THE same day that this writer’s column on black money was printed (Feb 17), this newspaper carried a report which claimed that Pakistanis had invested Rs430 billion during the last two years in properties in Dubai which has resulted in them cornering an 8pc share in its property market. This the article had also mentioned as one of the investments attracting black money holdings.

The article had argued that there was no reliable estimate of illegal funds held by resident Pakistanis in Swiss banks. And that by deploying efforts to trace black money of Pakistanis and seeking its return to the country the government and all those calling for its confiscation through Swiss cooperation were simply on a wild goose chase.

The argument that one had tried to make was that official claims about hundreds of billions in black money of Pakistani residents lying in Swiss bank accounts was a gross exaggeration. Such sums of money could certainly have been concealed without any trace of identity in the international financial system as a whole but not just in Swiss banks, considering today’s world of several safe havens for such flows of earnings or stocks of wealth.

Larger proportions of illegal wealth and earnings are now being invested in other financial centres like Dubai, the Virgin Islands, the Cayman Islands, the Isle of Man, Luxembourg, Singapore, Mauritius, etc. which have fast become major money-laundering centres for illegitimate funds. And when this money is invested in these centres through the use of trusts or by establishing front companies registered in such locations, identifying the individuals who are the source of these funds becomes even more difficult.

The reference to Swiss banks deflects the focus from the real issue.

For instance, Dubai is much more attractive to the less well-heeled moneyed groups. This is because of greater scrutiny of monetary flows into and out of Western financial markets and because this city serves as the hub of hundi/hawala operators who enable the swift movement of funds very efficiently, and at nominal cost. Dubai hides illegal money invested in property and in gold and diamonds (through those trading in gems there) with hawala operators free to relocate funds to other global destinations. That is why one would suggest a more careful analysis of the rapid growth in our trading links with this non-oil producer — the large trade-related numbers are not primarily, as some might contend, because of the informal trade with India being routed through Dubai, getting reflected under trade in goods.

As argued in the earlier article on this subject some of this money has found its way into our stock market and the recently floated Euro and Sukuk bonds, much of it through these trusts and structured companies. The government, therefore, if it is at all committed to tackling the problem of black money accumulation, should be applying its energies and attention to not just these centres but more importantly to the source of such money, our domestic economy. It is from here that it repeatedly gets shifted out only to be recycled back into the local economy through hawala trade or legally (fully protected by our laws and the country’s Constitution) by being declared as ‘foreign investment’ or remittance for ‘family maintenance’, to be employed yet again for conducting and expanding business operations.

Just to remind ourselves, black income is earned from both legal and illegal activities. The illegal versions include drug trafficking, gambling, smuggling, cartels, evasion of all forms of income and sales taxes and excise and customs duties, bribes earned from arranging award of contracts or procurement deals, etc.

And it is generated as a consequence of high rates and complex tax structures; an inflationary situation coupled with supply scarcities; the character of the socio-political system; the nature of the economic regime, the electoral process supervised by rather weak election rules; policies formulated by government and the manner of their implementation; the institutional configuration through which these systems operate; flawed regulatory and control laws; feeble administrative capacities for checking regulatory violations or other illegalities; cumbersome official procedures that induce delays in commercial transactions thereby incentivising corruption for fast-tracking processes; a deficient system for penalising such indiscretion, etc.

The nature and extent of influence of such factors gets reflected in the type and volume of transactions breeding black money, limiting the efficacy of government policies to curb such pursuits.

For a long time, owing to its banking secrecy provisions, Switzerland certainly served as a centre for drawing such funds and was widely perceived as a location for parking/storing illegal money. However, the world has changed over the last few years. The Western countries, and especially the US, have forced Switzerland to amend its banking secrecy laws.

In 2009, the US not only got Switzerland to provide information relating to around 4,500 of its rich citizens but also to pay a penalty of approximately $800 million. It could coerce Switzerland into providing this information by threatening to withdraw the US licences of Swiss banks operating in its lucrative financial market. As a result of reforms in its banking secrecy provisions we can today, through our double-tax treaty with Switzerland, request the sharing information on a case-to-case basis by submitting adequate evidence against the individual or corporate entity.

However, as already explained above, the mere reference to Swiss banks deflects the focus from the real issue. A whole range of options and instruments is available today for hiding and investing black money. Professional advice is available in abundance internationally on the different types of financial and non-financial products on offer globally and the geographical areas serving as off-shore havens for locating these funds. And it is almost impossible to track down such money in these protected sanctuaries. Hence, as argued earlier above, to be able to access information associated with black money held abroad so that it can be brought back to the country we need to focus on the source of such earnings/wealth, the commercial activities and transactions in the domestic economy.

The writer is a former governor of the State Bank of Pakistan.

Published in Dawn March 3rd , 2015

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