SBP on money laundering

Pakistan loses $10 billion a year to money laundering. This is the amount of money that, according to the US State Department estimates, goes out of Pakistan each year through illegal channels. Local regulators have not released similar figures. In a meeting on Monday with the heads of all major banks in the country, the State Bank of Pakistan asked them to improve their capacity to control money laundering. Last year, Pakistan finally passed an amendment to strengthen the anti-money laundering laws in the country. There had been little movement on this serious issue before Monday’s meeting. Some action on it seems to have become necessary after US authorities named the Altaf Khanani group based in Karachi for being involved in money-laundering offences. Most of the money laundering in Pakistan happens either through informal money channels such as hawala or hundi or through legitimate trade practices. Formal banking channels seem to be the least significant of the money-laundering channels employed in Pakistan, especially since a money-laundering investigation forced the Bank of Credit and Commerce International (BCCI) to shut down in 1991. This does mean banking may still not be used for similar purposes – but the focus in terms of money laundering through banks will need to be on trade-based money laundering.

The SBP raised this concern with major bankers during its meeting, but the reality is that such trade is harder to detect. The UK is currently facing a fine from the European Union for accepting over-invoiced goods in large qualities; they seem to be part of a major trade-based money-laundering scheme. The SBP governor recognised that the main check on this form of money laundering had to lie with the Pakistan Customs, which is equipped to understand the delicacies of foreign trade transactions. Bon their end, banks would do well to enhance their capacity to undertake such a task, but the capability to do so simply does not exist right now. Getting appropriate training would involve becoming up to speed with global practices but the confused signals the SBP has sent over the last week over foreign travel for bank officers for advanced training need to be sorted out. Existing mechanisms, including conducting due diligence and reporting to the Financial Monitoring Unit, need to be invoked more often. That is certainly within the capacity of the banking sector. But there are serious questions over how much money laundering takes place through formal banking channels. One must wonder if the SBP should spend more of its time focusing on informal channels of moving money. Moreover, the SBP needs to make its own calculations about money laundering in the country and make them public. If it agrees with the US State Department estimate of $10 billion in money laundering each year, it must give estimates of how the money is funneled out and decide its priorities accordingly. Moreover, there is a question of financial accounting it must answer: if this figure is accurate, what does it mean in terms of Pakistan’s current account deficit and foreign exchange reserves? It is good that the SBP is moving on the matter but it needs to do more than talk a tough line.