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What new forex regulations mean

Updated May 28, 2018


After recent amendments in the laws governing foreign exchange management, tax evasion and money laundering via foreign currency accounts has become quite difficult to get away with.

But implementation of the changed sections of these laws need a careful approach to reduce suffering of bank customers not well versed with the changes in the financial regime.

The amendments introduced through the Finance Bill 2018 to two landmark pieces of law dealing with foreign currency accounts have put stronger barriers on free transfers of funds into and out of these very accounts.

And, they have shut the doors on feeding of these accounts through foreign exchange purchased from the open currency market. Whereas the rationale for the first move is obvious i.e. it aims at blocking possibilities of money laundering and capital flight, the purpose of the second move is not that clear to ordinary account holders.

Implementing changed laws (regarding foreign exchange) needs a careful approach to reduce the suffering of bank customers not well versed with the changes in the financial regime

Finance Minister Miftah Ismail had not mentioned in his budget speech that feeding of foreign currency accounts of resident Pakistanis would not be allowed via purchases made from the open currency market in Pakistan. So when this requirement came to the knowledge of people after the approval of the amendments in Finance Bill 2018, many of them were got confused.

In his budget speech the minister had said that only tax return filers could make cash deposits in their foreign currency accounts. Accordingly, the Finance Bill 2018 actually made a certain amendment in the relevant foreign currency laws to that effect. Influential people involved in tax evasion, money laundering and capital flight will no longer be able to use their front-men, usually non-tax payers, to continue to feed their foreign currency accounts indirectly.

But what if a bank now requires its foreign currency account holders desiring to make a transaction in their accounts to prove that they have been regular tax filers right from the time of the opening of those accounts?

This is not just a hypothesis. Holders of foreign currency accounts are actually facing this situation. Low or mid-tier bankers are even denying their clients permission to operate their foreign currency accounts if they are not regular tax filers. And these bankers claim they are doing this in compliance with the latest instructions from the State Bank of Pakistan (SBP).

As a regulator, the SBP makes sure that after any amendment made into law, the latest version of a particular clause or section of that law is communicated to banks, requiring them to implement the same. This is what central bankers say but they don’t comment on specifics of any recent instruction issued to banks after the introduction of amendments in forex laws via Finance Bill 2018.

So, it seems appropriate for banks that they display at their branches and also on their websites details of what holders of foreign currency accounts can or cannot do now with their accounts. They also need to educate those customers who were not income tax filers at the time of the opening of foreign currency accounts and have become tax filers only recently.

Senior bankers overseeing operations of foreign currency accounts say banks are seeking guidance from the central bank and the Federal Board of Revenue (FBR) in regard to implementation of the updated rules and regulations governing such accounts.

They admit that branch level officials of banks and bank clients alike might be facing difficulties in the absence of clear instructions from the top management on what to do under a certain situation. But lack of clarity will soon be over, they insist.

The Finance Bill 2018 has introduced a new provision (in the relevant forex law) that empowers the federal government to make rules governing deposits and withdrawal from foreign currency accounts. If addressing complaints regarding operations of these accounts remains problematic even after clarification from SBP and FBR, then the government of the day can use this provision to ease the situation, senior bankers reassure.

With stricter checks on foreign currency accounts both in terms of their feeding as well as usage, forex management is expected to become more transparent. And that in itself is a noble and a practical objective; noble for its inherent benefit to the overall economy and practical because we need transparent forex management to avoid threats of being put on the watch list of global anti-money laundering watchdogs like FATF.

That also partly explains a separate yet significant SBP initiative: it has recently asked exchange companies to collect and retain personal identification of those buying or selling more than $500 worth of foreign exchange in the open currency market.

In the past, the no-question-asked status of foreign currency accounts and ability of influential people to buy foreign exchange freely from the open currency market has resulted in substantial capital flight. In the recent past, a number of wealthy Pakistanis managed to take out a few billion dollars from the country to invest the same in Dubai’s overheated real estate market.

Bankers and executives of forex companies admit that with the changes now introduced in the law there is little or no room available for such capital flight and money laundering — all in the name of lawful transactions.

Foreign currency deposits of resident Pakistanis which stood below $5.4 billion in June 2013 when the present government came into power grew rapidly in five years and crossed the $7bn mark in March 2018. However, at end of April these deposits fell slightly and stood a shade below $6.9bn, SBP statistics show.

Bankers are confident that stricter measures currently undertaken to check possible misuse of these accounts for money laundering and capital flight, the volume of these accounts as such will not shrink much. They hope that as the economy expands and becomes documented such measures will rather encourage regular tax filers to feed these accounts with no fear of harassment at the hands of taxmen in the future.

People can freely feed these accounts with the declared income, lawfully converted into foreign exchange and direct forex income earned through online export of services, bankers say.

Growth of foreign currency accounts of resident Pakistanis is important for banks as they draw upon them for financing external trade, maintaining cash reserves with the SBP against forex holding and for short-term lending and borrowing in foreign currency in the interbank market.

Published in Dawn, The Business and Finance Weekly, May 28th, 2018