FATF: FBR’s challenges – Dr Ikramul Haq

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In June 2021, Pakistan is going to face yet another review of its remaining compliance of three action items, out of total 27 under anti-money laundering and combatting financing of terrorism [AML-CFT] mandates agreed with Financial Action Task Force (FATF) in June 2018.

After remaining unsuccessful in last review of FATF, according to a report, Mr. Hammad Azhar said: “As you have seen, today the FATF itself is saying that we are 90 per cent close to achieving this goal…the residual three points on the FATF’s action plan will be completed soon….a lot of work has been done on the three points in which we are partially compliant…Pakistan is perhaps the only country in the world that is under the FATF’s dual scrutiny”.

In Press briefing, FATF President announced: “As all action plan deadlines have expired, FATF strongly urges Pakistan to swiftly complete its full action plan before June 2021… a fully completed action plan including three outstanding areas will be verified and then members will test ‘sustainability’…severe deficiencies still remain relating to terror financing. It means the Mutual Evaluation Report [MER] process is also ongoing simultaneously with three remaining partially complied areas.

Pakistan tried to address concerns of FATF by amending the Anti-Money Laundering Act, 2010 [AML, 2010] through Anti-Money Laundering (Second Amendment) Act, 2020, received assent of President on September 22, 2020. Section 6A of AML, 2010 delegates powers to Federal Board of Revenue (FBR) to regulate Designated Non-Financial Businesses and Professions (DNFBPs), namely real estate agents, jewellers, dealers in precious metals and precious stones, and accountants, who are not members of the Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management Accountants of Pakistan.

It is shocking that only two political parties filed income tax returns for tax year 2020 out of 27 registered with FBR and 127 with Election Commission of Pakistan despite section 114(1)(ac) of the Income Tax Ordinance, 2001 makes it mandatory

In exercise of powers conferred under AML, 2010, FBR made regulations, Federal Board of Revenue Anti-Money Laundering and Countering Financing of Terrorism Regulations for DNFBPs, 2020’ [“the said Regulations”] through SRO 924(1)2020 of September 29, 2020, ‘to regulate the above-mentioned DNFBPs.

These generic regulations, poorly drafted, do not meet the standards provided in guidelines issued by FACTA and MER by Asia/Pacific Group (AGP). The only way to come out of grey list is issuance of industry specific regulations and establishing independent anti-crime agency. In the absence of these, the illicit flows of funds will remain unchecked keeping us vulnerable to ML/FT. For example, the term, “Real Estate Agent”, as defined in Regulation 2(n), “includes builders, real estate developers and property brokers and dealers when execute a purchase and sale of a real property, participate in a real estate transaction capacity and are exercising professional transactional activity for undertaking real property transfer”.

It is worth mentioning that while in the grey list, our governments offered unconstitutional asset-whitening-schemes and tax amnesties. Even 2021 started with extension of amnesty for developers, builders and buyers of properties under ‘Prime Minister’s Package for Construction Industry’, widely publicized at the website of FBR, while the same agency is mandated to regulate “real estate agents”. It is open mockery of the role of the FBR to regulate one of DNFBPs, it notified.

According to data given by FBR on special request, the total number of “Real Estate Agents” registered with it are only 16,000 plus ((excluding builders and developers) and return filers for tax year 2020 are around 10,000. It is worthwhile to mention that according to a report, the World Bank estimates the size of Pakistan’s real estate assets “between 60 and 70 percent of its total wealth” (around 300 to 400 billion dollars). FBR’s enforcement in this sector is absolutely hopeless as the number of income tax filers prove. There are numerous associations of real estate agents in each city of Pakistan and their directory is available at a website. FBR must get data from real estate regulatory authorities, one established for Islamabad Capital Territory (ICT), and others by provinces and from websites of private parties to enforce the said Regulations without any delay. Weak enforcement of FBR is evident from the number of registered “estate agents” and those filing returns.

The expression “jeweler” as per Regulation 2(k) “means a person who is a bullion dealer or engaged in sale of jewelry, precious stones and metals including all articles made wholly or mainly of gold, platinum, diamonds of all kinds, precious or semi-precious stones, pearls whether or not mounted, set or strung and articles set or mounted with diamonds, precious or semi-precious stones or pearls, when they engage in a cash transaction with a customer of a value equivalent to two million rupees or more”.

There are over 60,000 jewellers alone in Pakistan. Out of 21,396 jewellers registered with FBR, only 9,651 filed income tax returns for tax year 2020. This is a pathetic number! Interestingly, bullion import is almost negligible, but jewellery shops in large cities have stocks of billions of rupees. Though, this is one of the prime sectors to be regulated under guidelines of FATF and AGP, it is grossly neglected, vulnerable to ML/FT, and largely undocumented.

As regards, “accountants”, defined under the said Regulations, those registered with FBR are only around 57,000 out of which around 37,000 are income tax filers. This is also a very low figure and FBR needs to collect data and enforce the said Regulations as many give fictitious financial statements to banks so that their clients can get higher limits of running finance and loans. This information must be collected from all the banks.

The most disturbing and shocking area is that of Non Profit Organisations (NPOs). The data provided by FBR reveal that around 4000 are registered, while the filers are below 1500. There are conflicting requirements for registering NPOs. The list of “safe charities” is available at the website of National Counter Terrorism Authority and total number registered with various bodies is nearly 100,000.

It is shocking that only two political parties filed income tax returns for tax year 2020 out of 27 registered with FBR and 127 with Election Commission of Pakistan despite section 114(1)(ac) of the Income Tax Ordinance, 2001 makes it mandatory. How can we expect rule of law in Pakistan, when 125 political parties are committing flagrant violation of Article 5(2) of the Constitution? They keep on bashing FBR but fail to fulfill the command that “Obedience to the Constitution and law is the inviolable obligation of every citizen wherever he may be and of every other person for the time being within Pakistan”.

The complete roadmap to come out of grey list of FATF and effectively counter ML/CFT, is available in the book, Pakistan Tackling FATF: Challenges and Solutions [AA Publications, Lahore, January 2021]. It highlights all shortcomings in existing laws/regulations/enforcement to counter ML/TF, tax evasion and other financial crimes. The Government paid no heed to it and remained unsuccessful in the last review. The same will be the position in June 2021, if remedial measures and concrete steps for enforcement are not taken as narrated above. FBR needs trained workforce in countering ML/CFT and get all the DNFBPs/NPOs registered and compel them, especially political parties, to file tax returns and keep prescribed records/documents under industry-specific regulations.

The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)