The Anti-money Laundering Ordinance (AMLO) promulgated on September 7, 2007 provides for prevention of money laundering and forfeiture of property derived from, or involved in money laundering.

Money laundering is a process by which illegal income or proceeds are concealed and disguised to convert them into legal income, goods or services. It means putting illegal money into the stream of commerce, corrupting financial institutions and money supply. The essence of money laundering is to hide or disguise the underlying nature of a transaction. These include criminal and non-criminal activities.

In Pakistan the most commonly used method for money laundering is “Hawala” or “Hundi”, generally termed as “alternative remittance system” in the West. The key factor of Hawala system is that the value can be moved from one location to another without the physical movement of the currency. These systems normally operate outside national financial regulatory system. In certain cases even the licensed money changers secretly provide Hawala facilities to their special regular customers.

On the other hand, Hawala also provides an important financial service to immigrants as it has less costly than traditional banks. It also serve as a means to circumvent currency exchange regulations.

Hawala also offers a certain amount of anonymity to the user. This has given additional incentive for others to make use of alternative remittance systems, including legitimate businesses, as well as criminal elements. Hawaladars now use modern technology to assist them. The two brokers may use satellite phones, fax machines or even internet to make contact. Typically, the transaction will be made by using various secret codes. Hawala works through connections. These connections provide a network for conducting the Hawala transactions.

A pure Hawala system is very hard to detect and investigate due to lack of records. The AMLO does not specifically take cognizance of the Hawala companies. The Section 2(f) of the AMLO defines “financial institutions” in a sweeping manner, whereas a special reference to Hawala should have been made in the definition.

Another method of money laundering, again with the assistance of Hawaladars, is through under and over-invoicing of goods. For example a Hawaladar operating in a western country could send an associate $100,000 by purchasing $200,000 worth of goods. He ships the merchandise with an invoice for $100,000. The associate receives the merchandise and pays the first Hawaladar $100,000. This payment appears to be legitimate because of the shipment and the invoice. The associate has $200,000 worth of merchandise for which only $100,000 was paid. This technique, known as “under invoicing” is one way of circumventing remittance controls, as well as settling debts between Hawaladars.

The inverse of this, “over-invoicing” also exists. It would, for example, be used to transfer money to the United States. A Hawaladar operating in the United States would purchase $100,000 worth of goods that his associate wants. He would ship the goods with an invoice for $300,000. Payment of this amount would allow the associate to move $200,000 to the United States. Like “under invoicing,” this technique can also be used to circumvent remittance controls and settle debts between Hawaladars.

Exclusion of fiscal offence from the purview of the AMLO makes life very easy for both the domestic and international money launderers. Besides, there is every possibility that money launderers shift their major money laundering activities to import or export transactions. This would also render the law enforcing agencies viz. NAB, FIA and ANF helpless and incapacitated to check and curb money laundering effectively. Thus the exclusion of fiscal offence from the AMLO needs to be reconsidered and fiscal aspect, to the extent of under and over- invoicing of imports and exports, should be included as an offence under the AMLO.

A Financial Monitoring Unit (FMU), internationally known as Financial Intelligence Units (FIU) shall be established under the AMLO. The FMU would, inter alia, be responsible for receiving, analysing, maintaining and disseminating data on Suspicious Transaction Report (STR) and Currency Transaction Reports (CTR) The FMU may call for the record and information from any agency with the exception of information on income tax. It is not clear that how a meaningful analysis of STR and CTR would be possible without information on income tax and issues pertaining to imports and exports.

According to the Section 2(a) of the AMLO “accounts transaction” means any facility or arrangement by which a financial institution does any one or more of the acts namely (i) accepts deposits of currency, (ii) allows withdrawal of currency or transfers into or out of the account, (iii) pays cheques or payment orders drawn on a financial institution or collects cheques or payment orders on behalf of a person, (iv) provides a facility or arrangement for a safety deposit box, (v) wire transfers, or (vi) allows any transaction which has the effect of any debit or credit entry in respect of particular accounts.

The term “accounts transaction” is generally termed as “financial transaction”. The American legislation also uses the term “financial transaction”. The scope of this term would be required to be enlarged keeping in mind the wide variety of cases to be handled under the AMLO.

Some anomalies exist in the operational side of the AMLO. For instance the non-inclusion of the heads of investigation agencies viz. NAB, FIA, and ANF as permanent members of the National Executive Committee (NEC) to be constituted under the Section 5 of AMLO needs to be rectified. The non-inclusion would create operational and working snags and difficulties in the smooth working of anti-money laundering efforts on the part of the government. Moreover, the clause of de minims level of amount considered for action under AMLO has not been mentioned in the ordinance. In USA anything below US$10000 is not considered as a money laundering offence.

A careful perusal of the AMLO reveals that the success of the anti-money laundering activity would depend upon the analysis of the STR and CTR by FMU to be headed by a financial expert. The analysis of STR and CTR, would also require specialists equipped with financial, economic and criminal investigation techniques and exposure.

The writer is economic consultant at Special Operations Wing, National Accountability Bureau.