As international efforts to check the unbridled spread of dirty money and catch tax evaders intensify, banks in the United Arab Emirates – one of the major safe havens for such funds – are introducing new measures for their customers to bring such money under scrutiny.
The HSBC this month sent a circular to its customers in the Gulf nation stating that the new measures are being implemented from January 1, 2017 on the orders of the Organization for Economic Co-operation, a grouping of more than 30 countries mainly from Europe.
“These local laws will mean that from the beginning of January 2017, governments will start requiring all banks and other financial institutions to ask customers for information with a view to determining where they are resident for tax purposes,” the HSBC circular said.
“Therefore, from the beginning of 2017 onwards, we will be contacting some of our customers to collect information related to their tax status.”
Under the new measures, named as Common Reporting Standard (CRS), the account holders of over one million dollars, irrespective of being residents or non-residents of the UAE, would be required to provide details about their permanent residency, their citizenship and their tax status in their home countries.
Though the banks in the UAE would start implementing these measures from January 1, it would become mandatory for the account holders to furnish these details from January 1, 2018.
The move came in the wake of tremendous pressure being exerted by the US as well as European governments all over the world to check tax evasions in their countries.
Unlike many other countries, the United States requires its citizens who live abroad and draw salaries above a certain limit to pay taxes back home.
The United Arab Emirates offers extensive tax breaks which have allowed it to emerge as a major tax haven in the world.
Thousands of companies have been registered in the UAE free trade zones, which taking benefit from the lavish tax exemptions and lax tax rules, are making huge profits.
The UAE has more than 38 free trade zones, which are isolated lands governed by a special tax, customs and imports law.
The G20, the grouping of the world’s 20 developed nations, however, plan to prepare a blacklist of “unco-operative tax havens” in the world by the middle of the next year as part of the global crackdown on tax evasion.
Though these efforts were launched during the global financial crisis, they were intensified this year following the release of Panama Papers that included names of many top politicians of the world and their families, including the children of Prime Minister Nawaz Sharif.
In an interesting development, Panama has signed the global treaty to join efforts to combat tax evasions, but UAE has yet to sign this treaty.
However, the gulf state runs the risk of being included in the blacklist of non-cooperative tax havens, if it does not do so; as it is feared to be used as a conduit for illegal flow of funds.
There are also fears that if UAE did not lend support to these efforts, the ill-gotten money hoarders may transfer their wealth from other tax havens which have signed the treaty, to the gulf state.
Moreover, the gulf state has long been contemplating to introduce and tighten its tax law, and impose some taxes to make up for the loss of revenues caused by the deep plunge in the oil prices in recent years.
Observers say the latest measures by the UAE banks must have sent shockwaves among those who have stocked their untaxed and ill-gotten money in the gulf state.
A big chunk of this money has been invested in Dubai real estate and stock exchange, they say.
Interestingly, a large number of wealthy Pakistanis have also invested their money in the UAE.
“Pakistanis and Afghans are among the top investors in real estate sector and Dubai stock exchange,” a Pakistani banker, who has recently returned from Dubai after serving for 30 years in an Emirati bank, said.
“It is an open secret that a large number of Pakistanis, who have accumulated illegal money, have parked their money either in the UAE banks or have invested in the real estate or stocks there,” he said. “You go to Dubai and you will find these people roaming around everywhere.”
Pakistanis reportedly invested 816 million dollars in the real estate sector of the UAE in the first half of 2016.
It means that they were just behind Indians, who invested 1.5 billion dollars, and Britons who put in over one billion dollars in this sector.
According to Dubai Land Department report, Pakistanis have invested nearly five billion dollars in the Dubai real estate over the past two and a half years.
Pakistan is not a signatory to the OECD-sponsored CRS, but earlier this year, Islamabad signed a Multilateral Convention on Mutual Administrative Assistance in Tax Matters under OECD which allows free exchange of information among the signatories on tax-related matters. Moreover, Pakistan and UAE have also signed bilateral agreement on avoidance of double taxation and prevention of tax evasion, but previously it has not been much helpful, as UAE had refused to provide blanket information to Pakistan on its citizens investing there and had asked for specific names from Pakistani authorities who they wanted to scrutinise.
However, Dr Ikram ul Haq, a leading lawyer and tax expert, says the recent developments would help strengthen international cooperation to chase bad money.
“It is a good development as it would help check tax evasion and discover hidden money.”
The Pakistani banker said, “You will find (that) the money of most of the land grabbers, extortionists and other mafias has been invested in Dubai.”
Former army chief General Raheel Sharif had repeatedly said that peace in Karachi could not be restored unless the sources of terror financing were curbed. Many of the sources of terror financing generate from the money stashed outside Pakistan.
The security analysts say that if these sources of terror financing were curbed, crimes, particularly in Karachi would be brought down to a large extent.
But the million dollar question was whether there was strong political will among Pakistan’s ruling elite – who themselves have been accused of tax evasions – to go after this dirty money.
Given the present political situation in the country, where the government itself is facing serious questions from the opposition over the sources of money from which prime minister’s family bought luxurious flats in London, there is little hope that the issue will be taken up vigorously with the foreign governments to expose people who have stashed their ill-gotten wealth outside the country.
The writer is a senior journalist based in Islamabad