Money Laundering

Vienna Convention in 1989 and United Nation Convention Against Transnational Organized
Crime in 2000, these international instruments call on states to outlaw the most common
offences, including Money Laundering and terror financing and bind states for strict
compliance.
The Financial Action Task Force (FATF) identifies it as the processing of criminal proceeds to
disguise their illegal origin. The main purpose of FATF is to devise an intergovernmental
response for curbing money laundering and combating the financing of terrorism. It
monitors the government’s financial activities to track any misappropriation related to
money laundering regulations and can suggest financial sanctions against countries that do
not obey international regulations and policies. Pakistan resorted to some comprehensive
anti-money laundering measures in the early 2000s. But in June 2018, Pakistan was included
in the ‘grey list’ issued by the FATF. Most of the reports and indexes of the international
organizations rank Pakistan as one of the worst countries having a poor Anti-Money
Laundering/Combating Financing of Terrorism strategy. As per Basel Institute on
Governance report of 2017, Pakistan ranked worst 46th country among 146 countries on
money laundering. There are no penalties by being in the ‘grey list’; but there would be
detrimental effects on the Pakistani market. Banks would be the first to suffer by this as
International financial institutions would be reluctant to conduct business with the Pakistani
counterparts. It would deter investment. Even international banks can pull their business
out of Pakistan as a result of it. It may causing problems for oversees Pakistanis as well.
Money laundering involves three basic steps to disguise the source of illegally earned money
and make it ready for usage as white: placement, in which the money is introduced into the
financial system, usually by breaking it into many different deposits and investments;
layering, in which the money is shuffled around to create distance between it and the
perpetrators; and integration, in which the money is then brought back to the perpetrators
as legitimate and “clean” money.

Causes of money laundering

• TAX EVASION is one of the main reasons for money laundering. Many elites in Pakistan avoid
paying taxes. They usually bribe the tax office employees to either show their tax status as
“paid” or to not notify he tax authorities of the fact that the tax has not been paid. The rich
people a small chunk of the tax amount as bribe. They also bribe the concerned officials of
the Anti Money laundering organizations to allow the transfer of large amounts of cash
abroad and label the same as “clean” without paying the applicable tax on it, by either
reporting an incorrect amount of transferred cash or not reporting it at all. Hence, money
laundering proceeds in two ways, i.e., by evading taxes and by transferring cash to foreign
banks successfully for the sake of getting property abroad.

• Another reason is the Bribery and Corruption of our politicians and bureaucrats. They
promote this crime either by becoming directly involved in money laundering; making
 offshore properties, drug trafficking, smuggling, corruption, misappropriation of funds,
bribery, etc. or by taking bribes from those who are involved in such crimes. It is not only
politicians but also personnel in the administrative and anti-corruption departments who
have been found guilty of taking bribes from money launderers, who have been allowed to
take huge amounts of cash out of the country and, in return, took bribes from them.
• Thirdly the weak financial regulations on the part of government are increasing risks of
money laundering. The failure of banks in detecting the laundered money is quite alarming.
• Similarly our geographical and demographic composition including porous nature of
international borders, law and order scenario can as be quoted as reasons in this regard.

Methods of money laundering

1. Smurfing is the process where large amounts of money is divided into multiple
small transactions, often spread out over many different accounts, to avoid
detection; and the use of currency exchanges, wire transfers and “mules” or cash
smugglers to move money across borders. By investing in mobile commodities such
as gems and gold, they easily move the same to other jurisdictions.
2. Hundi has been a major channel of money laundering in Pakistan. Through this
method, overseas nationals send remittances to their relatives, friends, family, etc. It
works as a credit transfer and transfers money without actually moving it from one
region to another. Allegedly, some foreign exchange companies use this process to
hide their taxable earnings from government.
3. Bulk cash smuggling: This involves physically smuggling cash to another
jurisdiction and depositing it in a financial institution, such as an offshore bank, with
greater bank secrecy or less rigorous money laundering enforcement. Done through
borders and airports.
4. Sponsorship to terrorists is provided by money launderers and other criminals
who support them in a disguised manner. In such cases, all the money that terrorists
receive is actually ‘laundered’ money because it is kept hidden, and neither its
original source nor its destination is revealed to government.
5. Drug trafficking Pakistan and its neighboring countries, Iran, Afghanistan, and
India, have a high volume of opium cultivation and trade origins. Drug trafficking
within these countries, as well as across their boundaries, takes place regularly
because the borders, especially the Afghanistan–Pakistan, Iran–Pakistan, and Iran–
Afghanistan borders, are not strictly protected and monitored. Drug traffickers move
the drugs across the border and get cash in return from the drug lords, who are
pursuing their activities furtively in Pakistan as well as in its neighboring countries
6. Laundering through Trade involves under- or over-valuing invoices to disguise
the movement of money. For example, the art market has been accused of being an
ideal vehicle for money laundering due to several unique aspects of art such as the
subjective value of art works as well as the secrecy of auction houses about the
identity of the buyer and seller.
7. Cash-Oriented Businesses: In this method, a business typically expected to
receive a large proportion of its revenue as cash uses its accounts to deposit
criminally derived cash. Such enterprises often operate openly and in doing so
generate cash revenue from incidental legitimate business in addition to the illicit
cash. In such cases the business will usually claim all cash received as legitimate
earnings. Examples are parking structures, tanning salons, car washes, arcades, bars,
restaurants, and casinos.
8. Shell companies and trusts : Trusts and shell companies disguise the true
owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need
not disclose their true owner. Normally they use the slang term rathole, though that
term usually refers to a person acting as the fictitious owner rather than the business
entity.
9. Round-tripping: Here, money is deposited in a controlled foreign corporation
offshore, preferably in a tax haven where minimal records are kept, and then
shipped back as a foreign direct investment, exempt from taxation.
10. Bank Control: In this case, money launderers or criminals buy a controlling
interest in a bank, preferably in a jurisdiction with weak money laundering controls,
and then move money through the bank without scrutiny.
11. Casinos: In this method, an individual walks into a casino and buys chips with illicit
cash. The individual will then play for a relatively short time. When the person
cashes in the chips, they will expect to take payment in a check, or at least get a
receipt so they can claim the proceeds as gambling winnings.
12. Tax Amnesties: Criminals often take advantage of such schemes in order to
legalize their unreported assets and undisclosed cash before tax authorities
13. Conversion of bribe into foreign currency : It is the novel way to do money
laundering by converting the Pakistani rupees into foreign currency of higher value
such US Dollars or Euros.
14. Agricultural income: Since Pakistan has almost nil agricultural tax on Agni
production so traditionally people claim huge sums of money as profits earned
through agricultural activities.
15. Shrines income: Pakistan has a strong attachment towards religion and related
religious activities. They visit the shrines of holy saints and offer alms and other cash
amounts as charity there. Except few shrines under the control of Auqaf
Department, there are thousands of such shrines whose income along with its
source is not known. It is alleged that criminals use the name of such shrines to do
money laundering.
16. Antiques income: Criminals show their illegal money as an outcome of sale
proceeds of some antiques either discovered by them or received through
inheritance.
17. Prize bond money: This is the most ideal way of money laundering. The corrupt
Politicians, Government officers and other criminals show their ill gotten money as
an outcome of Prize bond draws.
 18. Income shown from the Tax exempted areas such as FATA and PATA:
The criminals show their illegal money as proceeds of income from businesses
carried out in the tax exempted areas such as erstwhile FATA and PATA.
19. Fake Bank Accounts: Some bank officials carry out this practice by showing the
dirty money in someone else account instead of the original culprit. The recent high
profiles case of fake bank accounts involving some top politicians is a classic example
of it.
20. N.G.Os: The criminals register phony N.G.Os to show that either they collected funds
through community participation, donations or simple fund rising.
21. Foreign Remittances and wire transfers : This is a very safe way of laundering
the dirty money as Government has encouraging policies for foreign remittances and
wire transfers.

FATF most strictly to act against the illegal activities of NPOs Non Profit Organizations
as they are abused the most for terror financing.