

Although, shell companies virtually do not exist in Pakistan, there are several thousand dormant companies on the SECP record that promoters did not bother to close/liquidate formally.

Many big business groups do own several unlisted subsidiaries, some active, others dormant. These are declared entities that fulfill all legal obligations and serve businesses.

According to figures derived from official data, hardly 0.25pc of a wide range of businesses in Pakistan file income tax returns which highlights the low level of documentation and flaws in the tax administration. And only 44pc of registered companies report annual accounts to SECP.

Of the assessed 4m business outfits operating in Pakistan, 67,000 are registered with the SECP. However, only 30,000 fulfil the reporting conditions. Of these 23,000 file income tax returns.

The SECP officials did accept that the liquidation process for the failed companies is cumbersome and people already in economic stress avoid formal closure.

Former Competition Com­mission chairman Khalid Mirza said often subsidiaries are used by listed companies to siphon off profits from accounts to reduce the liability of sharing it with minority stockholders. In some cases separate companies are created to sub let certain operations to avoid/minimise the cost of complying with labour laws and other costly obligations..

“Typically shell companies are used to minimise the burden of corporate taxation in the developed world. It is a right of an individual or a firm to achieve ‘tax efficiency’ i.e. to manage accounts under experts’ supervision to minimise the burden without violating tax laws. Technically it is not an illegal activity,” he said.

“In Pakistan moneyed people have easier and less cumbersome options to hide wealth and channel it around. People engage accounting firms for creative accounting practices for tax avoidance,” another expert commented.

Earlier the State Bank in a written response to a Dawn query on possibility of toxic transactions using banking channels ruled out such an eventuality.

“The SBP has implemented an effective regulatory regime to curb money laundering. The regime include requirements of customers due diligence, correspondent banking, wire transfers, reporting of suspicious transactions, record keeping, internal controls, policies compliance and audit and training. The compliance is ensured through systematic process of on-site inspections and off-site supervision,” said the bank.

An analyst who monitors and comments on the capital market told Dawn that he had no data to support the SBP assertion but was positive that some shell companies are listed at the PSX.

Muhammad Sohail, CEO Topline Securities, dismissed doubts and asserted that the capital market of Pakistan is well regulated with high disclosure demands on listed companies. “Gone are days when the focus was on numerical strength. Today it is the capitalisation of the market that matters,” he said, implying fewer stable companies are better than a market place crowded with weaklings.

Published in Dawn, Business & Finance weekly, April 18th, 2016