INSIGHT
Financial crime investigators are facing many challenges in Pakistan. The undocumented economy; the nonexistence of wealth tax, inheritance tax, and gift tax; unchecked foreign remittances; and deposit-oriented commercial banking make it difficult to track dirty money earned by tax evaders and corrupt individuals. Because of this, the role of whistleblowers has become imperative in efforts to eradicate the menace of corruption and tax evasion from the society to make it equitable, just, and fair for all social classes.
The presence of large denominations of financial instruments, including currency notes and prize bonds, help people transact in cash instead of through banking channels. Thus, in most cases, it becomes difficult for financial crime investigators to develop a money trail when a suspect makes hefty investments or incurs huge cash expenses using the dirty money.
A currency note of Rs5,000 and a prize bond of Rs40,000 make it easy for tax evaders and corrupt individuals to carry huge cash amounts. The dirty cash creeps into the economic system along with white money to launder itself, thereby deceiving investigators of the Federal Board of Revenue (FBR), the National Accountability Bureau (NAB), the Federal Investigation Agency (FIA), and other provincial revenue authorities and anti-corruption establishments.
For example, a criminal having Rs1 million of white money and Rs2 million of black money in cash purchases a property of Rs3 million and makes payments of Rs1 million and Rs2 million through cheque and cash respectively. He declares the worth of that asset to be Rs1 million in his wealth statement filed under income tax law or in his asset declaration filed under conduct rules 1964, instead of its actual value ie Rs3 million in this case.
This undervaluation of an asset is difficult for an investigator to prove. Moreover, lawyers, doctors, architects, and builders, etc, render their expensive services in cash that further facilitate dirty money earners. Therefore, it has become challenging to document the economy due to the built-in love of our economic system to cash.
The low tax-to-GDP ratio of around 10 percent is evident that our people are by and large tax aversive for various reasons. A good tax system is the first step to detecting incidents of corruption and raising the cost of tax evasion to make it unacceptable and unprofitable. Additionally, fiscal laws help in the documentation of the economy by disallowing expenses made in cash and making the declaration of assets and wealth compulsory. The Income Tax Ordinance, 2001 and the Sales Tax Act, 1990 laws require people to make business transactions of Rs50,000 and above through banking channels only, while the former also imposes a substantial penalty along with income tax if a person receives a loan or a gift in cash and not through established banking channels. Section 39(3) of the Income Tax Ordinance, 2001 states that “...any amount received as a loan, advance, deposit for issuance of shares or gift by a person ... from another person ... otherwise than by a crossed cheque drawn on a bank or through a banking channel ... shall be treated as income chargeable to tax under the head “Income from Other Sources” for the tax year in which it was received”.
However, despite these stringent penalties, corrupt individuals, and tax evaders successfully launder their dirty money by making loan-back and gift-back arrangements without repercussions due to the non-existence of gift tax and inheritance tax laws. Similarly, dirty money earners make benami investments in the names of their close relatives and after a considerable time receive back their assets either in the shape of a gift or inheritance without paying even a penny to the government. Declaring fake gifts and inheritance in this way is an easy way to launder money which also necessitates arduous financial crime investigation as the investigator has to put in a significant amount of work to prove the crime before the courts of law.
No one can deny the pivotal role of foreign remittances in efforts by the State Bank of Pakistan (SBP) to accumulate foreign currency reserves which allow the economy to absorb shocks from factors that can negatively affect exchange rates. Foreign remittances give relief to economic managers when continuous negative Balance of Payments (BOP) threatens the economy. However, due to the established hawala system in Pakistan and blanket immunity from tax inquiries, foreign remittances are widely used to whiten untaxed money by tax evaders. Section 111 of the Income Tax Ordinance, 2001 deals with unexplained income or assets and subsection 4 of the said section restricts its application on foreign remittances. It states that section 111 does not apply “to any amount of foreign exchange remitted from outside Pakistan through normal banking channels that is encashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect.”
Tax evaders use this immunity in their favour by sending their untaxed black money to financial havens such as Dubai through the hawala system and receiving back their money in the shape of foreign remittances. FBR tax investigators are facing severe difficulties in chasing the dirty money in all such cases.
Therefore, laundering money in the form of foreign remittances has become an important way to dodge tax investigators. Though the honourable Supreme Court of Pakistan has already struck down the claim of immunity on account of foreign remittance by corrupt individuals in cases of the National Accountability Bureau, the hawala system is still being widely used for trade-based money laundering.
A large number of bank officials rely on deposits to secure their jobs, and they knowingly avoid prudential regulations of the State Bank of Pakistan to keep their customers happy. These bankers guide their customers through the process of splitting and smurfing transactions to bypass compulsory reporting of Suspicious Transaction Reports (STRs) and Currency Transaction Reports (CTRs) to the Financial Monitoring Unit (FMU). Moreover, a few bankers also help their clients in operating benami accounts by making fake “Know Your Customers (KYC)” reports. A biometric verification process for the opening of bank accounts was recently introduced with the aim of reducing benami accounts. Still, financial crime investigators face difficulties in chasing dirty money when white-collar criminals develop a collusive arrangement with bankers.
Under present circumstances, the role of a well-informed whistleblower is imperative in pointing to and tracking dirty money possessed by corrupt individuals and tax evaders. Reward rules approved and notified by the government in May 2016 under the Income Tax Ordinance, 2001, the Sales Tax Act, 1990 and the Federal Excise Act, 2005 will encourage whistleblowers to report incidents of tax evasion and tax frauds. In return, the Federal Board of Revenue will give them a reward. Moreover, effective promulgation of whistleblower protection acts by the federal and provincial governments will provide them with safety. Resultantly, it will help financial crime investigators to follow the dirty money to make the life of white-collar criminals difficult.
The writer works with the Inland Revenue Service
