Authorities are casting a broader net on capital flight and forex smuggling to contain their damages to the economy and mitigate associated risks to the nation`s security.
The recent signing of a memorandum of understanding between the State Bank of Pakistan (SBP) and Federal Investigation Agency (FIA) is a step in this direction. Both institutions have resolved to enhance their existing cooperation in dealing with illegal money changers/forex dealers.
Over the past three years their joint efforts already yielded some results: a few forex companies have been closed, others were been suspended and restored only after penal action was taken against them, and hundreds of cases of forex smuggling are under process.
But the latest MoU spells out modalities for a rather long-term, consistent cooperation in dealing with illegal forex transactions, including those of illegal forex dealers. `One important understanding (between the SBP and FIA) is that the later will make sure that people posing as personnel of intelligence agencies do not mess with licensed exchange companies, an official of Exchange Companies of Pakistan told this writer.
Efforts to curb forex smuggling out of Pakistan often lose momentum because some agencies and institutions try to rescue one particular illegal forex dealer or the other.
Now, on an operational level the FIA will deal with people who claim to be acting on behalf of such institutionsand seek a softening in forex regulations, sources in the SBP say.
One thing in the context of forex smuggling that has become a myth is the number of illegal forex dealers.Some put this number as high as 30,000. But, according to central bankers, the actual number is far less.
If a man with a cell phone in his hand transacts forex deals from the remotest part of Balochistan or KP, he is counted as an illegal money changer. But he might be just one of the many touts of exchange companies. `Our intelligence shows there are many of this type,` says an FIA official.
Actions taken against some licensed forex companies have discouraged them, and all others, to keep such touts, or agents, the majority of whom are part of a broad network of Hundi/Hawala operators.
But the state response to smuggling is now becoming somewhat stricter due to smuggled wealth being used for terror financing and to avoid its socio-political ramifications. The expansion of the parallel economy not only prompts forex smuggling but also feeds it. `Thus the central banks and governments around the world are forging greater and closer coordination in their common fight against money laundering and we are playing an active part in it,` a senior official of the Ministry of Finance told this writer.
Officials of exchange companies are optimistic that a deeper and wider coordination between the SBP and FIA would help them as well because most of their troubles arenot of their own making.
`Sometimes some exchange companies of B category (those that are allowed just to sell and purchase foreign currencies, and sell the same to the companies of A category) facilitate illegal forex transactions, sometimes their agents do it. But at the end of the day we have to face the music, laments the head of a leading exchange company of A category.
`We have long been demanding that the SBP launch a crackdown on all illegal forex dealers so that whitening of ill-gotten wealth by unrecorded buying/selling of foreign exchange and forex smuggling out of Pakistan can be checked effectively. It`s good to see that the central bank is doing that.
About two dozen exchange companies of A category are now operating in a more transparent manner than before, thanks to a tightening of the rules of business by the SBP, central bankers say. They, too, admit that the exchange companies in B category (less than 30 in number) need to be regulated more strictly. But they reject the notion that exchange companies of only one particular type connive with forex smugglers.
Central bankers say that the FIA has assured the central bank that it has improved its institutional capacity to fight capital flight from the country via outright smuggling of hard currencies or through dubious forex deals involving exchange companies. FIA officials say that they have also increased liaison with authorities at Dubai airpor1to check capital flight. In the last five years Pakistanis haveinvested an estimated $6.6bn in Dubai`s real estate market.
Authorities doubt that a big chunk of it has been repatriated illegally.
They also doubt that part of the wealth so employed is nothing but ill-gotten and tax-evaded money. FIA officials say that they have proof of connivance of a few forex companies in capital flight from Karachi, and other cities, to Dubai. `In one or two cases, owners of our leading forex firms were repatriating foreign currencies to Dubai on behalf of unverifiable individuals and that money was being invested there in housing projects in which they had a stake,` a senior FIA official told this writer.
At a recent parliamentary panel briefing by a senior SBP official, Asad Umer of PTl wondered why resident Pakistanis can, by and large, repatriate abroad foreign exchange using their foreign currency accounts with banks with no sufficient safeguards in place. Capital flight through misuse of these accounts is well-known in banking circles.
The SBP-FIA crackdown against capital flight, money laundering and forex smuggling seems to be heading in the right direction but to make it more effective, some other issues merit deeper consideration.
The U-turn taken on the issue of property evaluation rules, weak prosecution in high-profile cases and lack of a clear policy on the infamous Panama Leaks point to a weak political will to deal with the problem of money-laundering and forex smuggling.