By definition, money laundering is a process to legitimise illegal money by passing it through legitimate business channels such as bank deposits, investments or by transferring from one place to another.

However, money laundering is a serious crime having multiple economic effects. It becomes extremely difficult for legitimate businesses to compete with criminal organisations engaged in the activity — situations may arise that result in crowding out legitimate businesses.

Money laundering can also adversely affect currencies and interest rates thereby increasing the threat of monetary instability. As money launderers redirect funds from high quality investments to low quality ones, economic growth may suffer.

In developing countries like Pakistan that suffer from a scarcity of revenue, money laundering further diminishes tax revenues resulting in honest taxpayers having to — indirectly — bear the burden of additional taxes.

Above all, countries with financial institutions that reinforce illegal activities such as money laundering lose legitimate global opportunities that are crucial for achieving sustainable growth. It has been empirically established that money laundering significantly reduces GDP growth.

Keeping in view the adverse effects of this practice on the economy and society, the Pakistani government has adopted stern measures to deal with the growing menace.

Accordingly, significant changes have been introduced in the Anti-Money Laundering Act, 2010 (Act) in the recent past.

In developing countries money laundering further diminishes tax revenues resulting in honest taxpayers’ having to — indirectly — bear the burden of additional taxes

Tax authorities have been empowered to investigate money laundering cases and for this purpose, offences relating to evasion of duty and taxes under the Sales Tax Act, 1990 and Federal Excise Act, 2005 have been included in the Schedule of predicate offences pursuant to section 41 of the Act.

Similarly, offences relating to income tax evasion have also been included in the Schedule of predicate offences pursuant to SRO 425(I)/2016 of May 14, 2016.

The four predicate offences added in the Anti-Money Laundering Act 2010 regarding income tax evasion include prosecution for false statement in verification where tax sought to be evaded is Rs10 million or more; prosecution for concealment of income where tax sought to be evaded is Rs10m or more; prosecution for improper use of national tax number/certificate where tax sought to be evaded is Rs10m or more; and prosecution for abetment where tax sought to be evaded is Rs10m or more, respectively.

For more effective and efficient handling of investigation of money laundering cases, the government has notified the Directorate General of Intelligence & Investigation (Inland Revenue) as Investigating and Prosecuting Agency pursuant to section 2(i) of the Act via SRO 611(1)/2016 of June 9, 2016.

Subsequently, the Directorate General has established dedicated units for Anti-Money Laundering to investigate and prosecute cases involving predicate offence of tax evasion and tax fraud.

Tax authorities are now empowered to lodge complaints in the court of Special Judge (Customs, Taxation and Anti-Smuggling) under section 203 of the Income Tax Ordinance, 2001, read with sections 3, 4 and 8 of the Act, against tax evaders and money launderers for the purpose of prosecution.

However, the Directorates of Intelligence and Investigation (Inland Revenue) established at Lahore, Karachi, Faisalabad, Peshawar and Islamabad lack much of the requirements needed to carry out effective investigation of money laundering cases. Almost all the directorates have an insufficient number of investigators.

Since investigation is time consuming and exhaustive work, it requires a greater number of investigators with the requisite skills to trace the desired information, prepare relevant documents and initiate prosecution.

A few individuals cannot carry the whole process which also includes searching various records, questioning people, checking banking instruments and verifying assets and properties.

As the Anti-Money Laundering units are in their formative phase, they lack the desired level of legal backing available in advanced economies. There investigation systems are empowered to enforce decisions and obtain information relevant to fraud cases from any source, including banks, directly.

Another important element is the prosecution process annexed with the investigation. In case the process is lethargic, the very objective of deterrence against money laundering through the investigation may not be achieved. In view of time value, the state may be deprived of revenue, necessary for economic growth and development, for a longer time period.

Last but not the least, providing relevant training to officers and the staff entrusted with anti-money laundering investigative work is crucial for carrying out investigations in an efficient manner and in accordance with best international practices.

Hence, enhancing the work force in field directorates; equipping tax investigators with the necessary legal and administrative strength; providing adequate and relevant training; and ensuring adequate involvement and monitoring of the Federal Board of Revenue in potential cases are essential measures for strengthening the drive against money laundering.

Furthermore, reinforcing enforcement strategies such as investigation and prosecution of money laundering in addition to the predicate offence, effective regulation over exchange companies, stringent controls for cross-border cash transactions, and implementation of an effective asset forfeiture regime will be useful in combating this menace.

The writer is Additional Director Intelligence and Investigation (Inland Revenue) at the Federal Board of Revenue

Published in Dawn, The Business and Finance Weekly, September 5th, 2017

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