"Tell me,” Munaf Kalia challenged his interrogator immediately after his arrest, “who is not involved in this?” The question hung over the ensuing investigation into money laundering by Pakistan’s largest forex company. The answer came three years later when all involved were acquitted of all charges. “Politicians, ministers, generals, businessmen, tell me who is not a user of our services?”
That was in 2008, the heady year of catastrophe. The financial system had nearly collapsed, with the stock market shut and banks seeing withdrawals so rapidly that fears of a large-scale run the likes of which we have never seen in our history were rising. The country’s foreign exchange reserves dropped from what was touted only a year earlier as “record high” to such a precarious level that the government had to approach the IMF for an emergency lifeline. And the government launched a massive crackdown against illegal hawala traders, money changers who engaged in the illegal transfer of foreign exchange into and out of the country, though in those days almost all the traffic was outbound.
Investigators estimated that Khanani and Kalia (K&K) —of which Kalia was a director — held between 25 to 30 percent of the hawala market at that time, and had transferred close to 104 billion rupees in the 13 months leading up to their arrest. Press reports speculated that these transfers were responsible for depleting Pakistan’s foreign exchange reserves, forcing the country to seek an IMF bailout, but the estimated amount would not be sufficient to bring the economy to its knees.
What those transfers, and the subsequent investigation of the enterprise, did reveal though was how far and wide the web of money laundering is spread within Pakistan’s economy, and how central it is to its normal functioning.
Flush with cash
Pakistan has one of the world’s highest cash-to-bank deposit ratios. The amount of money that swirls around the economy in cash is more than one third of total bank deposits. Its fractured relationship with neighbours has also helped create an informal payment systems and a large overland trade designed to bypass normal customs channels. Finally, capital accumulation domestically finds it difficult to locate investment opportunities within the country due to the rigid nature of the industrial system which has not changed much for the past three decades, creating a built-in incentive to accumulate assets outside the country.
For K&K, all these constraints were an opportunity. Their headquarters housed more than 35 servers dedicated to processing money transfer requests received through a network of up to 4,000 branches and franchisees around the country. They had their own software house, located in a five-storey building with hundreds of employees, dedicated to building and upgrading money-transfer software that would connect their branch network across Pakistan with thousands of other branches and franchises spread around the world. Whenever the amount of money travelling through their system approached the regulatory limit allowed to them as a registered ‘A’-class exchange company, the system would automatically route the transfer through their parallel hawala operation. They sold the software to other exchange companies in addition to using it themselves.
For the regulator, the biggest clue that large amounts of money are being routed to the parallel hawala network is when the spread between the kerb rate and the market rate, meaning the exchange rate advertised for a particular currency and the rate at which it is actually being sold, begins to climb. Throughout 2007 this spread climbed, reaching almost 10 rupees by the time the law closed in on K&K. Where the dollar was advertised for 70 rupees, it was going for 80 rupees in the market, and upwards of 85 rupees in the hawala market.
Contrary to popular misconception, hawala actually uses the banking system extensively. The theory about hawala transfers says that no physical movement of money is required, since funds coming to the recipient country are settled against funds going out to the country from where the funds are remitted. So remittances coming to Pakistan from the UAE, for example, would be taken by a hawala trader there, and the requisite amount of rupees would be issued by that trader’s agent here in Pakistan.
$10bn: MONEY LAUNDERED OUT OF PAKISTAN EVERY YEAR, ACCORDING TO US STATE DEPARTMENT ESTIMATES
But the theory describes a system as it would operate in an ideal situation. There would be a total lack of any physical movement of funds in a hawala operation between two countries only if the total flow between both of them was exactly equal.
In practice, the flow of funds changes from time to time, and more often than not, does not match between the sending and the receiving countries. This means money will accumulate in some nodes of the traders system while it depletes from others, necessitating a periodic squaring of accounts between various nodes in the system. This squaring of accounts takes place daily.
Funds sent abroad are also sent via a bank account, usually opened in the name of the exchange company, as well as a large array of “benami” accounts — accounts opened in someone’s name but operated by other people — which they use for their hawala operation. In the case of K&K, the central node in their system was Al Zarooni Exchange, located on Naif Road in Dubai, which received funds from across the world. The sender would be issued a code, which he or she could take to any K&K branch or franchise anywhere in the world and obtain their funds accordingly. Once cleared, their position would be closed.
Their paid-up capital, or the ceiling that they were allowed to legally transact under the terms of their license, was 25 crore rupees daily, but the funds landing in Al Zarooni were far in excess. By 2015, the US Treasury department claimed that the K&K enterprise was moving “billions of dollars” annually on behalf of a global clientele. When he was arrested in a sting in 2015, Altaf Khanani was laundering money for an American law enforcement agent and charging him 3 percent commission.
In Pakistan the commissions varied, depending on how dirty the money was. Simple tax-evaded wealth could move out for a nominal fee, but funds connected with narcotics, kickbacks or extortion could command fees as high as 20 percent of the amount being transferred.
Channels of deception
Exchange companies are only one way to transfer funds into or out of the country without arousing the authorities’ suspicions. The State Department has estimated that 10 billion dollars are laundered out of Pakistan every year, meaning the channels through which to move this quantity of money would be numerous.