SBP's move to check ML&TF

The authorities in Pakistan are quite active these days to check money laundering (ML) and terrorist financing (TF) for obvious reasons. After SECP's proposed amendments on ML&TF through microfinance institutions a few days ago, State Bank of Pakistan has also moved to curb this menace and issued "Framework for Managing Risks of Trade-Based Money Laundering and Terrorist Financing" on 15th October, 2019. According to SBP, transferring value through legitimate trade transactions has become increasingly attractive avenue for money launderers and terrorist financiers, as they are able to easily obscure their transactions in significant volumes of international trade and escape detection. The main methods by which parties could transfer value through legitimate trade transactions are under-invoicing, over-invoicing, short or over-shipment and obfuscation of type of goods and services. SBP has now developed a comprehensive framework in this regard in order to strengthen Anti-Money Laundering/Combating Financing of Terrorism (AML/CFT) regime to restrict possible misuse of banking channels. In this respect, authorised dealers (banks) have been advised to upgrade their systems and control, and bring policies/procedures in line with the new framework to ensure meticulous compliance with its provisions with immediate effect. Banks have also been advised to educate their clients about their obligation of ensuring correct declaration of particulars on the prescribed forms, utilisation of foreign exchange for the exact purpose for which it is acquired and repatriation of foreign exchange that represents the full export value of goods.

SBP has also stressed the point that provision of this framework is in addition to and not a replacement of the instructions already issued on the subject of ML/TF risks. Banks are also told that "in the event it is found that material information required to be submitted on the prescribed forms has been omitted or suppressed, foreign exchange is misutilised by a client or export proceeds repatriated by a client do not represent the full export value of goods, SBP will initiate penal action against such delinquent parties."

The fresh set of instructions by the SBP to the authorised dealers, in our view, is another attempt to plug all the loopholes which could be utilised for ML and TF by criminal elements to spread terrorism within the country and abroad. It may be mentioned here that SBP has always been very conscious about the need to block ML & TF because of its highly negative impact on investor sentiment and growth prospects besides constraining the professionals and the entrepreneurs to leave the country for greener pastures elsewhere. Some of its earlier initiatives in this regard included making regulatory changes to align AML and CFT with the recommendations of FATF, identification and verification of banks' customers and their beneficial owners and changes made in the Fit and Proper Test (FPT) criteria for sponsors/directors, etc. However, while such instructions would have been considered sufficient in normal circumstances, the SBP now seems to be making extra efforts to cover all the means for ML and TF in order to find an exit strategy from the grey list of FATF. The step seems to have been particularly motivated by the fact that Pakistan continues to be in the grey list despite meeting most of the requirements of the FATF. According to the latest reports from Paris, FATF has, unfortunately, again decided that Pakistan will remain on its grey list till next February and directed Islamabad to take extra measures for complete elimination of terror financing and money laundering. Although we feel that the latest measure by the SBP could only make a minor difference to the flow of illegal funds for ML and TF, yet there is no harm in covering each and every avenue which could be used for these kinds of nefarious designs and fulfil the requirements of FATF.

While there could hardly be any doubt about the objectives and sincerity of the SBP, it could be easily argued that exporters or importers generally resort to over-invoicing/under-invoicing or short/over-shipment to keep a part of the foreign exchange earnings abroad for the purchase of property or spending in certain developed countries and some other contingencies and not for ML and TF purposes. Such tactics are also employed to evade customs duties and tariffs on imports and exports. Besides, it may be noted that there are some other channels like illegal money changers which can be more easily used for these evil intentions. Also, the SBP must be aware that bankers are not equipped and trained to trace and detect the possibility of ML and TF through over-invoicing/under-invoicing, etc. Instead, it would have been better to give this responsibility to the customs staff at the ports. It has also been noticed that it has become quite difficult to open an account with a bank and deposit or withdraw amounts beyond a certain limit from a bank. The new instructions of the SBP would add to the difficulties of potential and existing clients, particularly those who are engaged in the export or import business.