The flow of illegal funds is a challenge for the global community. A study conducted by the United Nations Office on Drugs and Crime (UNODC) states that the total volume of criminal proceeds amounts to 3.6 percent of the global gross domestic product (GDP), with 2.7 percent (or $1.6 trillion) being laundered through different means.

The International Money Fund (IMF) has estimated that the volume of money laundering in the world is around 2.5 percent of the global GDP. In order to curtail this volume, efforts are being made to prevent criminals’ reach to legitimate financial systems so that the resources are used to create more revenues to overcome the challenges of unemployment, health and education, etc.

In this regard, the Financial Action Task Force (FATF) has established standards to provide guidance to member nations for formulating laws and regulations to counter this menace. The main challenges are about the movement of illicit funds. Technology now provides many means for easy transfer and movement of funds. As a result there are threats of their misuse.

Criminals are always on the look-out for ways to transport crime proceeds. The banking sector is trying to enforce the basic requirements of onboarding their customers and implementing ‘know-your-customers’ requirements and conducting due diligence but some challenges remain.

Another sector that is very attractive for criminals to use as a channel for movement of illicit proceeds is money service business (MSB). The world’s biggest challenge is the operation of unlicensed MSBs that play a vital role in facilitating criminals wanting to inject illegal funds in the legitimate financial system. The criminals identify and use lapses in the system to skip the diligence measures. Moreover, offering online money transfer services without having a physical presence is another challenge. These channels are difficult to monitor and provide criminals an opportunity to evade the screening requirements meant to prevent money laundering and combat financing of terrorism.

Pakistan too faces the problem of unlicensed MSBs. It is one of the countries that did not have formal laws to monitor money laundering activities until 2007. Similarly, there was no mechanism available until June 2004 to monitor remittances made through alternative remittance systems, especially unregistered moneychangers. People were free to choose between traditional banks and unregistered alternative remittance system. Since there were no rules or mechanisms to regulate this activity, money transfer through alternative channels was not treated as a crime.

The International Narcotics Control Strategy Report (INCSR) has highlighted that though it is illegal to operate a hawala without a licence in Pakistan, the practice remains prevalent because of poor enforcement and lack of penalties against illegally operating businesses. Unlicensed hawala/hundi operators are common in the border regions and are widely used to transfer and launder illicit money through neighbouring countries. A common method for transferring illicit funds is fraudulent trade invoicing.

Newspaper stories have highlighted the operation of unlicensed money changers facilitating illegal transfer of foreign currencies abroad. Given the circumstances, Pakistan has a responsibility to counter illegal operations of unlicensed money changers and needs to take strict action against the main drivers of movement of illicit proceeds. The government should devise a mechanism for registration of MSBs and renewal of their licences. Rules should also be introduced to provide a threshold for transfer of funds by MSB agents so that their activities can be monitored closely.

Pakistan is struggling to comply with the FATF action plan. The global regulator has expressed concerns regarding control over risk of terrorist financing. Pakistan’s mutual evaluation reports issued by Asia Pacific Group highlighted anomalies regarding regulations of MSBs.

Pakistan is struggling to comply with the FATF action plan. The global body has expressed concerns regarding control over funding of terrorist financing. Pakistan’s mutual evaluation reports (MER) issued by Asia Pacific Group highlighted anomalies regarding regulation of MSBs. The report also raised questions regarding our understanding of public and private sector officials’ role in Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT).

Keeping in view the fact that there is a high proportion of undocumented economy, execution of due diligence process can be complex and time-consuming. In this regard, regulators have a responsibility to equip their staff with advanced professional skills so that they can play an effective role in regulating this sector. Regulators should also ensure that people in this sector are aware of their responsibility to comply with the regulations. For this, issuance of comprehensive guidance can be an effective method. This will help them in day-to-day compliance with Foreign Exchange Manual and Anti Money Laundering Act, 2010.

The most important factor to monitor, investigate and report is detection of suspicious transactions and cash transaction reporting. As global regulators focus on curbing the menace of money laundering, terrorism financing and proliferation financing, governments are required to have comprehensive AML/CFT/CPF policies and guidelines on a risk management approach in order to identify, assess, manage and mitigate such risks.

The mutual evaluation report highlighted that there were no obligations for dealers of foreign exchange and licensed money changers in Pakistan to report all cash and negotiable instruments in foreign currency over the value of $10,000. Pakistan has amended its Anti Money Laundering Act, 2010, in 2020 and tried to address various concerns raised in the MER. However, detection and reporting of suspicious transactions requires specific expertise. Therefore, regulators should issue proper guidelines highlighting the different scenarios, typologies and red flags so that quality and authenticity of reporting can improve.

The complexity of international transactions needs to be addressed as well. Regulatory frameworks of various jurisdictions differ in threshold requirements and criminals always exploit the loopholes. Effective monitoring requires that authorities improve communication with their counterparts in other countries as well as execute MOUs of cooperation so that proper controls can be implemented. This cannot be done informally or by other government agencies. This will require more formal arrangements. The local agencies must be legally empowered to coordinate and exchange information with other agencies to facilitate the collection of data in order to assist financial investigations.

The only way forward is for regulators to ensure that each of the MSBs adopts the risk-based approach, implements an AML/CFT programme, properly trains its staff and implements internal controls and testing. Regulators must ensure that all MSBs observe licensing requirements. Moreover, all the licensed MSBs should apply customer due diligence and monitor and screen their transactions to curtail potential risks.

Pakistan’s next evaluation is scheduled in February 2022. Progress on all counts will be assessed with reference to strategically important AML-CFT deficiencies. Pakistan should focus on compliance in each and every sector so that it can bid farewell to the embarrassment it has faced since June 2018.

Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in white collar crimes. Huzaima Bukhari is an advocate of High Court and adjunct faculty at the Lahore University of Management Sciences (LUMS)