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Money laundering forex firms and remittances

The State Bank of Pakistan (SBP) has asked all foreign exchange companies to make sure their business is in compliance with the anti money-laundering rules and regulations.

The President of the Forex Association of Pakistan, Malik Bostan, says he and his colleagues have already tightened their belts to do the needful and come up to the expectations of the central bank.

“We plan to organise workshops and training programmes in collaboration with the central bank, banks and experts of anti money-laundering laws for executives and staff of all exchange companies,” he told this writer on March 14 over phone.

“The SBP has told us in writing that it could proceed against those companies unaware of anti money-laundering and steps combating terrorism financing (AML/CFT). So, we have to do it. All exchange companies will do it.” He was responding to queries regarding SBP’s requirements from them in the wake of grey-listing of Pakistan by the inter-governmental Paris-based Financial Action Task Force (FATF).

Also read: Pakistan deserves international support, not a place on the FATF grey-list

“Banks are already implementing the AML/CFT regulations in letter and spirit though oversights do occur and SBP does take stern action against them,” says the head of a big local bank. “It is good to see that our exchange companies, too, are now preparing themselves to become fully compliant regarding the applicable parts of those regulations.”

“It’s easier for unscrupulous elements, tax-evaders and money launderers to misuse an exchange company rather than a bank to channel illicit funds. But that will now stop”

Need of the hour: Fuller and stricter compliance of AML/CFT is the need of the hour for Pakistani banks and exchange companies to avoid the negative impact of being grey-listing by FATF, central bankers say privately.

It is also necessary for ensuring faster growth of sustainable forex inflows in Pakistan they say, implying that any mishap in weak administration of AML/CFT regulations runs the risk of hampering smooth flow of export proceeds, home remittances and even foreign direct investment (FDI).

Sources in banking circles say the central bank may come up any time with a new sub-set of AML/CFT regulations for exchange companies. “It’s easier for unscrupulous elements, tax-evaders and money launderers to misuse an exchange company rather than a bank to channel illicit funds,” says treasurer of a large local bank.

“But that will now stop”.

Remittances: Exchange companies play an important role in facilitating remittances of overseas Pakistanis. According to Malik Bostan, a significant part of our total $19bn plus annual remittances, up to 15-20pc by some estimates, comes through exchange companies.

If these companies don’t become fully responsible in their conduct, Pakistanis settled abroad might stop using their services and switch over totally to banks through their internationally accredited money transfer operators (MTOs).

Home remittances of Pakistan are growing at 3.4pc during this fiscal year, quite at par with the World Bank estimate for global average growth in remittances during 2018, and higher than its 2.6pc forecast for the entire South Asian region.

With $19.251bn remittances in calendar year 2017, Pakistan stood sixth among the largest remittances recipient countries behind India, China, Mexico, Philippines and Nigeria.

In eight months of FY18 i.e. July 2017 to February 2018, Pakistan received around $12.834bn in home remittances and this figure may touch—or even cross—the crucial $20bn mark at the end of the year in June.

On the other hand, exports during this period totalled $14.854bn, pushed by an annualised growth rate of 11.66pc, and by the end of the fiscal year close around $23bn.

“The problem is, neither remittances nor exports can go beyond these projected levels which are quite optimistic and even their sum total ($43bn) would grossly fall short in financing imports that are projected close around $58bn-$59bn,” says a former deputy governor of the State Bank of Pakistan. In eight months FY18, imports have already consumed $39.131bn.

Apart from inadequacy of our remittances in providing relief in the context of our external sector problems, their importance as the second largest non debt-creating source of forex inflows is quite obvious. “That’s why we must give remittances a real policy push.”

Changingpattern: Inflows of remittances are witnessing a change in pattern: Saudi Arabia is still on top of the list of host countries from where the bulk of our remittances originate but Saudi remittances are currently witnessing negative growth.

There are quite a few reasons for that: imposition of a tax on non-earning family members of expatriates in the Kingdom, economic problems of Saudi economy, fall in export of our Pakistani labour there and the ongoing process of localisation of jobs in the Saudi labour market etc.

In first six months of 2017, only 77,600 Pakistani workers went to Saudi Arabia against 262,119 in six months of 2016, according to our Bureau of Emigration and Overseas Employment. More recent data is not available.

Pakistan has relied on Saudi Arabia and the UAE for too long to attract remittances of overseas Pakistanis working there but now not only Saudi remittances are declining but due to changing market dynamics export of labour to the entire GCC region is falling.

Naturally then remittances inflow from there (through official channels) would begin to fall or stop growing.

Informal remittances: One way of addressing this issue could be to intensify checks on remittances inflow through informal ways of Hundi and Hawala. If all Pakistanis in the GCC region start remitting money back home via banks and stop using informal means, it would not only boost remittances inflow but would also help Pakistan make a stronger case at FATF about its financial transactions mechanism being efficient enough to fight money laundering in all forms.

SBP warning: That is why it is necessary to sensitise all forex companies on the issue of money laundering and combating financing of terrorism, central bankers say. Forex companies claim they are willing to make all their operations compliant to AML/CFT in a good spirit of cooperation with the regulators but deny their involvement in illegal handling of remittances.

Sources in SBP say the central bank has recently warned exchange companies if they are found involved in tolerating or promoting lack of transparency in their operations, the SBP can take extremely strict actions against them. And when SBP says so, it really mean business, bankers insist recalling how in the past the central bank had cancelled, despite immense pressure, the license of a big and powerful exchange company that had strong political backing.

Published in Dawn, The Business and Finance Weekly, March 19th, 2018

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