ENGAGED more actively in the fight against money laundering and terror financing while disciplining forex markets for durable economic benefits, the State Bank of Pakistan is further tightening checks on forex transactions of banks and exchange companies.

And, this is being done under a coordinated national programme in collaboration with institutions as Federal Board of Revenue (FBR), Securities and Exchange Commission of Pakistan (SECP) and Federal Investigation Agency (FIA).

“Recently Intelligence Bureau has shared with us some details of 800 plus hundi/hawala operators and we’re chasing them. Without such input it would have been difficult for us to discipline forex regime on sustainable basis,” says a senior central banker.

“Recently Intelligence Bureau has shared with us some details of 800 plus hundi/hawala operators and we’re chasing them. Without such input it would have been difficult for us to discipline forex regime on sustainable basis,” says a senior central banker

On the other hand, the SBP has shared with FIA about 500 cases of illegal forex transfers that it has detected in the last 10 years including about 60 in 2015 alone.

Executives and bankers of exchange companies say in recent months some inquiries have been initiated by the SBP into what it perceived as attempts at facilitating capital flight and suspicious inward remittances.

In the third week of February, the SBP asked banks to keep detailed records of each and every transaction in foreign currency accounts if the amount transacted exceeds $10,000 in case of individuals and $25,000 in case of ‘entities’. Exchange companies were also asked to report to the SBP all buying/selling details if the amount involved is $5000 or more.

Banks and forex firms are required to conduct more internal checks now then before, take actions on suspicious activities and, report to the SBP all such cases where a breach of regulations has occurred. But all of this was done last month.

On March 1, taking a more important step, the SBP has come up with a draft of forex manual 2016 which, when introduced formally, would serve as legal and regulatory premise of the entire forex regime.

According to draft forex manual, authorised dealers — commercial banks and exchange companies nominated by the SBP — shall ensure compliance of updated regulations in their day-to-day operations.

They are required to immediately report to SBP ‘every case of evasion or attempt, direct or indirect, at evasion of the provisions’ of the forex Act and notifications or any rules, orders or directions issued thereunder, as it comes to their notice.

Exchange companies will be free to determine exchange rates but the difference between buying and selling shall not exceed 20 paisas per dollar.

“Incorporating this explicit condition will enable the central bank to check speculative activities in open forex market more effectively and without encroaching upon the rights of the exchange companies to determine rupee’s parity with other foreign currencies,” says a former SBP executive director.

The draft forex manual says that banks, too, will continue to determine their own exchange rates both for ready and forward transactions with a buying-selling gap of 20 paisas per dollar. But, the condition of 20 paisas will not apply on interbank transactions.

Forex manual stipulates that banks will now provide forward cover against import letters of credit ‘for a period not less than one month and up to a maximum period of one year on roll over basis’.

This is aimed at discouraging bankers from speculating against the rupee intentionally or unintentionally by way of excessive and very short-term forward selling of foreign currencies, senior bankers say.

In recent years it was not uncommon for importers to over-book import dollars by paying exceptionally high forward premiums to banks whenever the rupee began to slide for right reasons or on speculation-led forex buying spree.

Under the forex manual the central bank has also proposed to penalise a bank if it delays crediting the amount of remittances into the account of their beneficiaries or makes delayed payments to them.

Central bankers say that despite all warnings, some banks still continue to make such delays that, in effect, promotes handling of remittances through informal channels including hundi/hawala.

One key area of misuse of foreign exchange has been imports of gold. Exporters of jewellery had provided incorrect data of exports and withdrawn foreign exchange from banks to import gold against those exports.

When this scam was unearthed, it transpired for the horror of policy makers that the bulk of export proceeds of jewellery were never materialised. Central bankers say that under forex manual, special provisions have been introduced to avoid such misreporting in future.

Published in Dawn, Business & Finance weekly, March 7th, 2016