Pakistan last week made arrangements to strengthen anti-terror financing and money laundering laws to foil illegal money transfer through cross-border trade transactions. The move will fulfill one of the major demands of the Financial Action Task Force (FATF), which last year put the country on its “grey list” of nations not doing enough to curb money laundering or terror financing.

In order to comply with FATF guidelines and to avoid further negative classification, the country’s central bank has introduced a regulatory framework for commercial banks dealing in foreign exchange transactions. New rules are devised to frustrate the misuse of trade-related deals for money laundering, terrorist financing and proliferation financing.

The people involved in money laundering and terror financing simply use legitimate trade transactions to transfer value through over-invoicing, under-invoicing, and short shipments.

Muhammad Ishaq, an exporter and one-time member of the Khyber Pakhtunkhwa Board of Investment & Trade (KPBOIT) told Asia Times: “Through this means the persons involved not only hide the use of the substantial volume of international trade for illicit activities but also escape exposure. The undocumented assets acquired through unlawful means thus become legal.”

He also said that following the FATF’s action in June 2018, Pakistan’s external sector finances dropped over 60% in the half of the fiscal year from July to December. “Pakistan received $2.3 billion worth of soft loans and grants from multilateral and bilateral groups during this period as against $5.89 billion in the same period during last financial year,” he added.

“Tampering with the invoice value and short shipment is a two-way process for the Chinese importers and exporters and their Pakistani counterparts. Most of the Chinese products in Pakistan are under-invoiced to save duties but who knows how the Pakistani importer pays the remaining amount of the invoice value to the Chinese exporter,” Ishaq said, while adding that it was a very complex situation that cannot be addressed only with banking regulatory measures.

The regulatory framework of the State Bank of Pakistan (SBP) does not take note of the conflicting clauses of the country’s Export Policy Order (EPO). As far as exports to Afghanistan are concerned, the new regulations clash with the EPO guidelines for land route trade.

Dr. Saeed Jadoon, Collector of Customs told the Asia Times: “In its existing form, the SBP regulations stand in conflict with the procedure defined for Afghanistan in the Export Policy Order. Unless appropriate changes are made in the relevant clauses of land-route exports to Afghanistan, the SBP instructions for combating terror financing and money laundering would be hard to comply with.”

He further said that the procedure defined in the export policy manual for Afghanistan allowed exporters to deposit export proceeds in the bank without using banking channels, which hampers tracing of money trails and does not explicitly show where the money has come from.

“They (government) must amend the policy for exports to Afghanistan to make anti-money laundering and anti-terror financing laws a bit more effective on Afghanistan,” Jadoon said.  He added that Pakistan has strengthened the money laundering procedure by exchanging data with banking companies but Afghanistan was still a gray area that needed to be further scrutinized.

Pakistan made a high-level political commitment to reinforce its anti-money laundering and anti-terror finances regime. Pakistan also committed with the FATF to address its strategic counter-terrorist financing-related deficiencies.

In June last year, the FATF suggested that Pakistan needs to “coordinate and take enforcement action against illegal money or value transfer” services. The FATF also recommended that terror-financing risks need proper identification, assessment, and supervision with remedial actions and sanctions in cases of money laundering and financing of terrorism violations. It further advised for identification of cash couriers and control over the illicit movement of currency to understand the risk of cash couriers used for financing of terrorism.

The Sate Bank of Pakistan underlined 26 examples of tactics titled “Common Red Flag Indicators” which people misuse to manipulate foreign exchange. The first five common red flag indicators center around discrepancies that appear between the value of the goods reported on the invoice, Electronic Import Form (EIF), Manual Import Form (MIF), Electronic Form-E (EFE) and Manual Form-E (MFE) and the known market value of the goods. The indicators pointing to manipulation of the goods include variations in the descriptions of goods on the Goods Declaration Form/transport documents from the descriptions declared on EIF/MIF, EFE/MEF or underlying contract.

Variations between the descriptions of goods on the bill of lading and the invoice show that the description of goods has been disguised.