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Money laundering flourishes under garb of remittances

ISLAMABAD: A famous bakery chain with its branches in every large and small city does a roaring business, now expanding into other sectors as well. But when it comes to paying the tax, the business is either shown in the loss or making a small profit. This is a family-owned

By our correspondents
September 03, 2015
ISLAMABAD: A famous bakery chain with its branches in every large and small city does a roaring business, now expanding into other sectors as well. But when it comes to paying the tax, the business is either shown in the loss or making a small profit.
This is a family-owned business. The father, who heads the business, and his sons all live in Pakistan but receive remittances in billions from the Middle East. No one asks them who is sending them huge money from abroad when all the family members are in Pakistan.
The Federal Board of Revenue is not authorised to inquire about the source of such remittances that run into billions of rupees with the Middle East constituting over 60pc of them, the main source of the country’s foreign exchange reserves.
Every government has proudly claimed that record levels of remittances were achieved during its tenure but none bothers to know how large businesses are involved in money laundering. A proposal to tax the foreign remittances has repeatedly been turned down, the latest this year when the FBR demanded it.
Not only the big businesses evade taxes through remittances, they avoid the documentation of their income sources. “The example of this bakery chain is just a tip of the iceberg. Name any big business and they are into it,” said an FBR official.
This business goes on under the garb of the Protection of Economic Reform Act, 1992, which instead of promoting formal economy, has helped the undocumented economy flourish, according to an investigator of financial crimes.
Some officials had dared to question this suspicious inflow of remittances a few years after the promulgation of this Act and were placed under suspension. “None has tried to peek into this murky business since then,” a taxman said.
“Don’t go after the remittance” is a typical answer whenever the issue is taken up at the departmental level, fearing reprisal as big businesses are closely tied to the power corridors, no matter who is at the helm of affairs.
The case of the said bakery chain is as interesting as instructive. The founder of the business and his three sons received remittances to the tune of four billion rupees in one year. Included among them is one son who is a BS-19 officer. Even he received around Rs10 million from a Middle Eastern country. Who was the sender is anybody’s guess, as it is unlawful to question it.
What is the modus operandi of this recycling of money? The persons involved in hundi business are in every city of Pakistan to offer such services. They will charge you two percent of the total amount as you go to deposit the sum. Their contacts in the Middle East will transfer as many dollars into your bank accounts.
If you are a man of means and daily transactions in and out of your account runs into millions a day, you can easily escape the suspicious transaction alerts of the banks. That does not mean the bankers are ignorant of this practice but they don’t bother unless they suspect it is terrorism-related. Taxing and documentation is not the banks’ business, for them more money means more business.
Even in the instance of suspicious use, the case will be sent to the FIA. Again, the FBR has no role in it, said an official. “We have a know-your-customer (KYC) system,” explained a banker. “We keep on increasing the limit of transactions depending on the frequency and volume of money in circulation of a client,” he said.
The bakery chain is not the only case spotted in vain by the tax authorities. A senior tax official noticed a brand new Land Cruiser on a Islamabad road bearing a VIP registration number. Upon inquiry, it transpired that the vehicle belonged to a family that runs poultry farming and feed business. It has three such new vehicles registered in the names of father and his two sons. The registration number of the luxury vehicles bears the initials of their business names.
That family received ‘remittances’ worth Rs1.5 billion, again from a Middle Eastern country, though they have all their businesses in Pakistan and operate 30 bank accounts. Their tax filing record shows their business faces heavy losses so no tax was paid. When the FBR questioned how they could afford luxury vehicles during such business ‘recession’, they were quick to show the proof of remittances they received from somebody living abroad ‘for the purpose of investment’. Here starts the no-go area for the FBR.
An owner of Islamabad-based bakery chain was however successfully trapped only because he himself had confessed. He was under investigation for concealing assets and undeclared bank accounts. Puzzled and panicked as he was caught off-guard and unaware of the consequences, he admitted during the course of investigation using the hundi route to receive Rs300 million ‘remittances’ from a Middle Eastern country.
This granted the FBR an opportunity to impose a heavy fine and taxes since the confession came straight from the suspect. Now, he has gone into appeal in the court against this penalty.