Taxation

79 suspicious transaction reports being investigated

Directorate General, Intelligence & Investigation-Inland Revenue (IR) is thoroughly investigating 79 Suspicious Transaction Reports (STRS) received from Financial Monitoring Unit (FMU) of State Bank of Pakistan (SBP), covering high risk areas of money laundering ie real estate dealers, precious metals/stones dealers and financial sector.

According to the annual report of directorate for 2016, there are seventy nine Suspicious Transaction Reports (STRS) which have been received from FMU since 09.06.2016 (issuance of notification) till 31.12.2016 and investigations in all cases are underway in the concerned Directorates of I&I-IR. As soon as cases are finalized, FMU shall invariably be informed about the outcome of the same.

The agency highlighted that the proceeds of crime can easily be invested in the stock market for purpose of money laundering as no compliance to AML is required. Suspicious transactions are not reported to FMU. There is no effective mechanism to check sources of proceeds of an institutional investor.

Major Risk Areas in Money Laundering revealed that Pakistan promulgated its first money laundering law in form of Anti Money Laundering Ordinance in 2007 which was reframed in form of Anti Money Laundering Act, 2010. According to AML Act, 2010, offence of money laundering includes that a person shall be guilty of offence of money laundering, if he acquires, converts, possesses, uses or transfers a property knowing or having reason to believe that such property is proceed of crime or a person conceals or disguises the true nature, original location, disposition, movement or ownership of a property, knowing or, having reason to believe, that such property is proceed of crime. Money laundering is the process of disguising the proceeds of crime and moving value through the use of any medium like trade, investment in real estate etc in an attempt to legitimize their illegal origins.

Proceeds of crime are invested in those sectors where there is least documentation and it becomes easy to give legal cover to ill-gotten money. The serious threat posed by this menace to the very existence of the state and social fabric is paramount. The AML Act criminalized the offence of money laundering and added a wide range of predicate offences. Sectoral vulnerabilities to the acts of money laundering in Pakistan manifest great variety. Some sectors of economy have very effective frameworks and procedures in place to check money laundering while other sectors lack fundamental regulatory mechanism. In order to counter the acts of money laundering it is imperative to have knowledge of the national economic structure as well as vulnerabilities of different business sectors in relation to their contribution to money laundering threat. Major risk areas for money laundering in Pakistan include real estate dealers, precious metals and stones dealers, and financial sector.

Real Estate: Real estate is one of the most attractive areas of investment for Pakistani citizens at home and abroad. As per statistics provided by Pakistan”s Ministry of Commerce, real estate investment constitutes about 2 percent of GDP and according to a study about 7 billion rupees have been invested in the real estate which are untaxed. It is a favourite area for parking proceeds of crime and has high vulnerability for money laundering.

Real estate service providers make deals between buyers and sellers of property against predetermined commission. Typically a property dealer is responsible for getting the paper work done in a deal for both seller and buyer. Mainly business of real estate is not regulated in Pakistan. Real estate agents are registered under Real Estate Agents & Motor Vehicle Dealers Ordinance, 1980 by the provincial authorities. Property ownership, title, sale, purchase, leasing and other transactions relating to real estate are governed by different laws including Registration Act, 1908, Stamp Act, 1899, Land Revenue Act, 1967 and Transfer of Property Act, 1882. Real estate is highly vulnerable to money laundering for the following reasons:

The real estate agents are not very well educated and licensing and registration process is not very stringent. Hence, the real estate dealers are not able to appreciate the AML. Currently, no standard operating procedure or code of conduct is in vogue to check money laundering in real estate sector. The regulatory framework in place is obsolete. Capacity building, training, certification and impending knowledge regarding anti money laundering is non-existing for the real estate agents.

There is no price determination mechanism in the real estate sector. Transactions are recorded at very lower side as compared to fair market value of property. In a cash based economy in absence of any updated rate lists real estate sector becomes a safe haven for the money laundering activities. There is no reporting of unusual and suspicious transactions.

Precious Metals & Stones: Precious metals like gold and gem stones are not only used during marriage ceremonies but also attract the investors as it provides easy mechanism for long-term savings. Due to the fact that these precious metals & stones can be easily moved the risk of using this medium in money laundering is very high. As the precious metals & stones carry large value they are preferred over cash. There is no regulatory or supervisory mechanism in place for this sector. In a cash based economy there is great ease and convenience to invest the proceeds of crime in this sector. Lack of awareness among the dealers about money laundering laws and absence of supervisory oversight makes this sector most vulnerable to be misused for money laundering. Through the size of this sector in economy is small yet its vulnerability is very high. Income Tax Rules require the traders to maintain books of accounts along with other record of transactions but need for specific and effective supervision, licensing, registration and reporting mechanism for dealers of precious metals and stones is undisputed and imperative.

Financial Sector: It is one of the major sectors of economy of Pakistan and consists of banks, securities, National Savings, insurance and non-banking financial institutions. As of December, 2015, aggregate assets of the financial sector were about 68 percent of the GDP of the country

Banks hold 74 percent of the financial sector assets. Though bank input is verifiable and effective monitoring mechanisms are in place its vulnerability to money laundering cannot be overlooked. Regulatory framework for banks in Pakistan is principally based on Banking Companies Ordinance and State Bank Act along with more than dozen supplementary laws and regulations. Anti money laundering laws in Pakistan mainly focus on liability products and least attention has been paid to asset based products. There is a need to have clear instructions to banks to have specific controls applied on asset based products. Banking sector needs to have more stringent regulatory framework, develop risk profiles of its customers, to fix integrity issues of staff and put in place bio-metric technology in all bank branches for customer identification in order to effectively cope with issue of money laundering.

After integration of Lahore, Karachi and Islamabad stock exchanges, securities market of Pakistan consists of Pakistan Stock Exchange and over 350 brokerage houses. Securities & Exchange Commission of Pakistan regulates securities market in Pakistan.

According to the capital market plan issued by SECP in April 2016 the market capitalization as a percentage of GDP was 24.6 percent in the year 2015. Both individuals and institutions invest in the securities market after complying with the existing regulatory provisions and opening brokerage accounts. Proceeds of crime can easily be invested in the stock market for purpose of money laundering as no compliance to AML is required. Suspicious transactions are not reported to FMU. There is no effective mechanism to check sources of proceeds of an institutional investor. Directors through company”s account may route the illicit proceeds to brokerage trading account in order to engage in trading activity and launder illicit proceed through routing of funds from banks and securities market. Brokers are not trained to verify the sources of the proceeds of investment. Effective mechanism and regulations need to be in place in order to filter the suspect investors.

The Directorate General of Intelligence & Investigation (IR) was given powers of anti-money laundering investigation and prosecution of offences under Anti Money Laundering (AML) Act, 2010 where proceedings of crime have been accrued from commission of offences. The Directorate General of Intelligence & Investigation (IR) was given powers of anti-money laundering investigation and prosecution of offences under Anti Money Laundering (AML) Act, 2010 where proceedings of crime have been accrued from commission of offences, the report added.

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