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Intricacies of pre-poll money flow

Updated July 23, 2018

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In elections, big interests clash with each eager to overpower the other. Interest groups and their proxies begin to fight: some for survival, some for influence and others to make a debut.

Understandably, all this is not possible without big money coming into play. Locally, funds are moved from one account to another. Workers and supporters of political parties abroad begin to send foreign exchange here. Part of local and foreign funds moves while skipping the banking channels, taking advantage of a network of informal money handlers. Months and weeks before the polling date, new patterns of money flow begin to emerge and become visible for trained eyes.

“A week before elections, we can see changes in money flow patterns. We’re even internally analysing them but that’s something we can’t share,” says a senior executive of a large local bank. “Information-gathering in real time, thanks to a greater use of technology, makes such patterns more obvious now than in 2013 (when the last elections were held).”

Almost all sizable banks undertake this exercise prior to polls. But they do it to evaluate the risks associated with unusual banking activities, and not for judging any particular movement of funds.

The cycle of money flow ahead of the general elections begins with the inflow of large sums via both banking channels and informal means into the designated accounts of political parties, their office-bearers and frontmen of top politicians, senior bankers say. The bulk of pre-poll expenses are then financed from these accounts.

Broader monetary indicators, like remittances and currency in circulation, don’t exhibit a big difference between their usual averages and pre-poll volumes

But this simple-looking method has lots of intricacies. Money flows are divided along the lines of illicit and lawfully earned money, local and foreign donations and funding, corporate and non-corporate money, money meant for elections but disguised as some other expenditures etc, they say.

That is why broader monetary indicators, such as remittances or currency in circulation, don’t exhibit a big variance between their usual averages and pre-poll volumes. That is also why the State Bank of Pakistan (SBP) takes little interest in this issue. A standard answer of senior central bankers on pre-poll patterns of fund movements is that the subject does not merit discussion unless monetary aggregates show an otherwise unexplainable change ahead of the elections.

If you press them hard on an unusual change in the set patterns of account activities of a certain bank or a foreign exchange company, they say that the central bank does seek an explanation from the institution concerned if such a change warrants it under relevant rules and regulations. “But then, linking even such deviations to an undesired pre-poll activity without solid evidence, and in the absence of a justification to do that, is not appropriate,” says a central banker.

Take the example of home remittances. Lots of pre-poll activities are financed with foreign exchange sent by overseas Pakistanis. Major political parties that have their chapters in countries like the United Kingdom, United States, Saudi Arabia and United Arab Emirates even begin to press their overseas office-bearers to collect and send back home as many donations from supporters as possible.

Part of this funding comes through banks and licensed foreign exchange companies. But the net amount sent back home is not big enough to show a major change in pre-election average monthly remittances. “Part of the funds that comes into Pakistan through illegal channels is also routed in manageable chunks to avoid raising unnecessary suspicion among law enforcement agencies,” according to a source in the security establishment. “Since the 2018 elections are being held amid stricter checks on money flows in the backdrop of global concerns regarding money laundering, volumes of illegal funding from abroad are not that thick.”

The cycle of money flow ahead of the general elections begins with the inflow of large sums via both banking channels and informal means into the designated accounts of political parties

But then the announcement about the tax amnesty scheme has coincided with the campaign period and holders of undeclared foreign assets have already brought back hundreds of billions of rupees. Under the part of the scheme that deals with undeclared assets within Pakistan, huge sums of black money have been whitened at the same time. “The timing of the tax amnesty scheme should raise a few questions from the point of view of financing election campaigns.”

Locally, funds for pre-election use are transferred not only through banking channels but also mobile wallets, an instrument of branchless banking. Though this instrument is very useful for the transfer of cash, the implementation of the know-your-customer regime in transactions made via mobile wallet leaves much to be desired. Officials of the security establishment say, and bankers agree, that lots of funds — segregated into smaller chunks — could be sent and received across Pakistan using mobile wallets without the banks ever knowing the true identification of fund movers.

This could have implications in terms of trailing fund movements by unscrupulous elements during the electoral process — more so this time as the use of this instrument of money transfers has grown rapidly in recent years. Here again, keeping an eye on the movement of funds meant for the electoral process financing is just too difficult. Even scanning the relevant data for this purpose becomes out of the question unless a big change in volumes of overall transactions ahead of elections comes to the regulator’s notice. “Variations in volumes handled by particular banks and microfinance banks don’t matter as much because such variations do take place as a matter of routine and for genuine reasons,” says a senior executive of a microfinance bank.

Money flows are divided along the lines of illicit and lawfully earned money, local and foreign donations and funding, corporate and non-corporate money, money meant for elections but disguised as some other expenditures etc

Given the enormity of economic problems, judicial activism and a tussle between the political class and the establishment, both mobilising and utilising funds for electioneering have been a challenge. But then, politicians always find ways for financing their election campaigns the way they plan while disregarding the limits imposed on pre-poll expenses.

Senior sales officials of a brokerage house say some of their top clients — businessmen considered close to two leading political parties — were constantly selling stocks of various companies ahead of the polls. They were diverting large parts of the money realised to accounts of people actively involved in election campaigns of the two parties.

Similarly, the owner of a Karachi-based foreign exchange company says some holders of double-accounts in foreign exchange firms offloaded their entire positions after the rupee depreciation since December last year.

“I suspect that sale proceeds in rupees are being used in elections. Since total offloading has practically emptied their accounts with foreign exchange firms, they can also avoid punitive actions for holding undeclared amounts of foreign exchange.”

Published in Dawn, The Business and Finance Weekly, July 23rd, 2018