Global Policy Forum

Pakistan continues to be a haven for 'dirty money', mainly because of its lax white collar criminal laws and its inability to enforce even these laws to curb the crime.

That is perhaps why the phenomenon of money-laundering in this country has continued to go on unabated despite all kinds of the so-called financial and banking sector reforms introduced in Pakistan over the last 10 years on the advice of the World Bank and the IMF.

There is no way of knowing how much of the irregular economy which itself is perhaps larger than the regular economy in Pakistan is infected with purely criminal money linked to drug trafficking, gun running, smuggling of consumer goods, tax and duty evasion and commission, kickbacks and graft. But then its enormity is likely to remain forever as hidden as the money itself because of its very nature.

Even at the World Bank and the IMF levels, an accurate estimate of the money being laundered worldwide is missing. A couple of years back the IMF estimated that the magnitude of money laundering was something like 2 to 5 per cent of the world's gross domestic product or at least $600,000 million. The Group of Seven (G-7) nations' Financial Task Force had put the figure at $300,000 million to $500,000 million worldwide.

According to a number of studies, washing dirty money involves three basic steps: placement, layering, and integration. In the first stage, the dirty money's illicit origin is attempted to be hidden by changing its form by having this money invested in cash-intensive businesses. Next, a number of shell companies are set up in countries known for strong bank secrecy laws or for lax enforcement of money laundering statutes. Then the dirty money is circulated within these shell companies until they appear clean.

For circulating this money, two age-old methods are used. The first is the loan-back system and the other the double invoicing system. With a loan-back, the criminal puts the funds in an offshore entity that he owns and then 'loans' them back to himself. According to researchers, this technique works because it is hard to determine who actually controls offshore accounts in some countries.

In double invoicing-a method for moving funds into or out of a country-an offshore entity keeps the proverbial two sets of books. To move 'clean' funds into say, Pakistan, a Pakistani exporter overcharges for goods or service. To move funds out of Pakistan, a Pakistani importer is overcharged.

Other 'layering' techniques involve buying big items like stocks, luxury cars, travel tickets-that are often registered in benami accounts. The integration stage is the final point when the money is moved into mainstream economic activities- typically business investments, real estate, or luxury goods purchase.

Money laundering is said to have potentially devastating economic, security, and social consequences. It provides the funds needed to finance drug dealers, terrorists, illegal arms deals, corrupt public officials, and others to operate and expand their criminal enterprise.

According to John MacDowell, senior policy adviser, and Gary Novis, Programme Analyst, Bureau of the International Narcotics and Law Enforcement Affairs, US, Department of State in a paper (The consequences of money laundering and financial crime-published in the Electronic Journal of the US Department of State) modern financial systems, in addition to facilitating legitimate commerce, also allow criminals to order the transfer of millions of dollars instantly using personal computers and satellite dishes.

Because money laundering relies to some extent on existing financial systems and operations, the criminal's choice of money laundering vehicles is limited only by his or her creativity. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, gambling houses, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all can mask illegal activities.

Increased efforts by authorities in the major financial markets and in many offshore financial centres to combat this activity had provided further incentives for launderers to shift activities to emerging markets. That is why it is prudent to monitor rather closely the foreign portfolio investments in countries like Pakistan. There is evidence of increasing cross-border cash shipments to markets with loose arrangements for detecting and recording the placement of cash in the financial system and of growing investment by organized crime groups in real estate and business in emerging markets.

It is from this cross-border cash shipments that the State Bank of Pakistan has been buying dollars to window dress its foreign exchange reserves while the IMF looks the other way, perhaps for political reasons. These dollars which the SBP purchases from the market did not come into the market due to legitimate trading activities. If that had been the case, the SBP would not have had to buy them in the first place. And the rupees that the SBP had used for buying them is said to have come from its profits. What profits? It is no more than an accounting trick simply to keep the budgetary deficit within the ceiling fixed by the IMF.

One of the most serious microeconomic effects of money laundering is felt on the private sector. Money launderers often use front companies, which co-mingle the proceeds of illicit activity with legitimate funds, to hide the ill-gotten gains. These front companies have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates.

Money launderers are not interested in profit generation from their investments but rather in protecting their proceeds. Thus they invest their funds in activities that are not necessarily economically beneficial to the country where the funds are located. Among its other negative socio-economic effects, money laundering transfers economic power from the market, government, and citizens to criminals. Furthermore, the sheer magnitude of economic power that accrues to criminals from money laundering has a corrupting effect on all elements of society. In extreme cases it can lead to the virtual take-over of legitimate government.

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