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CGT rules not to facilitate money laundering

May 12, 2012

KARACHI, May 12: A letter written by the Securities and Exchange Commission of Pakistan (SECP) and forwarded to the three stock exchanges has raised a storm in the tea cup.

The apex regulator in its dispatch to the bourses stated that the Finance (Amendment) Ordinance, 2012 under which the tax department would not ask questions on the source of funds invested in stocks up to June 30, 2014, is not all inclusive.

The money suspected to be channeled into the stocks in contravention of Anti-Money Laundering Act, 2010 would remain open to questions. The letter in essence, therefore, sifts the money invested in stock market, between legal and criminal, more than between black and white or documented and undocumented.

The notice sent to the stock exchanges by the apex regulator, dated May 8 reads: “Pursuant to amendments in the Income Tax Ordinance, 2001 notified through the Finance (Amendment) Ordinance 2012 dated April 24, 2012 whereby provisions related to Capital Gain Tax (CGT) for the stock market investment have been implemented, the stock exchanges are advised to immediately circulate the following for compliance of the members/brokers:

The said provisions shall only be applicable under the Income Tax Ordinance, 2001 (ITO) and does not bar asking source of income under any other law including Anti-Money Laundering Act, 2010 (AMLA). Therefore, the exemption under these provisions is not available for income derived from a criminal activity under any other law for the time being in force.

Second, the requirements of AMLA and the rules and regulations made there under are not affected by these provisions of the ITO and no exemption, in whole or in part, is available for any AML/CFT preventive measures under the AMLA. The KYC/CDD and Suspicious Transaction Report (STR) reporting requirement vide stock exchange regulations and guidelines dated Feb 1, 1012 shall continue regardless of the above amendments. Therefore, brokers shall take reasonable measures for establishing the source of wealth and source of funds for high risk customers and also to obtain sufficient information to determine the expected source of funding for the account.

Third, the Financial Monitoring Unit may refer any STR to tax authorities notwithstanding the provisions of ITO and tax authorities will continue to cooperate with law enforcement agencies on AML matters.”

The SECP letter also alerted stock brokers regarding Section 33 of the AML Act 2010, which inter aila specifically provide for criminal sanctions on failure to file STRs and for providing false information.

“Furthermore, in case any member/broker is found to be in violation of above legal requirements, a simultaneous regulatory action shall be initiated,” the SECP warned.

While most brokers during the weekend were taking the Regulator’s note in stride and some even feigned ignorance about the red flag— understandably to soothe investors’ nerves and dispel any panic in the market when it opens on Monday, one senior broker asserted that there was nothing new in the SECP note.

”Brokers are already required to file an undertaking every 15 days, certifying that there was no violation of Anti-Money Laundering Act, 2010 in the ranks of their clients and that the brokerage was following the ‘know your clients’ criteria,” he noted.

Mr.Nadeem Naqvi, Managing Director of the Karachi Stock Exchange stressed that the SECP letter was being taken ‘out of context’ in interpretation. He said that it was a mere ‘clarification’ and did not cause change in the already declared provisions of CGT.

He said that two months ago, the bourse had further tightened the tap for scrutiny of funds entering the stock market by issuance of guidelines for brokers to conform to the AML.

“If sufficient suspicion exists that any money flowing in was in contravention of AML or Anti-terror laws, a scrutiny could always be made by the Anti-terrorism or AML task force,” he said. He stressed that unfolding the letter on May 11, sent by the SECP on May 8, was of little consequence for the information was not ‘price sensitive’. The plunge of 383 points in the KSE-100 index in the last two days of the previous trading week, he said, was not the cause of leakage of information to some selected investors, but the result of a flare up in US-Pak relationship and secondly the payment of dues to Independent Power Producers (IPPs) through the OGDC--the highest weighted scrip on the KSE-100 index, which many thought would impact the valuation of the big stock.

But for all that, it is difficult to shake off the fear that has come to haunt investors’ in stocks. It would be churlish to think that the major provision in CGT reformed rules of “no questions to be asked on funds invested in stocks till June 2014” may have ever meant that it supercedes the United Nations Convention Transnational Organised Crime, of which the Article 7 covers money laundering. Yet the sudden realisation that funds flowing into the market would, after all, be under the glare of the authorities, is likely to deal a blow that the market would take right under the chin, when it opens up for trading on Monday.