The Secur-ities and Exchange Commission of Pakistan (SECP) has apprehended that proscribed persons involved in terrorist financing activities may be involved in obtaining microcredit or micro-loan from microfinance companies and using it for such illegal activities. According to a SECP report on measures to control money laundering/ terrorist financing, the lending products like loans/leases and deposit products offered by non-banking finance companies (NBFCs) and modarabas may be used for money laundering purposes.
The NBFCs and modarabas offer loans/ leases and deposit products. There is a risk that lending products of these institutions may be used for ML purposes. Microfinance institutions provide microloans to low-income individuals with the aim of poverty reduction and promoting the betterment of the social wellbeing of individuals.
However, there is a risk that persons involved in TF activities may obtain microloans from these institutions and use these funds for illicit purposes, including terrorist financing (TF). Asset management companies (AMCs) offer investment products to both individuals and institutions. The investment products offered by AMCs may be used for layering of suspicious funds through frequent/ unusual transactions.
In case of non-banking financial companies & modarabas, these are investment products and both legal and physical persons and legal arrangements may invest in these deposit products. These have a medium high level of ML vulnerability. In case of leasing/financing, these have a moderate level of TF risk. Some NBFCs do offer credit to meet working capital requirements, where there is some risk of funds being used for TF.
Microfinance NBFCs offer microcredit to individuals with an aim of poverty reduction. However, there is a risk that proscribed persons/ persons involve in such activities may obtain microcredit from these entities and use it for terrorist financing, sources said. The report highlighted that the microfinance entities have outlets across Pakistan, especially in rural/remote areas. Branches alongside porous borders in different provinces are inherently more vulnerable for ML/TF. Pakistan has porous borders with Afghanistan and areas along KP and Balochistan are therefore critical geographical vulnerability. Customers from high risk countries for ML/TF may seek a business relationship with a NBFCs/modarabas in Pakistan to conduct/facilitate criminal activities in Pakistan. Such customers from high risk jurisdictions present a higher risk to ascertain the validity and adequacy of the documents presented and to be familiar with the laws and requirements of foreign jurisdictions, the SECP said.
Moreover, most of the recovery of micro-credit is in the form of cash. This presents a challenge that the movement of funds may not be easily traceable. About the modarabas products, it said that these are investment products and both individuals and institutions (including trusts, NGOs) are allowed to invest in these products. These have a relatively high level of money laundering (ML) risk.
As far as ijarah (Islamic leasing)/ musharika/ morabaha (Islamic financing) are concerned, the SECP report said that these have a moderate level of TF risk. Leasing is mostly granted to finance purchase of plant, machinery and vehicles. However, some modarabas do offer credit to meet working capital requirements, where, the risk of funds being used for TF may not be ruled out, the SECP said.
The assessment of the inherent ML/TF vulnerabilities by the sector revealed that the information available to NBFCs and modarabas on the source of funds invested by high net worth individuals is often unreliable or unavailable. For these reasons, these customers are rated high risk for ML.
In case of foreign and non-resident clients, the customer identification and CDD information (source of funds) is not easily verifiable and therefore it is difficult to ascertain if the funds being invested constitute criminal proceeds. Foreign and non-resident clients may also place funds, the source of which is not verifiable, in the deposit products offered by NBFCs and modarabas. Therefore, these customers are rated high risk for ML (money laundering).
Copyright Business Recorder, 2019
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