Money with no name

December 16, 2019

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THE tax authorities have lately apprehended close to Rs25bn that have been transferred between various locations within the country by parties that otherwise have no known sources of income.

A pattern has emerged through these actions, in which vast sums of money can be seen moving between Karachi, Quetta and Malakand in nine specific bank accounts.

Read: FBR unearths Rs20bn illegal bank transfer, withdrawal scam in KP

Tax officials are reluctant to discuss the case on record, but have confirmed that the transactions are an example of ‘smurfing’, a term used to describe actions that seek to disguise the beneficial ownership of money.

When the authorities moved to examine the identity of the people in whose names the accounts have been opened, they found that no record of them exists with the tax authorities. Yet vast sums could be transacted through their accounts.

The episode shows the hazards of a vast cash economy and the undocumented sector in which our financial system has to operate.

As the authorities pursue the people involved, they will likely find themselves falling deeper down a rabbit hole that could possibly even connect with funds that relate to illicit activity or terrorism. At that point, dilemmas multiply and the complexity of enforcement actions also increases.

As the source of the funds is revealed in more detail, it could bring other law-enforcement bodies apart from the tax authorities, into the picture, perhaps even triggering a terror-financing alarm. At the moment, though, the matter is purely an issue of tax enforcement.

Such actions present a deep dilemma, or powerful trade-off, for the authorities.

The more they rely on enforcement actions to track and trace such funds — that have escaped the tax net or have been derived from or are meant to advance illicit activity including terrorism — the more their actions choke the financial system.

Additionally, given the ease with which alternative channels can be found for remitting money within the country outside of the formal financial system, greater enforcement today can simply mean more money staying outside the financial system altogether.

In part, it is this dynamic that has led us to a situation where currency in circulation today has grown massively since the government began clamping down on the use of the financial system by the non-filers of tax returns.

Five years ago, the total cash in circulation in the economy was about one-third of the total amount of deposits held by the banks. Today, that ratio has risen to 43pc, a very large figure for five years only.

The complexity of the task ought to be self-evident.

The government must arrest the growth of the cash economy, while simultaneously safeguarding the financial system from bad money. And it will take more than enforcement actions to make this happen.

Published in Dawn, December 16th, 2019