25 August 2004
by Khalil Ahmad
"In a society, deep neck in corruption, I more often than not, find
myself a misfit. There is no place for a veteran businessman anymore
in the society." G. M. Adamjee, a businessman [Quoted in
Shahid-ur-Rehman, Who Owns Pakistan?]
"There is no business in Pakistan today which can be run without
paying bribes to the ministers and secretaries." Yusuf Haroon, a
businessman [Quoted in Shahid-ur-Rehman]
The economy of Pakistan is heavily regulated and controlled by the
government. The ever-increasing burden of taxes and regulations has
given rise to a parallel economy (usually termed as black economy) of
which tax-evasion and money-laundering are two significant phenomena.
The part-I of this brief study will focus on the following:
• The nature of taxation
• The process of taxation and tax-collection
• The governmental uses of tax-money
• The magnitude of tax-evasion
• Why do people resort to tax-evasion?
The part-II of this study will focus on the following:
• The nature and process of money-laundering
• The sources and magnitude of money-laundering
• The state of legislation regarding money-laundering
• Why do people resort to money-laundering?
The part-III of this study will focus on the following:
• The legality or illegality of tax-evasion and money-laundering
• Tax-evasion and money-laundering and from the perspective of a free society
• Concluding remarks/Recommendations
Khalil Ahmad
Alternate Solutions Institute
Lahore, Pakistan
Part I
The Nature of Taxation in Pakistan
Currently, it is understood in Pakistan that a nation or a society
cannot do without a government; and, to run the business of a
government, taxes are levied. It is said that the business of a
government comprises two things: i) to provide services to the people
such as maintaining law and order, and accomplish development works
such as build and maintain roads, etc; and ii) (in case of a
redistributive state) to provide welfare services such as 'food,
clothing, shelter,' and education, health care, etc. For most of the
people, it is quite natural a political philosophy!
Obviously, the more duties and responsibilities we assign to a state,
the more machinery (bureaucracy, etc.) will it require, and the more
expenditures will it incur. Thus, in addition to maintaining law and
order, if a state is required to provide everything to its citizens,
then its government won't remain limited. It will require more
revenue, and will resort to high taxes. Conversely, if its duties are
limited to the protection of life, liberty and property of its
citizens, it will have no justification to have recourse to more and
more taxes.
But all the governments tend to expand, and develop a big
state-apparatus which it with the passage of time becomes difficult
for them to sustain without imposing high taxes. As a result, they are
caught in a net of clear disproportion: their non-development
expenditures outweigh their development expenditures; and, in some
cases, their development expenditures, too, can be termed as
non-development expenditures as they are spent without producing any
tangible results. Such a state because of its erratic policy of
taxation turns into an unhappy burden on the shoulders of its
citizens.
Pakistani state is such a high tax state. On the one hand, it is not
providing the least of the essential services to its citizens; that
is, maintaining law and order, and protecting life, liberty and
property of its citizens. On the other, under the slogan of Welfarism,
it is resorting to high taxes and control over the lives of the
people, and thus it has to sustain an ever-increasing state-machinery.
Moreover, it has instituted monopolies, and likes to take care of
their interests. And, last but not least, it has gathered around a
ring of rent-seekers in the shape of politicians, privileged groups,
civil and military bureaucrats, etc. who cause to manipulate its
policy of taxation to their own benefit or to the detriment of others.
Another important aspect of the nature of taxation in Pakistan is
trade protectionism; or, in other words, another cornerstone of
taxation is the protection of local industry. For this purpose, the
interests of the consumers, the common citizens, are ignored and,
rather sacrificed on the altar of that holy cow, local industry. High
duties are imposed on all of the imports, except ones benefiting the
privileged ones, to protect the local industry which is inefficient,
uncompetitive, and dependent on the help from the government to
sustain itself. As a result of this, consumers are forced to buy low
quality and expensive goods.
The Process of Taxation and Tax-Collection in Pakistan
In Pakistan, taxes are levied at three levels: federal, provincial,
and local. At federal level, Central Board of Revenue (CBR) takes care
of the revenue-collection. At this level, there are four major taxes:
Income, Customs, Excise and Sales Tax. At provincial level, various
departments perform this task. Major taxes at this level are: Stamp
Duty, Motor Vehicle, Entertainment, and Electricity taxes. And, at
local level, entities of district government levy taxes.
Under the circumstances, as Pakistani government has not been able to
form and practice a just, uniform and consistent policy of taxation,
the process of taxation in Pakistan is in shambles. Indeed, it has
become a tool in the hands of the privileged and powerful elites and
groups. They pressurize, bribe or influence the authorities to impose
a new tax or increase the rate of an old one to reap the benefits or
to harm their rivals. Taxes are imposed and/or reduced to suit this or
that elite. "The 1973 constitution had clearly provided that
"imposition, abolition, remission, alteration or regulation of any
tax" would fall in the jurisdiction of the Finance Bill to be passed
by the national assembly. But during the Zia-ul-Hq era when there was
no national assembly, this power was usurped by CBR which imposed
duties, withdrew duties, exempted industries from payment of taxes and
duties, made refunds with retrospective effect when somebody had to be
favored, simply by issuing SROs." [Shahid-ur-Rehman, Who Owns
Pakistan?] Perhaps, it's never thought of in Pakistan that
imposing/abolishing or increasing/reducing taxes should be done in the
interest of the broader sections of society.
"The Central Board of Revenue (CBR) can enrich individuals and groups
beyond one's expectation and imagination by issuing the right SRO
(Statutory Regulations and Orders) or vice verse turn them into pauper
by starting investigations of tax evasion and assessing tax liability
with retrospective effect." [Shahid-ur-Rehman] In this regard, the
'politics of tax holidays, rebates and subsidies' is also too known.
From the point of view of the tax payers, the mechanism of
tax-collection is very difficult, complicated and cumbersome besides
being time-consuming. "Pakistan today has a mind-boggling taxation
system that defies comprehension of the average citizens and experts
alike." [Shahid-ur-Rehman] The tax-assessing and tax-collecting
officials enjoy unlimited discretionary powers, and by using these
powers, they harass and blackmail the tax payers, and extort money
from them. In Pakistan, it is said that even an honest tax payer can
not pay his taxes honestly; he will be forced to bribe the concerned
authorities to pay his due tax.
The most corrupt departments in Pakistan are the tax departments. "CBR
has the reputation of being corrupt, besides being one of the most
politicized departments of the Government of Pakistan. From the office
of the chairman to middle and lower ranks, appointments are made in
CBR on political and financial considerations. One frequently comes
across people in Islamabad with offers of money for appointments or
postings in departments under the jurisdiction of CBR. The amount that
these people offer, even for a clerical job in customs, income tax or
other subordinate departments give a measure of corruption and graft
in CBR. . . It is thus not mere coincidence that the chairman of CBR
has invariably been the first to go with each change of government
since 1988." [Shahid-ur-Rehman] That was why, to contain the excesses
of tax officials, in the year 2000, the federal government had to
establish a separate institution of Federal Tax Ombudsman. Though, its
scope and jurisdiction is too limited, but it is playing an important
role in redressing the grievances of the tax payers against the tax
officials.
A cursory look at the following table which details the year-wise
figures of complaints filed and disposed of by the office of the
Federal Tax Ombudsman can convince us of the notoriety of the
tax-machinery in Pakistan:
Year-Wise Complaints Filed and Disposal
Year No. of complaints Disposed Balance
2000 72 72 0
2001 1782 1782 0
2002 1549 1518 31
2003 till 15th 1469 885 584
October
___________________________________________________
Total 4872 4257 615
[Source: Dr. Ikramul Haq, Federal Tax Ombudsman: role and challenges]
As to the number and rate of taxes, there is no comprehensive study
available. But it is generally believed that everything is taxed and
is taxed at a far higher rate. "In 1990, Karachi Chamber of Commerce
and Industry had established that the industry was subjected to 50
direct and indirect taxes but the statement of Senator Ilyas Bilour,
President PFCCI (Pakistan Federation of Chambers of Commerce and
Industry) at the Businessmen Conference in Islamabad on March 25,
1997, that 37 government departments and agencies were collecting
taxes gives a measure of the proliferation of taxes that has taken
place in Pakistan." [Shahid-ur-Rehman]
The author of the same book, "Who Owns Pakistan?" has identified 70
major taxes to which consumers and producers are subjected. "In
addition there are host of specific taxes like a Research and
Development Levy, Drug Manufacturing License and Drug Registration
Fee. It can be said safely that there are at least 100 taxes in vogue
in Pakistan." [Shahid-ur-Rehman]
A List of Taxes in Vogue in Pakistan
Federal Taxes
S. No. Name of the Tax
1. Income Tax
2. Super Tax
3. Wealth Tax (abolished. K. A.)
4. Gift Tax
5. Turnover Tax
6. Corporate Asset Tax
7. Corporate Income Tax
8. Import Duties
9. Import Surcharge
10. Export Duties
11. Iqra Surcharge
12. Income Tax on Imports
13. Import License Fee
14. Import Registration Fee
15. Export Registration Fee
16. Central Excise Duty
17. Sales Tax on Manufactured Goods
18. Capital Value Tax
19. Export Development Surcharge
20. Development Surcharge on Petroleum
21. Gas Development Surcharge
22. Federal Education Cess
23. Workers Participation Fund
24. Workers Welfare Fund
25. Estate Duty
26. Zakat
27. Ushr
28. Oilseeds Development Cess on Companies
29. Tobacco Cess
30. Cotton Cess
31. Development Surcharge on Electricity
32. Textile Technology Cess
33. Airport Tax
34. Cargo Charges, etc.
35. Capital Gain Tax
[Source: Shahid-ur-Rehman, Who Owns Pakistan?]
Provincial Taxes
S. No Name of the Tax
1. Professional Tax
2. Property Tax
3. Stamp Duty
4. Vehicle Tax
5. Entertainment Tax
6. Betterment Tax
7. Social Security Contribution
8. Explosive License Fee
9. Provincial Education Cess
10. Capital Gain Tax
11. Punjab Airport Tax
12. Provincial Excise Duty
13. Karachi Dock Labour Board Cess
14. Cess on Hotels
15. Cotton Fees
16. Paddy Development Cess
17. Land Revenue Tax
18. Employee Old Age Benefit Contribution
19. Trade Tax on Jewelers, Garment Shops
[Source: Shahid-ur-Rehman, Who Owns Pakistan?]
Note: These lists are not complete and up-to-date; from time to time,
new taxes and duties are imposed, some of the old ones abolished. Now
with the introduction of District Government System, an array of newer
taxes at the local level has come to play its role. Also, some of the
old things are still in existence such as Television License Fee.
The governmental uses of tax-money
The non-development expenditure of Pakistani Establishment has always
been on the increase putting undue pressure on the tax payers. For
example, "the level of current Government expenditure . . .
(increased) at fast pace particularly during the period 1982-83 to
1984-85. As percentage of GDP at market prices, current Government
expenditure fluctuated between 14 and 15 per cent during the period
1977-78 to 1981-82. In the subsequent 3 years the increase in current
expenditure accelerated a great deal and as percentage of GDP at
market prices it rose from 14.4 per cent in 1981-82 to 17.9 per cent
in 1984-85." [Tax System in Pakistan]
According to a report of the World Bank, Pakistan consumed 10.3
percent of GDP in 2001. [Quoted in 2004 Index of Economic Freedom]
Internationally, Pakistan is considered a 'soft state.' But it's too
soft an acronym. Pakistan is one of the most corrupt states of the
world. According to the Transparency International's ranking of the
most corrupt countries of the world, in 1996, Pakistan stood 2nd.
"Pakistan is one of the countries of the world that has achieved
notoriety in terms of its association with twin evils ('corruption and
money-laundering') and particularly with corruption. The gravity of
the situation can be gauged from the fact that the then prime minister
of Pakistan, Nawaz Sharif, himself admitted sometime back that the
country was losing Rs.2 billion a day or Rs.720 billion a year to
corruption. (This is significant because the total revenue collection
in Pakistan is a little over Rs.300 billion.)" [Ijaz Hussain]
After the martial law of 1977, when a civilian government was
installed, a new political tradition got started that strengthened the
institution of corruption in Pakistan. Members of the parliament were
to be given funds to use for the development of their constituencies;
these funds were never to be audited.
A letter to the Editor of one of the top national English dailies
relates the story as follows:
LEGISLATORS' DEVELOPMENT FUNDS
[S. M. F. Hasan, Lahore]
It goes to the eternal infamy of the first dictator of Pakistan that
to appease his supporters and to tame his opponents, he introduced the
vicious system of transfer of huge state funds to his MNAs and basic
democrats in the name of public development but actually for their own
development. Stark corruption received a stamp of approval creating a
new political culture. Money and manipulation became the dominant part
of politics.
The abiding tragedy is that every succeeding regime, while condemning
corruption and maladministration of the dictator, have retained his
system of allocation of large amounts of state money to control MNAs
and MPAs.
In no other country of the world, members of the legislature are
encumbered with the responsibility of executing or supervising
development projects. Their sole function is to frame laws for good
governance. Being free of monetary temptations, they jealously guard
their independence against the executive authority.
In Pakistan, every MNA, MPA or another public-spirited person should
be authorised to submit his scheme of development to the Planning
Division for central subjects and to Provincial Planning Boards for
provincial subjects to be thoroughly scrutinized. If found suitable,
it should be implemented by the normal executing agencies of the
government without the intervention of the proposing body or person.
Unless this is done, development funds will continue to be wasted,
politicians will continue to be corrupt and the legislators will
continue to be subservient to the executive, whether the head of
government is a dictator or not or provinces are autonomous or
controlled. [The News International Lahore Edition September 3, 2004]
In addition to that most of the elected governments in Pakistan were
dismissed by the sovereigns on the charges of corruption, and many a
prime ministers and ministers have been and are being tried in the
national courts and other country's courts as well.
"It is noteworthy that corruption was the common ground in the
dismissal orders of the three governments since 1990. For example, on
18 April, 1993, when the Nawaz Sharif government was dismissed, the
dissolution order read that: "Maladministration, corruption and
nepotism have reached such proportions in the federal government, its
various bodies, authorities and other corporations including banks
supervised and controlled by the federal government, the lack of
transparency in the process of privatisation, in the disposal of
public/government properties, that they violate the requirements of
the oath(s) of the public representatives together with the prime
minister, the ministers, and ministers of state prescribed in the
constitution and prevent the government from functioning in accordance
with the provisions of the constitutions."" [Ijaz Hussain]
Also, "the presidential order of 5 November, 1996, also embodied the
similar charges against the Benazir Bhutto who was sacked for the
second time. The order read: "Corruption, nepotism and violation of
rules in the administration of the affairs of the government and its
various bodies, authorities and corporations has become so extensive
and widespread that the orderly functioning of the government in
accordance with the provisions of the constitution and the law has
become impossible and in some cases national security has been
endangered. Public faith in the integrity and honesty of the
government has disappeared."" [Ijaz Hussain]
The magnitude of tax-evasion
Though, investment is directly related with taxation, but it is the
rate of tax that determines the volume of investment. It's a fact that
besides political instability and deteriorating law and order
situation, high tax rates have played an important role in retarding
the growth of domestic as well as foreign investment. Despite utmost
efforts of various governments, the volume of investment has been
static.
Moreover, high tax rates have discouraged the personal initiative of
the individuals. They feel deprived of their hard-earned money. That
is why, in Pakistan, doing business legally is said to be a very
difficult enterprise.
As has been pointed out earlier, heavily controlled economy has given
rise to a parallel economy in Pakistan. The volume of this parallel
economy exceeds to that of the formal economy which implies a greater
volume of tax-evasion.
According to one study, "since 1973, a remarkable size and an upward
trend in the underground economy and tax evasion are noticeable . . .
the underground economy grew rapidly from about Rs.15 billion in 1973
to Rs.1115 billion in 1996 . . . the underground economy as a
proportion of GDP was about 20 percent in 1973, which increased to 51
percent in 1996.
". . . the level of tax evasion was about Rs.1.5 billion in 1973,
which tremendously increased to Rs.152 billion in 1996." [Zafar Iqbal,
The Underground Economy and Tax Evasion in Pakistan: A Fresh
Assessment]
It is also noteworthy that "the underground economy grew faster than
the formal economy. . . . the underground economy grew annually at the
rates of about 27 percent, 14 percent, and 26 percent in 1970s, 1980s,
and 1990s correspondingly while growth rates in the formal economy for
the same sub-periods were about 18 percent, 14 percent, and 17
percent." [Zafar Iqbal]
Another study states that "in the base year (1973), underground
economy was 20.27 percent of GDP, and it increased to 25.51 percent in
1991. Between 1991 and 1998 the underground economy increased rapidly;
it was 54.52 percent in 1998. However, by 2002 it had declined to
37.25 percent of GDP." [M. Ali Kemal, Underground Economy and Tax
Evasion in Pakistan: A Critical Evaluation]
As to the tax-evasion, according to this study, "it increased from
2.15 percent in 1073 to 3.42 in 1990, peaked at 7.22 percent in 1998
and then 4.17 percent in 2002.
"There could be various reasons of this sharp increase in the
underground economy and tax evasion between 1991 and 1998. For
instance, rise in private investment level which increases the overall
economic activity (formal and informal), increase in smuggling, etc.
Similarly, decline in underground economy from 1998 to 2002 may have
various reasons, for instance, decline in smuggling, but probably low
level of economic activity is the most important. . . . documentation
of the economy is one of the reasons which helped in preventing black
economy not to grow faster." [M. Ali Kemal]
Estimates of Underground Economy and Tax Evasion
Year Underground Tax (As Percentage of GDP)
Economy Evasion Underground Tax
Economy Evasion
1974 18020 1814 20.27 2.15
1975 21756 2219 19.42 1.98
1976 27781 2944 21.15 2.24
1977 31412 3351 20.80 2.22
1978 41832 4644 23.51 2.61
1979 51774 6186 26.35 3.15
1980 66414 8670 28.24 3.69
1981 74784 9814 26.88 3.53
1982 98406 14076 30.36 4.34
1983 104759 13361 28.75 3.67
1984 130796 17215 31.16 4.10
1985 129443 15878 27.42 3.36
1986 155677 20390 30.26 3.96
1987 184308 26698 32.19 4.66
1988 192752 26672 28.54 3.95
1989 210487 30209 27.38 3.93
1990 227245 30473 25.51 3.42
1991 268951 34163 26.35 3.35
1992 390366 53219 32.39 4.42
1993 470124 62913 35.27 4.72
1994 591899 77655 37.92 4.97
1995 758163 104787 40.63 5.62
1996 1004289 144748 47.37 6.83
1997 1233620 164923 50.80 6.79
1998 1449891 193397 54.52 7.22
1999 1146839 152499 39.03 5.19
2000 1094052 141077 34.76 4.48
2001 1298233 169025 38.00 4.95 2002 1388064 175472 37.25 4.71
[Source: M. Ali Kemal, Underground Economy and Tax Evasion in
Pakistan: A Critical Evaluation]
Why do people resort to tax-evasion?
The first answer to this question that comes to mind is that people do
not want to lose what is their own. The English actor, Charles Kemble
(1775-1854), after paying his tax to the tax-collector, said: "Sir, I
now pay you this exorbitant charge, but I must ask you to explain to
Her Majesty (Queen Victoria) that she must not in future look upon me
as a source of income." [Quoted in Kaleem Omar, The ins and outs of
taxes]
But that is quite a radical position. Sometimes people are willing to
pay taxes provided the rate of tax is not too high and is not an
unbearable burden on their personal income (one of the findings of a
Canadian study tells that a 'reduction in the marginal tax rates will
increase taxable revenues.' Taxpayers' Response to Tax Rate Changes: A
Canadian Panel Study), the taxation system is simple and intelligible,
and they know that their tax money instead of being wasted will be
properly utilized. But, in Pakistan the rate of tax is too high. The
top income tax rate is 35 %, rated by 2004 Index of Economic Freedom
as a 'high tax rate; whereas the corporate tax rate is 43 %, and is
rated by the same Index as a 'very high tax rate.'
In addition to these factors, a great 'incentive' to tax-evasion is a
complicated tax system. "Over the last fifty years, this country's
(Pakistan's) tax regime has become so complex and baffling that a
whole legion of accountants is now lucratively engaged in figuring out
just which taxes taxpayers have to pay." [Kaleem Omar]
Dr. Ikramul Haq states that "one of the factors responsible for the
present situation ('perpetual crisis of resources for the
developmental policies, crisis to meet trade deficit, crisis on
account of fiscal deficit') is the great speed with which black money
is generated. The Central Board of Revenue is directly responsible for
this as its Mafia-like operations has helped the people to avoid tax
on incomes by paying hem "due share." Through the infamous system of
SROs, the CBR's stalwarts provided "legal" ways and means to the
mighty sections of society to amass the very survival of state."
But, especially in the case of Pakistan, it may be pointed out that
since a culture of corruption has taken root, the corruption has
become a norm of daily life. The reason is very simple:
Corruption is just like snow
It falls on the cliffs of the hills
And melts down below.
As an American actor, Will Rogers referring to income tax said: "It
has made more liars out of the American people than golf." Too much
control, too much law and too much tax tend to make people
'unethical.' They start inventing ways to evade what is imposed
unethically upon them.
"Too many taxes can be too much of a good thing, killing the
proverbial goose that lays the golden egg." [Kaleem Omar]
As to this state of affairs, Mr. M. Ali Kemal is of the opinion that
"We should improve our taxation policy. It is pragmatic that our tax
rates are too high and, if possible, should be reduced to minimum
level where every person in the tax net is willing to pay tax.
Moreover, people have general dissatisfaction with the way government
manages its budget and utilises tax income."
The overall situation is not much different from what was recorded in
a report of a working group in (May/June) 1986. It stated that
"Pakistan's tax system, even after four decades of independence,
continues to have essentially the same features as were inherited from
the colonial period. The tax receipts continue to be pre-empted almost
entirely by current expenditure on general administration, defence and
debt servicing. For financing development expenditure, reliance has
been placed almost exclusively on internal and external borrowings.
The tax system continues to be regressive in character due to its
over-dependence on indirect taxes and has failed to be conducive to
the achievement of the objectives of growth, efficiency and equity."
[Tax System in Pakistan]
Part II
The nature and process of money-laundering
The case of money-laundering, especially in Pakistan, is no different
from the 'crime' of tax-evasion; here too the government itself is an
accomplice. "The ugly face of black money emerges in the corridors of
power, political as well as administrative." [Dr. Ikramul Haq, Money
laundering facilitated by tax laws] In fact, "Pakistan has been the
worst victim of money-launderers as during the last 30 years, the
successive governments showed an extremely benign attitude toward
corruption, drug trafficking and tax evasion." [Dr. Ikramul Haq]
The government, on the one hand, introduced laws to counter
money-laundering, and, on the other, floated schemes to allow the
whitening of black money. All the same, various governments
successively introduced novel schemes to declare untaxed and illegal
money. They used this 'weapon' to win political rivals, to please
their allies and to strengthen their rule. ". . . why the government
has floated schemes, which provide an easy way for whitening black
money, is the fact that many individuals belonging to the party in
power having amassed lot of money need to whiten it. In this backdrop
such money laundering schemes come handy to the members of the ruling
party and their associates." [Ijaz Hussain, Legal Control of
Corruption and Money Laundering in Pakistan]
Also, "CBR (Central Board of Revenue; responsible for the collection
of federal taxes) has never bothered to unearth laundered money,
rather always joined hands with the tax evaders and money launderers
by providing them unprecedented concessional schemes to whiten their
ill-gotten wealth. These schemes were announced by the governments on
the recommendations of CBR's wizards in the name of improving tax
collection!" [Dr. Ikramul Haq]
In its early years, Pakistan was not considered a favorable center for
money-laundering. But "certain developments in the recent past have
contributed to a climate conducive for money laundering. The first one
was the presence in the 1970s of a large expatriate community
exceeding one million, particularly in the Middle East, who relied on
non-formal banking facilities to remit their foreign earnings to
Pakistan." [Ijaz Hussain]
The other developments, according to Ijaz Hussain, are 'the burgeoning
drug addiction, an almost non-existent problem in the late 1970s,
which emerged into a major one with alarming figures of 3.1 million
drug addicts out of which 1.5 million were heroin abusers; the
introduction of schemes, which provided opportunities and facilities
to do so without much fuss; the promulgation of the Economic Reforms
Ordinance 1992 which aimed at attracting foreign exchange into
Pakistani banks; the introduction of yet another scheme under which
any Pakistani citizen can buy government-owned real estate auctioned
by a government agency and no questions as to the source of funds will
be asked from the buyers of plots as per decision of the government.'
Thus, Pakistan turned into a heaven for money-launderers.
The process of money-laundering is the distancing of the money earned
through illegal activities from its original source. At the first
stage, 'Placement,' the launderer introduces his money into the
financial system; at the second stage, 'Layering,' the launderer
engages in a series of movements of the funds to distance them from
their source; and, at the third stage, 'Integration,' the funds are
merged in the legal economy. [Sam Vaknin, Money Laundering in A
Changed World]
The other principal methods used for money-laundering in Pakistan are
as follows: [Ijaz Hussain]
i) Hawala/Hundi. Mostly used by expatriates to remit money to Pakistan.
ii) Bearer Investment Schemes. In existence for the last two decades
providing an attractive opportunity for money-laundering.
In addition, the money to be laundered is mostly invested in real
estate. Various other methods in vogue are: over/under invoicing of
imports and exports; bogus imports/exports; double invoicing; currency
smuggling; money declared as proceeds of agriculture (since the
agricultural income is exempted from tax)/poultry; and bank loan
methods. [Ijaz Hussain]
The sources and magnitude of money-laundering
The underground economy is the main source of black money. It consists
of illegal business and financial activities such as drug trafficking,
smuggling, insider trading, illegal arms sale, organized crime,
bribery, embezzlement, extortion by force, computer fraud schemes,
etc. "In Pakistan, the banks, insurance companies, non-banking
financial institutions, investment companies, money transmitters and
real estate agents are all targets of money launderers. The financial
institutions, inadvertently or otherwise, support money laundering by
providing means to convert cash into different types of financial
instruments, to convert the currency of one country into the currency
of another and to transfer funds to other financial institutions.
[Observations of the Chairman, Securities and Exchange Commission of
Pakistan quoted by Dr. Ikramul Haq]
The latest turn in the process of money-laundering is the replacing of
gemstones as a tool for laundering money. The "Western intelligence
community has claimed that some very powerful terrorist groups are
engaged in using gemstones, diamonds, tanzanite, and other commodities
to store and launder money for terrorist activities across the globe."
[The News International Lahore Edition June 26, 2004]
According to US Drug Enforcement Administration March 2002 Brief,
"Pakistan is not considered a major center for international money
laundering activity. However, Pakistan-based traffickers are
extensively involved in the production and transportation of opiates
and hashish. This suggests that drug proceeds are laundered within the
country." [http://www.usdoj.gov/dea/index.htm]
And, a 1996 estimate of the International Monetary Fund reveals that
'money laundered annually amounts to 2-5% of world GDP (between 800
billion and 2 trillion US dollars in today's terms). The lower figure
is considerably larger than an average European economy, such as
Spain's.'
[Sam Vaknin, Ph.D., Money Laundering in A Changed World]
Another study estimates that 'approximately $ 2 billion are
transferred each year through the Hundi system alone.' According to
the UNDCP report, the domestic heroin market in Pakistan is around
Rs.35 billion (1994 figures) per year and turnover of the heroin
industry is 5 % of the 1992-93 GDP and 20-25 % of the total estimated
"parallel" economy. [Quoted in Ijaz Hussain]
The same report estimates that 'most of the foreign exchange in the
"parallel" currency market was utilised to import foreign goods and
for flight of capital during the 1980s. Unofficially funded imports or
smuggled goods (through the Afghan transit trade, baggage rules, and
diplomatic bonded warehouses among others) constitute 10 % of the
official imports. Revenues generated from the sale of illicit drugs
were estimated at $ 1.5 billion in 1992. Drugs earnings averaged $ 1
billion per year during 1985-91.' [Quoted in Ijaz Hussain]
According to a conservative estimate, 'Rs.600 billion is generated
every year by the parallel economy. Add to this, the black money
generated through smuggling in goods and narcotics trade that is
between Rs.300 billion and Rs.500 billion. This makes a whooping
Rs.1000 billion.' [Dr. Ikramul Haq] And, according to 'official and
independent experts, ever-growing black money is Rs.1.8 trillion,
about 70 % of the total economy.' [Quoted in Dr. Ikarmul Haq]
These rough estimates suggest the sheer volume of laundered money in Pakistan.
The state of legislation regarding money-laundering
Since its inception, the Pakistani state has been infected with
corrupt practices. Hence, the laws were also enacted to deal with it.
The question is: are these laws sufficient to counter money-laundering
as a form of corruption? As to this, two views exist. The first one is
that there is no need of further legislation; what we need is the
political will to implement these and not to use them for political
gains. The second view is that we need further legislation.
Ijaz Hussain is of the view that 'the survey of legal control of
corruption and money laundering . . . shows that Pakistan is not
deficient in laws and regulations, which purport to combat and
eradicate the twin menaces of corruption and money laundering. In fact
they are quite numerous and comprehensive.'
He himself poses the question why then 'Pakistan has failed to make
real headway in effectively dealing with the twin menaces.' He
explains this failure in the following way:
"One problem with laws relating to corruption is that they apparently
propose to create independent institutions to deal with the problem
but in the ultimate analysis invest the real power with government
bodies. . . Another bane of the accountability laws on corruption is
the selectivity with which they are applied. The government in power
uses these laws to ruthlessly pursue its opponents but when it is a
question of accountability of the members of the party in power, these
laws do not seem to exist." [Ijaz Hussain]
His conclusion is that "it signifies that there is nothing wrong with
the laws but the manner and the method with which they are applied is
defective. The only way is to apply the laws even-handedly and
impartially."
This shows the need and importance of the rule of law in Pakistan.
Other writers highlight the need for new legislation. "Our country is
passing through the worst crisis of resource mobilization manifesting
it in the huge budgetary deficits. Revenue has to be collected and all
measures both stringent and persuasive have to be taken in that
direction. The government has, therefore, to plan in terms of a
well-thought-of anti-money-laundering cum asset seizure legislation to
draw upon the huge reservoir of the drug and untaxed money." [Dr.
Ikramul Haq]
In another place, Dr. Ikramul Haq writes that "in the context of the
prevailing grave challenge to combat terrorism, coupled with
money-laundering crises, and the problem of ever-growing black money,
there is an urgent need to launch a well-thought for anti-money
laundering law to block this huge money becoming a lethal weapon in
the hands of Mafias who now control the economy as well as
governments."
Another writer addresses the problem in the following way:
"A great deal can be done to fight money laundering. This includes
increasing awareness of the phenomena -- both within the government
and the private sector -- and then to provide the necessary legal or
regulatory tools to the authorities charged with combating the
problem." [Kashif Mateen Ansari, Dealing with organised financial
crime]
He suggests the following tools:
0 Making the act of money laundering a crime;
0 Giving investigative agencies the authority to trace, seize and
ultimately confiscate criminally derived assets; and
0 Building the necessary framework for permitting the agencies
involved to exchange information among themselves and counterparts in
other countries.
He also suggests that 'financial institutions must play their role in
dealing with the problem. This involves establishing financial
transaction reporting systems; customer identification; record keeping
standards; and, a means for verifying compliance.'
It's clear that all this requires more and more regulations and
legislation endowing the government with more and more free hand to
control the already heavily controlled economy.
After the gory events of September 11, 2001, the government of
Pakistan too has given extraordinary importance to the task of
countering money-laundering. The State Bank of Pakistan, Securities
and Exchange Commission of Pakistan, and other financial institutions
are paying more and more attention to the issuance and implementation
of rules and regulations to stop the laundering of money.
But, the overall situation in this regard is not satisfactory. Dr.
Ikramul Haq points out that "the SECP (Securities and Exchange
Commission of Pakistan) and Governor State Bank of Pakistan, perhaps,
are not aware of the fact that even today when the Pakistani
government, under tremendous pressure from the US and other states, is
introducing anti-money laundering law, the CBR is committed to giving
a free hand to money launderers assuring them that no question would
be asked if they remit their ill-gotten money from outside through
banking channels and surrender the foreign currency to the state and
get Pakistani rupees as encashment."
In this regard, the evidence quoted by Dr. Ikaramul Haq is conclusive:
"The CBR in its letter no. F4(34)/ITP/2002 dated 29-02-2002 reaffirmed
that "the Department would adhere to its policy of not probing the
foreign remittance" brought into Pakistan by any "person."
He further points out that "in the Income Tax Ordinanace 2001,
promulgated on the dictates of IMF on 13 September, 2001, a special
provision [section 111(4)] has been inserted giving a free hand to
money launderers, that no question will be asked to them if they remit
(laundered is more appropriate term) their ill-gotten money from
outside through banking channels and surrender the foreign currency to
the State Bank of Pakistan and get Pakistani rupees as encashment."
Why do people resort to money-laundering?
On the face of it, people resort to money-laundering because they are
forced to do so just like they are forced to evade tax. It is obvious
that people indulge in drug trafficking, smuggling, insider trading,
illegal arms sale, organized crime, bribery, embezzlement, extortion
by force, computer fraud schemes, etc. Of course, some of them are
crimes against property and person; their nature won't change in any
society be it a free or an unfree society.
But, when people are unjustly stopped from doing business with one
another, and thereby an incentive for more profit is created in that
particular area, as in production and trading of drugs, arms, and
across the borders trade, they start taking risk to earn higher
profits. In case, there is no illegality is involved, for example, in
drug-trade, the rate of profit in that trade would remain at a normal
level; this would discourage people treading that path anymore.
Thus, we may say that the lower the volume of 'black economy' under a
government, the lesser the amount of money laundered. It means that
the freer the people to pursue their businesses, the lower the volume
of black economy, and consequently, the lesser the amount of money
laundered.
Part-III
The legality or illegality of tax-evasion and money-laundering
The legality or illegality of tax-evasion or money-laundering is
determined by the nature of relevant legislation means that a thing or
an act that was legal or 'alegal' yesterday, after the legislation
becomes illegal today. For example, years before when VCR (Video
Cassette Recorder) came to Pakistan, owning it was neither legal nor
illegal; then, it was made that without obtaining a license owning a
VCR was illegal. Or, as it is today in Pakistan, to own a Television
Set, one needs to pay an annual license fee.
The question is: is the determination of legality or illegality of a
thing or an act in this manner itself legal or illegal? Asking this
means: what is legality or illegality? As we who believe in the
self-ownership of an individual assert that no legislation repugnant
to the 'inalienable rights' of the individual citizens can be made; we
do believe that this is how the legality or illegality of a piece of
legislation regarding a thing or an act is determined.
Thus, the acts of evading tax and laundering money are illegal since
the collectivist anti-individualist legislation makes them so. In the
absence of such legislation, they were/are not legal or illegal. Thus,
in a free society, where there is generally no restriction, for
example, on producing and using drugs, the businesses related to it
will not be illegal; and, consequently, there will be no incentive for
the people to earn higher profits.
Tax-evasion and money-laundering from the perspective of a free society
In a free society, the nature of tax-evasion and money-laundering
would be quite different from what exists now and here. There would be
no exorbitant taxes and not many taxes also. And, of course, there
wouldn't be many things declared illegal also. But, we must remember
that as there would be taxes though too lower and too less in number
as compared to the present tax-scenario; the occurrence of tax-evasion
in that society cannot be ruled out.
Same is the case with money-laundering. Though, we believe that so
many things due to the nature of existing legislation presently
considered 'criminal' wouldn't be treated as criminal in a free
society; for instance, the use of drugs, 'illegal' trade, owning arms
for self-defense, etc. However, there may be something which would be
treated as illegal in that society. In such cases, the act of
laundering money may happen and require some legislation to countering
it.
But, these are mere surmises. What we know for sure that in a free
society there would be crimes such as organized crime, bribery,
embezzlement, extortion by force, computer fraud schemes, etc. People
who earn money in these ways would try to launder it; so, we do have
to deal with them for which we would need legislation.
As we believe that in a free society people would be free to create
and produce, to do business and to transact when and where and with
whom they happen to choose; thus, there would be little scope of
anything to be declared illegal but encroaching upon other people's
freedom, or in other words, the crimes against property and person.
Concluding remarks/Recommendations
A government that tries to control many things, resultantly, comes to
have less and less control of many other things. Perhaps, that was why
Ronald Reagan had to say: Government is not the solution to our
problem; government is the problem.
And, probably, this is why a limited government (in the words of
Thomas Jefferson) is considered best because it governs the least. It
does not extort money in the name of this or that tax from the people;
and, thus, forces them to evade tax. It does not declare this or that
thing or act illegal in the name of propriety, morality, equality or
welfare of the poor; and, thus, turns them to resort to impropriety,
immorality, inequality and continuing willful poverty. It does not
stop them from doing business with the people of their choice in the
name of localism, nationalism, or patriotism; and, thus, converts them
to regionalism, internationalism, and cosmopolitanism and declare
these as crimes. Finally, it does not make them launder the money
earned through the 'illegal' ways.
What such a government or Pakistani government needs to do is to keep
the rates of taxes low, number of taxes reduced, and the tax net
broad-based. As regards, income tax, a far better strategy is to have
a flat tax system. And, of course, there should be no exemptions and
tax holidays since this is what is used in the interest of the
privileged and powerful groups of the society at the cost of other
sections of society.
But, from the perspective of a free society, also, the issues of
tax-evasion and money-laundering need serious deliberations. This
acquires more significance when we see that the transition from an
unfree society to a free society wouldn't be instantaneous; rather it
would be gradual and painful. There would be hurdles and reversals,
progression and regression.
Moreover, this shows that though there are issues that are the
creations of this particular government-controlled society, however,
the issues of today, such as tax-evasion and money-laundering, do not
belong exclusively to the complex of present unfree society. Actually,
it is this society that possesses in its womb the seeds of a future
free society. Instead of ignoring those seeds as being the negatives
of a controlled society, we need to look after them, even during the
transition period, to let them flourish into a free society.
--------------
Bibliography
[In the preparation of this paper, following books, articles, etc.
have been used.]
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--
Man would indeed be in a poor way if he had to be restrained by fear
of punishment and hope of reward after death." --
Albert Einstein !!!
http://www.scribd.com/doc/22151765/History-of-Pakistan-Army-from-1757-to-1971
http://www.scribd.com/doc/21686885/TALIBAN-WAR-IN-AFGHANISTAN
http://www.scribd.com/doc/22455178/Letters-to-Command-and-Staff-College-Quetta-Citadel-Journal
http://www.scribd.com/doc/23150027/Pakistan-Army-through-eyes-of-Pakistani-Generals
http://www.scribd.com/doc/23701412/War-of-Independence-of-1857
http://www.scribd.com/doc/22457862/Pakistan-Army-Journal-The-Citadel
http://www.scribd.com/doc/21952758/1971-India-Pakistan-War
http://www.scribd.com/doc/25171703/BOOK-REVIEWS-BY-AGHA-H-AMIN
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