Money laundering: SBP's sane advice

Briefing the media after a meeting with the heads of all banks on 13th March, 2017, SBP Governor, Ashraf Mehmood Wathra, disclosed that he had discussed a number of issues with bankers today but the prime and dominating subject was money laundering on which several decisions had been made. Tracing the challenge, he said that there was a substantial demand for money laundering and illicit financial services in Pakistan due to its black market economy and challenging security environment. As the high-ups in Islamabad were under a great deal of pressure due to terrorism, corruption and money laundering in different segments of economy, banks were advised to improve their capacity for control of the menace, especially by training their staff here and abroad in this respect. Referring to the decisions, the governor asked banks to "implement an in-house system to detect differences between the values declared in the documents and prevailing market prices." In this connection, banks must put in place subjective and objective controls to identify trade transactions of related parties and design policies and procedures to address the overall risks of trade-based money laundering. They were also advised to ensure that their transaction monitoring processes and systems were robust to flag suspicious transactions. The governor assured bankers that SBP would support and guide any exercises by banks to achieve this objective. Some trade transactions have the elements of under-invoicing and over-invoicing which facilitate transfer of value across borders and primary responsibility to detect this lies with the Customs Department. However, since documents are negotiated and L/Cs settled through banks, banks need to enhance their capacity to process and monitor foreign trade transactions with extreme care and diligence. Illegal forex operators may also have accounts with the banks through which they might be conducting illegal remittance business. Banks should monitor such transactions to enhance their customer diligence process to avoid such relationships. The governor also briefed the media about the rumours of unnecessary foreign travel of bankers. The practice was not widespread and Wathra gave the banks 90 days to submit their foreign travel policies.
So much emphasis on curbing money laundering through banks is understandable and has a certain background. Such a practice was not a big issue so far it was not related to organised crime and terrorist outfits but after certain facts about the unholy relationship came to the fore, the patience of international community is increasingly wearing thin, with the possibility of imposing sanctions on countries that are not serious in tackling the issue. Unfortunately, Pakistan is among the top countries deemed to be notorious for indulging in such a practice. A US State Department report released in the first week of this month was the latest accusation hurled at the country in which Altaf Khanani Group was labelled a money laundering organisation having close links with crime and terrorism. In order to mollify such a bad impression, the government was under tremendous pressure to act decisively and State Bank's latest advice to bankers seems to be a part of this broad-based effort.
However, whether the decisions taken at the bankers' meeting would yield the desired results is a moot question. In our view, the decisions may not be totally in vain but would have a negligible impact on the magnitude of over-invoicing/under-invoicing and money laundering. The governor has urged upon banks to train their staff for the purpose but bankers are neither well equipped to detect such crimes nor have they been recruited to fulfil such a function. Also, it is a full time job to keep a close watch on prices of thousands of products in the domestic and foreign markets and Customs Department, as mentioned by the governor, is more suited to the purpose. A better alternative could be proper adjustment of the rupee rate which could reduce the incentive for over-invoicing/under-invoicing to a certain extent. Another problem is the wide network of money changers in the country to facilitate money laundering. If the banks could somehow be discouraged or even totally prohibited from this practice, hundi/hawala and other informal channels could be easily used to meet the demand for money laundering. Money, in fact, is so fungible that, whatever the obstacles, it can easily cross the borders and reach the targets. A long-term solution to the problem is possible if security situation in the country is improved, the size of the undocumented economy is reduced, tax evasion is weeded out from the system, crime is curbed all over the globe, stability in exchange rate is ensured and confidence is restored in the policies of various governments. Anyhow, it is better for the government and the SBP to demonstrate to the outside world that the country is at least trying its level best to control the menace to the best of its abilities.