The UN conventions against illicit traffic in narcotics, drugs and psychotropic substances are the first multi-lateral, legally-binding instruments to address the issue of money-laundering.
Its provisions encourage international cooperation to identify, trace and confiscate the proceeds of drug-trafficking and to prosecute those responsible for laundering illicit profits.
Even before the collapse of the twin towers in New York on 11th September 2001, the laundering of money and its supply were part of geopolitics. The financing of arms used in the Afghan War in 1980’s after the Soviet invasion,the aiding of the Algerian rebels, and other covert operations and questionable activities involved money-laundering. Drug money is used to purchase assets and subsequently the assets are sold creating profits which are again used for further speculation. The money is then ‘cleaned’ and remains in safe tax havens. The US and Swiss banking sectors are largely unable, or unwilling to check the inflow of these dubious funds. Thus, the money laundering process is completed.
Money laundering is a term used to describe the process whereby cash from illegal activities is converted into an alternate form in a manner that conceals its origin; ownership or other potentially embarrassing factors. It obliterates the audit trail. By increasing the number of steps in laundering illegal funds, the transaction is camouflaged. The mega deals of gold buying and selling, commodities sales and international price fluctuations involve heavy movement of funds which are passed through a number of banks in order to conceal the source of said funds, without raising suspicious. Such transactions are usually illegal and in US, law binds banks to advise the Federal Reserve Board of any large deposits that are made in cash. Recent laws introduced in the United Arab Emirates also require banks to declare transactions exceeding $10,000.
A consultative document draft code of banking practices prepared by the British Bankers Association in December 1990, provided impetus for member banks to lay down the principles on standard of good banking and were made effective from 16th March, 1992. It is interesting to note that on 5th July, 1991, the Bank of England, by its direct action seized the assets of BCCI. It had an asset base of $20 billion and representation in 71 countries. Earlier, in October 1988, 84 individuals were indicted and accused of laundering $ 32 million for the Colombian Medelin cocaine cartel. As a Russian proverb states “when money speaks, the truth is silent”.
In the 1990’s, Pakistan encouraged the inflow of dollar funds with statutory cover of ‘no questions asked’, ‘no Zakat deduction’ and ‘no withholding tax levy’.
Excerpts from a UNDCP document reveal that the Basel Committee on Banking Regulations and Supervisory Practices issued a “Statement of Principles” covering the three corner stones of money laundering controls; avoidance of suspicious transactions, cooperation with law enforcement authorities and “Know your customer” rules.
The anti-money laundering issue needs to be addressed in the complex financial structure prevailing in Pakistan. It has been estimated that 50 per cent of the transactions are not documented and money is not routed through banking channels. At present, the scenario is very unique.The National Accountability Bureau is checking the original source to unearth-ill-gotten money. The Central Board of Revenue is trying to achieve its tax collection target. The Ministry of Finance is trying to reduce the budget deficit.The Commerce Ministry is busy in covering the one billion dollar export-import gap. Simultaneously, banks are also making efforts to recover Rs.300 billion in delinquent loans. In this environment, revival of economic activities will need a very prudent approach and require coordination of all relevant functionaries in framing laws.
The stringent laws against money laundering in the wake of the recently activated receipt of funds through banking channels is a very delicate issue. Due to the erosion of exchange differences in the kerb market and other business compulsions, remittances are being received through official channels. The rise in bank deposits is presently estimated at two billion dollars. This trend should continue.
The US, through the Secretary of the Treasury is putting pressure on Pakistan to form and implement new anti-money laundering laws, in order to reign in Al-Qaeda operations. Such laws will also impact drug traffickers, and criminals across Pakistan. The control on money laundering will help the economy and therefore framing of laws has to be done expeditiously.
It is estimated that about $70 billion are held abroad by the Pakistani community. They should be encouraged with concrete incentives to bring back the money. A market oriented economy needs marketing strategies. The Board of Investment, Ministry of Finance and State Bank should not suffer the illusion that stringent laws will bring dollars into Pakistani coffers; they must be vigilant.
Banking channels have become effective after of the 11th September episode. The money which has contributed to our present strength by deferring loan instalments, conversion of loans into grants and relaxation in import quotas for Pakistan, will be short-lived. The economy will be a crumbling edifice, and more devastating effects are in the offing than the collapse of the twin towers, if ascetic practices are not applied. Financial discipline, austerity measures in expenditure, avoidance of seepage, pilferage and ad hocism, should be the guiding principle of long sustaining growth.
The intricacy of laws will keep the economy under pressure by the nature of our discipline in financial matters. Pakistan’s support to US in the war against terrorism must continue, but an economic revival while framing laws and their impact should be borne in mind, lest the progress halts. Can Pakistan be a safe haven while the ‘transparent money system’ is becoming the order of the day? It is a big question. The security of individuals, country risks with fragile economy and replacement of short-term policies have to be addressed as important issues.
The State Bank should set out the standards of good banking practices which banks will follow. It should ensure a clear and fair relationship between customers and their banks. Customers should be helped to understand how their accounts operate. The confidence in security and integrity of banking payment systems should be maintained.
The State Bank should establish an office of banking ombudsman, which can be pursued by customers, when a complaint of services and other relevant matters exhausted internally by banks. With the office of banking ombudsman already in place, the State Bank can benefit by saving time and energy for attending to more important issues.
Pakistan has a window of two years, which are very crucial for stream-lining financial discipline and launching a milestone for durable growth of our economy. The honeymoon with US-sponsored world support due to our role in the Afghan War and combating terrorism, will be over soon. We must take the correct long term action now, lest we lose our chance again.