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Economic Crime and its effects on the Economy
Participant in the 82nd Advance Course in Public Sector Management
Individual Research paper By Haroon Muhammad Khan Tareen
Advisor: Mr. Shamsher Khan
I am grateful to Mr. Shamsher Khan, Additional Director, National Institute of Public Administration, Lahore for his valuable guidance and help, without which, it would not have been possible for me to write this paper. This is probably the first paper on the subject of Economic Crime written by any participant of Advanced Management Courses at the National Institute of Public Administration, Lahore. I am also thankful to Mr. Shahid Nadeem Baloch, Deputy Director FIA and Deputy Head of the Interpol, Pakistan National Central Bureau, Islamabad for their valuable help. I must also acknowledge the efforts of Mr. Muhammad Akram Tahir, Additional Commissioner of Income Tax, Lahore, in arranging the typing of some portions of this paper.
TABLE OF CONTENTS
1. 2. 3. 4. 5. 6. 7. 8. 9.
Executive Summary Introduction Definition and typologies of Economic Crime World trends in Economic Crime and Global awareness Statutes and Agencies tackling Economic Crime in Pakistan Global cooperation in tackling Economic Crime Effects of Economic Crime Recommendations Bibliography
Economic crimes fall broadly into the categories of those illegal actions under-taken by perpetrators to make money for themselves or those illegal actions undertaken principally to further the aims of their company or other organizations. However the definition of Economic crimes and their aims and motives vary with the time, facts and circumstances, the concept and the term of Economic Crime is, nonetheless comparatively new in Pakistan as compared to other developed countries. Some of the common types of Economic crimes that are rampant in Pakistan are Bank Frauds, Bribery, Corruption and Kickbacks, Counterfeiting of currency notes, securities and stamps etc, Investment schemes, Cooperative Societies Schemes, Land Schemes, Fraud on booking of Hotels and Tourists Resorts abroad, Fake forex business/trading, Money laundering, Insurance Fraud, Tax Evasion, Frauds in I.T Communication, Credit Cards Scams, Telemarketing Frauds, Irregularities in Export/Imports, Offences relating to NIC and Passports, Terrorist financing. Pakistan’s economy has suffered tremendously due to the outflow of cash or foreign exchange earned through illegal activities. The financial sector in general and the banking sector in particular have been thrown into a vicious spin, recovery out of which does not appear likely. Investment into ridiculous schemes such as the Yellow Cab scheme or into useless Mega projects such as the Motorway depleted our banking sector of its entire liquidity of both local and foreign currency. Granting of financial benefit to IPP’s has pledged our financial independence for almost all-foreseeable future. Much as we may try, the fuel bills alone render our industrial production uncompetitive for our own markets not to mention the export markets. Private individuals have also been fleeced in various schemes and, had the present Government not stepped in, the victims of the Cooperatives scandal and the Taj Company scandal would still have been running from pillar to post. The victims of the erstwhile Finance Companies and those of the Kia Pride car scandal are yet lamenting their losses. Borrowing from Nationalized banks and DFI’s against bogus securities has depleted all those institutions and banks as those loans had to been ultimately written off or declared bad. Tax evasion was provided legal coverage through various immunity and exemption schemes until the Protection of Economic Reforms Act, 1992 was introduced. After that it was a merry go round for the Economic
Criminals until the cycle was ground to a halt after the May 1998 nuclear blasts and consequential freezing of Foreign Currency Accounts. Flight of capital has been so massive that the country was at the verge of economic collapse. The incident of 9-11 and its subsequent developments, particularly the decision of the Government to act in a sane manner provided the requisite breather to the economy. This also came as a lifesaver in the shape of American crackdown on the Hundi-Hawala system that is the major conduit for laundering of illegally earned proceeds. Typologies of Economic Crime have been explained in detail so that the reader will become aware of the malady gnawing at the heart of our economy. Some of the other adverse effects include Loss of Foreign Exchange due to flight of illegally earned money, wrongfully borrowed loans, misappropriated amounts, bribe money, drug money and other proceeds of criminal activity, money laundering and inward remittances through Hundi/Hawala system. Industrial activity has suffered due to very high power rates, as well as from losses suffered by our banking system. Fraudulent schemes such as Cooperatives, Finance Companies, KIA Pride, Taj Company, New City etc wiped out life savings of middle class families and thus contributed to increase in the poverty level. Corruption has also been a cause of political instability in the country, resulting in the removal of four successive governments It is not possible to quantify the impact of Economic Crime on the Economy, yet this research paper is an attempt to highlight the major areas and to point out some of the major offences that took place.
The economy of Pakistan has been hit hard by Economic Crimes in the last two decades. There have been several financial scandals involving top-notch politicians, government servants, bankers, and common people. In the early eighties was the scandal of Finance companies, and then came the cooperatives scandal, followed by the Taj Company scandal and several others. At the same time the nation’s wealth was plundered from nationalized banks through write-off of loans and defaults on loans against bogus and forged securities. There were massive kickbacks in purchases from foreign countries in defence deals as well as civil developmental projects. The amounts scooped from the national kitty were schematically laundered through a number of conduits and safely placed in Western Countries. The Banks in western Countries and particularly the United States, having dispersed their own cash through massive loans to governments of developing countries in Asia, Africa and Latin America, were welcoming all sorts of cash inflow. They were turning a blind eye to the menace of money laundering. It was only when the United States was hit with an inflow of drug money from South and Central American drug cartels that serious efforts were undertaken to curb money laundering. By that time most of the money illegally transferred to US, UK and mainland European countries from Pakistan had been securely invested in property and other immovable assets. The Protection of Economic Reforms Act, 1992 and its preceding Ordinances were a blessing for the economic criminals. Similarly the Prize Bonds Scheme was, and still is, a conduit in Pakistan for whitening of black money. The Amnesty schemes for taxpayers introduced by CBR have also served a blow to the rule of law and legitimacy in financial matters, whenever such schemes were introduced. This research paper is aimed at determining the effects of Economic Crime on Pakistan’s economy. Those effects, if taken in exact figures could be given in one short table, but the scope of this study is to explain the various types of economic crime, prevalent in Pakistan and also to reveal the global picture. Therefore, the various types of Economic Crime have been explained and the figures quoted in various publications have also been reported. The methodology adopted for this research has been primarily based upon the data and information available from law enforcing agencies in Pakistan. However extensive use of Internet for updating information, relating to foreign countries and their law enforcing efforts, has been made. Some information and excerpts have been taken from publications by private authors, both from Pakistan & abroad.
Definition and typologies of Economic Crime:
There is no specific definition of Economic crime nor can it be limited to any specific type of offences. As far back as 1940, Edwin Sutherland, the renowned sociologist who coined the term “white collar crime,” complained, “The general public was, sadly, simply not aroused by economic crime.” Later, in 1968, the President’s Commission on Law Enforcement and the Administration of Justice in the United States concluded that the public was indifferent to economic crime and, in many cases, actually sympathized with economic offenders. Generally Economic crimes are committed by persons of relatively high social or economic status in connection with their regular occupation or business. Economic crimes fall broadly into two categories: • • Those illegal actions under-taken by perpetrators to make money for themselves. Those illegal actions undertaken principally to further the aims of their company or other organizations.
However the definition of Economic crimes and their aims and motives vary with the time, facts and circumstances. Though the concept and the term of Economic Crime is comparatively new in Pakistan as compared to other developed countries. However, the existence of a large number of these crimes goes with the past history. The recent development in science and technology and especially in the field of computer and information technology, has given these offences new dimensions.
Different types of Economic Crime
Bank Frauds This is an act or pattern of activity to defraud a bank’s fund. Following types of bank frauds are commonly experienced in Pakistan. • Fraudulent and irregular loans against in-adequate collateral/securities. • Passing of Bogus debit/credit entries in investor’s account(s) • Misappropriation of Utility Bills, Educational/Admission Fee collections. • Issuance of Letter of Credit without sufficient verification. • Use of bogus shipping documents to get export re-financing loans from banks. • Release of import documents to unauthorized persons. • Release of documents without discharging the bank liabilities. • Use of forged/fake Demand Drafts, Pay Orders.
• • • • • • • • •
Tampering of Cheques/Printing of fake financial instruments. Issuing cheques on closed accounts or accounts with insufficient funds. Use of fake Travelers Cheques and other financial instruments. Encashment of multi signature authorization cheques with single signature. Use of forged or stolen property documents for loans and guarantees. Parallel banking by not entering debit and credit in the Bank’s ledger. Fraudulent disbursement of agricultural loan to unauthorized persons. Opening and operating of fake accounts for different purposes. Fake telephonic and telegraphic transfers by using bank’s codes.
Bribery, Corruption and Kick-Backs Such offences specifically relate to public servants, bureaucrats, holders of public offices and persons attached with such transactions. In certain instances Kickbacks are also availed by unscrupulous private businessmen, while setting up large industrial units with bank borrowings. They skim the money off the lending institutions by inflating the cost of the project (particularly the imported segment of the plant/machinery). Such proceeds are invariably retained abroad. Counterfeiting of currency notes, securities and stamps etc Generally Pakistani currency notes, securities and stamps etc. are printed to defraud public. However, occasionally US Dollars, Saudi Riyal and some other foreign currencies are also counterfeited Investment schemes A large number of such scams were experienced by the people of Pakistan during the last 10-years which virtually affected millions of citizens. The bogus investment companies promise a large return on investments and then disappear. Cooperative Societies Schemes A number of Cooperative Societies indulged in this practice through which they fraudulently collected huge amounts from small investors, which they subsequently invested in fake projects and misappropriated. Land Schemes Offences relating to fraudulent sale/purchase of land are very common whereby the offenders manipulate fraudulent sale of land which is either not owned by them or has already been sold to other parties. Fraudulent booking of Hotels and Tourists Resorts abroad Such frauds have taken place during the past few years affecting thousands of citizens. Some foreigners pretending to be owners of tourists resorts abroad, fraudulently received huge money from the public on the pretext of seasonal booking/leasing of Resorts abroad which actually did not exist.
Fake forex business/trading These fake business firms induce the citizens to open forex account with them pretending that they would invest the money in foreign forex markets and metal markets etc. However, at the end of the day they show a total loss to the credit of the account holders. Money laundering This is the investment and transfer of money from racketeering, corruption and kick-back, drug transactions or other embezzlements schemes in such a manner that it appears that its original source either can not be traced or is apparently legitimate. During the past few years the quantum of money laundering has assumed an alarming magnitude. This issue is therefore being discussed separately. Insurance Fraud The fraud relates to an act or pattern of activity wherein one fraudulently obtains proceeds from Insurance Company, generally in collusion with the Insurance Company’s Agents and Surveyors. Tax Evasion In a third world country like Pakistan tax evasion in almost all available forms is a common practice and the modus operandi varies from case to case. All government revenues including, Property tax, Income Tax, Wealth Tax, Sales Tax, Excise duties, Import /Export Duty, Octroi, Wharfage, Toll tax etc. are subjects of evasion in different manner. Frauds in I.T Communication This is relatively a new field for Pakistan yet there are frequent complaints that a large number of persons are presently involved in committing cyber crimes whereby they are causing huge financial loss to the Communications companies. These include hackers and other offenders (including those indulging in pornography and particularly child pornography) and may also include some employees of the ISP’s who may be stealing Internet Time from customers. Credit Cards Scams This is yet another field where the perpetrators have started committing crimes by using other’s credit cards. While it is new in Pakistan, in the developed countries it has touched dangerously high levels, but now due to their effective management and control as well as successful prosecution of the offenders, the crime wave has receded somewhat. Credit Card fraud can occur even before the customer receives his or her card or even if the card has not been stolen or compromised. Internal theft of credit card information is a growing problem. Individual offenders, as well as sizable organizations, are able to take advantage of contacts within financial institutions to obtain legitimate bank and credit card account information for the purposes of counterfeiting/internet order purchasing.
Telemarketing Fraud This is also a new field of crime where the credit cards and funds of other persons are fraudulently used for getting financial gains. Other types include (1) online auctions, (2) general merchandise sales, (3) internet services, (4) computer equipment and software, (5) work-at-home schemes, (6) multi-level marketing and pyramid schemes, (7) business opportunities, (8) credit card offers, (9) credit repair, and (10) employment agency and job offer schemes. Theft of intellectual property/technology The Internet and digital technology have provided an unprecedented means for criminals to not only profit from the theft of intellectual property but also permanently diminish its value in the process. An estimated $10.8 (B) is lost annually to US Intellectual property Owners. Tens of thousands of web sites offer pirated software and material. Irregularities in Export/Imports The businessmen in order to save duties and taxes or to avoid the realization of entire sale proceeds indulge in different types of irregularities including overinvoicing, under-invoicing, trans-shipment of goods and formation of dummy export/import houses abroad. Offences relating to NIC and Passports Such offences are very rampant in Pakistan. Due to heavy influx of foreign nationals and refugees into Pakistan from Bangladesh, Afghanistan, Iran Burma, Sri-Lanka and other countries, besides Pakistanis, these foreigners also attempt to proceed abroad on forged/tempered passports, NICs and Visas etc. Terrorist financing Financial Action Task Force (FATF) experts have identified Terrorist Financing as a distinct and separate type of Economic Crime. They have focused for the first time on how terrorists conceal or move funds in support of their operations. The objectives of this work were to identify the financing methods used by terrorists and how they differ from those used by other criminal groups. Besides kidnapping and extortion, terrorist groups may engage in large-scale smuggling operations, various types of fraud, thefts and robbery, and narcotics trafficking.
World trends of various types of Economic Crime and Global awareness
While the crimes listed in the earlier chapter are not unique to Pakistan and have a universal prevalence, yet the focus of the International community is towards money laundering and particularly in the backdrop of 9-11 that of Terrorist Financing. In this context the Financial Action Task Force, the primary body of the Organization for Economic Cooperation and Development (OECD) has formulated its set of recommendations. Initially those were 40 recommendations, but later on 8 eight more were introduced. Please see annex-I. Financial Action Task Force (FATF) experts have identified Terrorist Financing as a distinct and separate type of Economic Crime. They have focused for the first time on how terrorists conceal or move funds in support of their operations. The objectives were to identify the financing methods used by terrorists and how they differ from those used by other criminal groups. Besides kidnapping and extortion, terrorist groups may engage in large-scale smuggling operations, various types of fraud, thefts and robbery, and narcotics trafficking. The ideological rationale for some terrorist movements means that individual terrorists or terrorist groups may sometimes rely on legally generated sources of income. As mentioned above, this is a key difference between terrorist groups and traditional criminal organizations. One FATF member reported, for example, that the supporters of a national liberation movement from a south Asian country (Sri Lanka) were carrying out ostensibly legal activities in that FATF country (UK) to obtain financial resources. They raise these funds by infiltrating and taking control of institutions within the immigrant community located there. Some of the specific fundraising methods mentioned by the expert include: Collection of membership dues and / or subscriptions; Sale of publications; Speaking tours, cultural and social events; Door-to-door solicitation within the community; Appeals to wealthy members of the community; and Donations of a portion of their personal earnings.
Correspondent bank accounts are accounts that financial institutions maintain with each other on their own behalf and in their own names. International correspondent banking relationships have a variety of legitimate business purposes. However, it has been found that these relationships are vulnerable to misuse for money laundering. Shell banks, certain offshore financial institutions and banks from third world countries are of particular risk to legitimate correspondent banking relationships. Correspondent banking is the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank”). By establishing multiple correspondent relationships globally, banks can undertake international financial transactions for
themselves and for their customers in jurisdictions where they have no physical presence. Large international banks typically act as correspondents for thousands of other banks around the world. By their nature, correspondent banking relationships create a situation in which a credit institution carries out financial transactions on behalf of customers from another institution. This indirect relationship means that the correspondent bank provides services for individuals or entities for which it has neither verified the identities nor obtained first-hand knowledge of the respondent’s customers. In correspondent banking therefore, the correspondent institution must rely on the respondent bank having performed all of the necessary due diligence and continuous monitoring of its own customers’ account activity. Some additional risks incurred by the correspondent bank include in particular, assessing the quality of anti-money laundering mechanisms in place at the respondent bank. For example, a foreign respondent bank may apply less stringent anti-money laundering standards due to weaker laws and regulations, inadequate regulatory supervision, or failures in applying standards or internal controls. While the correspondent bank may be able to determine the legislation in effect for the respondent bank, it is much more difficult to know the degree and effectiveness of the supervisory regime to which the respondent is subject. There also exist subrespondents through which a respondent bank may itself be offering correspondent banking facilities to other credit institutions. The failure of principal banks to take adequate steps to prevent money laundering through correspondent banks is a longstanding, widespread and ongoing problem. The instances that have come to light include: -laundering illicit proceeds and facilitating crime by accepting deposits or processing wire transfers involving funds that the high risk foreign bank knew were associated with drug trafficking, financial fraud or other wrongdoing; -conducting high yield investment scams by convincing investors to wire transfer funds to the correspondent account to earn high returns and then refusing to return any monies to the defrauded investors; -conducting advance-fee-for-loan scams by requiring loan applicants to wire transfer large fees to the correspondent account, retaining the fees, then failing to issue the loans; -facilitating tax evasion by accepting client deposits, commingling them with other funds in the foreign banks correspondent account, and encouraging clients to rely on bank and corporate secrecy laws in the foreign banks home jurisdiction to shield the funds from tax authorities; -facilitating Internet gambling, illegal under several countries’ laws (including those of Pakistan and United States), by using the correspondent account to accept and transfer gambling proceeds. Information developed by FATF shows that bearer securities available in certain jurisdictions (Including those being issued by Government of Pakistan) represent a particularly useful instrument in the setting up of international money laundering schemes. The bearer cheque is still an important negotiable instrument
in use in some regions of the world and could be, along with other types of bearer instruments, another means of laundering criminal proceeds.
Travellers’ cheques are an easily obtained financial instrument that can be carried overseas without requirement to declare their movement. Several FATF members have indicated detecting use of travellers’ cheques as an instrument for laundering of funds – either alone or in connection with other bearer instruments. In some instances, these cases have involved purchases (for cash) of large quantities of travellers’ cheques. The instruments are used to reduce the bulk of the proceeds for movement overseas, direct purchase of high value items to enrich the individual or as a direct payment for contraband or narcotics. Suspicious Transactions Reporting Regime or the STR reporting indicates that criminals may be using travellers’ cheques as a money-laundering tool to provide anonymity to the purchaser and/or the ultimate payee. Although travellers’ cheques may be a preferred instrument for conducting large business transactions in some countries, the use of travellers’ cheques to negotiate these transactions may offer the opportunity to commingle illicit funds with legitimate funds. Several major banks and travellers’ cheque issuers have detected and reported suspicious practices involving the use of hundreds of thousands of dollars worth of activity in travellers’ cheques, often in strings of sequentially numbered thousand-dollar cheques. In some cases, the payee was a numbered account in a foreign bank. Frequently, the name and/or address on the purchase agreement were left blank, unverifiable, illegible, or not matching the signature name on the corresponding travellers’ cheques.
Bank cheques and bank drafts (bills of exchange)
The use of bank cheques to move value between persons or jurisdictions is usually not reportable. A bank draft is a simple variant of cheque used in international payments. They constitute an unconditional written order by one party (the drawer – issuing bank) through which a second party (the drawee – normally the principal correspondent bank of the currency of issue) pays a fixed amount to a named party (the payee). Although not strictly speaking bearer instruments, both of these types cheques have frequently appeared in cases of money laundering alongside other true bearer instruments.
Fraud and tax evasion funds moved offshore through purchase of bank cheques
The proceeds of fraud and tax evasion were remitted offshore by purchasing bank drafts in structured amounts and with false sender details and then sending those drafts overseas, where they were deposited in bank accounts under false names. This simple method of moving funds was highly effective (funds exceeding USD 2.6 million were transferred by drafts in one 12-month period) and went largely undetected. The ease of the process was aided by the lack of a requirement to produce photographic identification when purchasing the cheques.
Co-coordinated money laundering among organized crime groups
Organized crime groups may be working together to co-ordinate their money laundering activities. This co-ordination involves having specific steps of the laundering process handled by different organizations – one group deals with structuring transactions, while another handles the layering step, for example – for proceeds derived from the same crime. The Western Economies are most worried about the effects of money laundering on their financial systems. It has been developed as a principal that all economic crime can be nabbed at one stage or the other if anti-money laundering legislation is effective. It has been a known fact that the proceeds of crime have been laundered and stashed in Bank accounts off-shore, i.e. in the tax free centers of the world, such as British Virgin Islands, Cayman Islands, Luxembourg, Isle of Man, Liechtenstein, Switzerland etc. An example of this activity can be gauged from two facts; Grand Cayman has a population of 10,000 only but has 11,000 registered companies owned by expatriates. Similarly, British Virgin Islands population of 25,000 includes the expatriates who work in the offices of the 600 world banks that are headquartered on that crummy Island (The use of the word “headquartered” is quite deliberate to indicate the number of banks operating from that Island and thus remaining outside the legal and financial controls of the democratic world whether developed or developing). Those banks include 6 of the world’s top 10 banks, including Citibank Corporation. These facts are reported in detail in “The Money Lenders” by Anthony Sampson, published by Coronet Books, New York in 1982 and in “The Laundrymen” by Jeffrey Robinson, published by Simon & Schuster Limited, London in 1994. The art of concealing the existence, the illegal source, or illegal application of income, and then disguising that income to make it appear legitimate required that the launderer have the means to physically transport the hard cash. The trick was, and still is, to avoid attracting unwanted attention, thus alerting the Internal Revenue Service (IRS) of USA and other government agencies involved in searching out ill-gotten gains. In what could be described as the "lo-tech" world of money laundering, the process of cleaning "dirty money" was limited by the creative ability to manipulate the physical world. Other than flying cash out of one country and depositing it in a foreign bank with less stringent banking laws, bribing a bank teller, or discretely purchasing real or personal property, the classic approach was to deposit cash at a bank. Essentially, platoons of couriers assaulted the lobbies of banks throughout the United States with deposits under the $10,000 reporting limit as required under the Bank Secrecy Act. The result was the formation of a serious loophole under the Bank Secrecy Act, allowing couriers almost limitless variables in depositing dirty money such as the number of banks, the number of branch offices, the number of teller stations at one branch office, the number of instruments purchased, the number of accounts at each bank, and the number of persons depositing the money.
In 1986, the Money Laundering Control Act of USA attempted to close the loopholes in the prior law that allowed for the structuring of transactions to flourish. In criminalizing the structuring of transactions to avoid reporting requirements, American Congress attempted to "hit criminals right where they bruise: in the pocketbook.”Under the Act, the filing of a Currency Transaction Report (CTR) is required even if a bank employee "has knowledge" of any attempted structuring. Thus, it appeared as if the ability to launder the profits from illegal activity would be severely hampered. Electronic transfers of funds are known as wire transfers. Wire transfer systems allow criminal organizations, as well as legitimate businesses and individual banking customers, to enjoy a swift and nearly risk free conduit for moving money between countries. Considering that an estimated 700,000 wire transfers occur daily in the United States, moving well over $2 trillion, illicit wire transfers are easily hidden. American Federal agencies estimate that as much as $300 billion is laundered annually, worldwide. As the mountain of stored, computerized information regarding these transfers reaches for the virtual stars above, the ability to successfully launder increases as the workload of investigators increases.
Statutes Dealing with Economic Crimes in Pakistan
The offences relating to Economic Crime are tackled through the following statutes, which are cognizable by FIA, Police (and NAB): 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. A number of offences defined under Pakistan Penal Code Offences under the Explosive Substances Act, 1908 Offences under the Official Secret Act 1923 Offences under the Foreigners Act, 1946 Offences under the Prevention of Corruption Act, 1947 Offences under the Foreign Exchange Regulation Act, 1947 Offences under the Imports and Export (Control) Act, 1950 Offences under the Banking Companies Ordinance, 1962 Offences under the Pakistan Arms Ordinance, 1965 Offences under section 156 of the Customs Act, 1969 Offences under the Foreign Exchange Repatriation Regulation, 1972. Offences under the Foreign Assets (Declaration) Regulation, 1972. Offences under the National Registration Act, 1973 Offences under the High Treason (Punishment) Act, 1973 Offences under the Prevention of Anti-National Activities Act, 1974 Offences under the Banks (Nationalization) Act, 1974 Offences under the Passport Act, 1974 Offences under the Drugs Act, 1976 Offences under the emigration Ordinance 1979 Offences under the Exit from Pakistan (Control) Ordinance, 1981
It may however, be mentioned that at present there is no specific criminal law against the offences of cyber-crimes. Legislation has been recently enacted against money laundering. That legislation is on the same pattern as an STR regime (Suspicious Transaction Reporting). It requires all banks, operating in Pakistan, to report suspicious transactions to the State Bank Pakistan where those are examined and, if money laundering is suspected, the matter is referred to FIA for investigation (and if need be for prosecution). That prosecution will however be before the normal courts (In this case the Special Courts (Offences in Banks), established through an enactment in 1992. Agencies tackling Economic Crime in Pakistan F.I.A. is the only Agency of the Federal Government that collectively deals with a large number of offences falling within the ambit of Economic Crimes. For the purpose, the FIA has its special wing called Economic Crime Wing besides a Crime Wing, Immigration Wing and Technical Wing. The FIA Act 1974 envisages specific powers to its members of the Agency to deal with a number of offences connected with Economic Crimes which have been included in its schedule of offences. Police has concurrent jurisdiction in all such offences but in line with rulings of superior courts in various cases, the police do not as a matter of
procedure now tackles the economic crime and those are transferred to FIA. Nonetheless a large number of such crimes is neither reported nor taken cognizance of as FIA is too thin on the ground. It has only about 2,500 personnel and in addition to economic crimes, it is tackling Immigration and Interpol duties also. Hence it is capacities are extremely reduced due to this logistical disadvantage. Another Agency that has now been established in Pakistan is the National Accountability Bureau. It was originally established as The Office of the Chief Ehtesab Commissioner in 1996, later on that office was retained but supplemented by an Ehtesab Bureau or the Accountability Bureau in 1997. However in November 1999 the National Accountability Bureau was established. NAB was primarily established to combat corruption. Later on recovery of defaulted loans was brought within its ambit through an amendment by classifying defaulted loans into willfully defaulted loans and the others. Another amendment in the law provided immunity to Bankers from prosecution until the State Bank of Pakistan approved their matters for Reference to NAB. This amendment has effectively made NAB toothless in respect of Banking Offences, as no Banking Offence can be committed without the Connivance or abetment, or collusion or criminal negligence of the bankers. The role of bankers (Including their criminal liability) has been clearly defined in case cited as 100CLC896 of the Honourable Sindh High Court (relating to NBP vs. West Pakistan Tank Terminals LTD. (A company owned by Sadruddin Ganji a swindler of hundreds of millions of Rupees from the banks)), wherein the honourable bench has held that all bankers, irrespective of their position in the bank are liable to criminal action if through their decision, or concurrence or assent or any other act amounting to negligence, the bank sustains loss because the bankers are custodian of the bank and it would be an act of breach of trust and criminal misconduct by the bankers if they fail to safeguard the interest of the bank. The NAB has recently been granted exclusive jurisdiction over Economic Crimes and in this behalf the Economic crimes wing of FIA has been merged into NAB. Similarly FIA has been deprived of its authority to look into matters of corruption also. This does appear to be a hasty decision. Institutions built in decades if decimated in a single day create vacuum that cannot be filled by such organizations as NAB. Those organizations are highly centralized institutions and without checks and balances, those will probably become a lethal tool in the hands of whosoever controls NAB in future. The process of accountability has some essential ingredients, the foremost being Justice (Not only being done but also appearing to be done), then come fair play, uniformity of treatment and transparency. Whereas it was provided in the statutes relating to FIA as to what levels of authority were to be consulted before initiation of enquiries, registration of cases or submission of final challan before the courts, the procedure at NAB is based on a highly centralized chain of command, that does not conform to the norms of judicial process or human rights. The Anti Narcotics Force is also an effective agency that deals in anti-narco operations as well as with anti-money laundering. In fact the ANF was the first agency in Pakistan that trained its officers to tackle money laundering.
Global cooperation in tackling Economic Crime
Suspicious transaction reports & money laundering cases
Suspicious or unusual transaction reports (STRs) have a key function in the overall anti money laundering programmes of individual FATF members. This function is either to generate anti-money laundering cases or to contribute to the successful outcome of such investigations. Within FATF member jurisdictions, it appears that by far the majority of investigated or prosecuted money laundering cases are related in some way to STRs (again, either derived from or supplemented by STRs). In those members where STRs serve as the direct source of the cases, the proportion of non-STR related cases seems to be small (some experts mentioned figures ranging from none to five or ten percent). For those countries in which the STR serves as a supplemental source of information, the proportion of non-STR cases is perhaps higher. Moreover, the nature of the cases differs from those generated by STRs. In a number of jurisdictions, money-laundering investigations do not really occur independently of the predicate offence that may have produced illegal proceeds. For example, one FATF member stated that most of its cases with money laundering aspects arise as part of narcotics or, more recently, terrorism investigations. Any investigation or prosecution for the money laundering offence occurs only in conjunction with the main predicate offence. STRs are thus used to help establish links to other parts of the criminal operation. It would seem to be true as well that money-laundering cases with no links to STRs also come from similar types of investigations; however, money-laundering cases without any links to STRs are rare.
Money laundering has become a global problem and all countries of the world are vulnerable to it. Getting the criminal money into the financial system means that it becomes harder to trace and confiscate. Drug Traffickers, terrorists, illegal arms dealers, fraudsters, tax evaders, corrupt bureaucrats, political figures and holders of public offices, all need to launder the proceeds of their crimes. In Pakistan there are a number of other popular ways through which illgotten money is laundered. Some of the modes include remittance received from abroad through Demand Drafts and other legitimate banking instruments, telegraphic, electronic and mail transfer of money, laundering of money through under-invoicing/over-invoicing of export/import, money laundering through under valuation of real estate and properties, acquiring of winning Prize Bonds to set-off against black money, bearer savings certificates and other such schemes of National Saving Centers, Banks, different Financial Institutions and Corporations foreign investments from anonymous/off-shore companies, Hundi and Hawala transfers through Money Changers, investment in costly vehicles/automobiles and other moveable assets etc. There is no restriction in bringing into Pakistan any amount of money from abroad through Demand Draft. For this transaction even an account abroad is not
necessary nor do the tax authorities have any objection with regard to the original source of money. Thousands of such transactions take place every year to whiten the money without the knowledge of State Bank of Pakistan. No source is asked in Pakistan for the money arrived through these means and as such the money launderers virtually have a free hand in effecting all such transactions. This white money may be used for any legal purpose in Pakistan. Over invoicing and under invoicing is a common practice amongst the businessmen who keep their illgotten money, drug money and kick backs etc. outside the country and spend the same for meeting the differences of over-invoicing and under-invoicing. This on one hand whitens their money while on the other hand they also evade taxes. The investment prices at the time of purchase of real estate properties are shown at substantially lower side by investing huge ill-gotten money. At the time of sale, the value is shown as appreciated. There is no system to strictly check the market value of the properties. While there is a need to reduce the registration fee for correct declaration of genuine purchaser, the legislation and rules are also required to be amended for maintaining a strict check and balance system. It is a very common practice amongst businessmen and public servants who whiten their ill-gotten money by purchasing winning prize bonds for placing them on record of declared wealth. The Income Tax for winning Prize Bonds is 10% as against the rate of 35% leviable on individuals which gives rise to this business. Bearer certificates have been a great source of money laundering which was recognized by all previous regimes of Pakistan and the State Bank of Pakistan as well as all the Tax Authorities also recognized the “sanctity” of these schemes. The ill-gotten money acquired through corruption, kick-backs, drug trafficking and tax evasion is kept in foreign accounts and subsequently the same money is brought into Pakistan and shown to have been invested by “foreign investors” without having proper identifications and generally belonging to Off-shore companies. In one such case, which was discovered recently by FIA a huge investment to the tune of Rs.3.2 Billion, was shown to have been invested by a local businessman by the unknown foreign investors without having proper addresses and identification. Subsequently the money was taken away and neither the tax authorities nor the State Bank of Pakistan questioned the transaction. At present there is no system of keeping any follow-up of such dubious transactions The moneychangers in Pakistan are generally involved in money laundering and frequently make huge transactions from and into Pakistan without any actual control of State Bank of Pakistan. There is no criminal law attracting the misdeeds of moneychangers who are governed by some Regulations of State Bank of Pakistan only. This also needs a proper legislation. There is no check of the Tax Authorities on maintaining of highly expensive cars/vehicles and other moveable assets with the results that huge ill-gotten money is invested in shape of these assets.
Effects of Economic Crime
Internationally the figures of money laundering, (described as the ultimate outlet of all economic crime), are staggering. Using 1996 statistics, the percentages estimated by UNDCP and FATF indicate that money laundering ranged between US Dollars 590 billion and USD 1.5 trillion. The lower figure is roughly equivalent to the value of the total output of an economy the size of Spain. The size of Pakistan’s economy (Both regulated and unregulated) is estimated to be less than US$ 60 (B). The impact of economic crimes on the economy of Pakistan can be best described by the following figures revealed by a survey conducted in 2000. These figures were communicated by Major General Bhatti, Director General National Accountability Bureau, Punjab in his address to participants of 82nd Advance course at NIPA on 17th September 2002: Amounts misappropriated through: Bank Loans: Rs. 470 (B) Taxes (Indirect and direct) Rs. 436 (B) Development Programmes Rs 116.3 (B) Import/Petroleum distribution Rs. 67 (B) Utilities (Electricity/Gas) Rs. 94 (B) Government Spending Rs. 175 (B) Total: Rs.1,358.3 (B) Similarly Chairman NAB also provided certain figures that are indicative of the massive jolts given to our economy by economic crime. It was intimated by him at NIPA on 16th September 2002, that NAB had handled 1153 cases since November 1999 (to August 2002), and out of those 495 cases were sent for prosecution, 478 being decided by the courts. The recoveries against bank loan default cases have amounted to Rs. 75.9 (B) and those in corruption cases have amounted to Rs 2.58 (B). Indirect recoveries amount to Rs. 18.34 (B) and rescheduling of bank loans has been in respect of defaulted amounts of Rs. 55.73 (B). The figures available with FIA are equally horrifying in respect of the large number of economic crime cases and enquiries. The figures in respect of pending FIA cases and enquiries for the financial year 2001-02 can be seen in Annex-I. The author of “Kon Bara Badunwan” writing about the corruption of two former major political parties estimates the looted amount at over 10 Billion US Dollars, but those figures are more speculative and sensational and therefore cannot be cited with certainty. But the cases of Schon group fleeing after misappropriating Rs. 7.2 (Billion), Sehgal’s misappropriating Rs. 3.5 (B) and the Tawakkals fraudulently availing loans of Rs. 3.5 (B) (against bogus letters of credit
purportedly issued by a non-existing bank the East Mediterranean Trading and Banking Corporation) are very real figures. The setting up of hotels in Houston (Hyatt
Regency) , Toronto and Dubai (Hilton) by famous hoteliers of Pakistan is borne from record. Mr. Roedad Khan, in his book “Pakistan, a Dream Gone Sour” refers to unauthorized withdrawal and misappropriation of an amount of Rs.95.1 (M) in 1988-89 by a former Prime Minister from the Secret Service fund of The
Intelligence Bureau. He also mentions the loss of US$ 4.65 (M) caused to the Cotton Export Corporation by the same Prime Minister in the clandestine export deal with Rilley Brothers of UK. Those allegations form prosecution material in References against the said Prime Minister. There are several other specific examples. But if specific examples were to be cited, several volumes could be written. Some excerpts from ‘Who Owns Pakistan?’ By Shahid-ur-Rehman available at Annex-III will give an idea of the amounts involved in economic crime in Pakistan. However, some of the specific adverse effects are enumerated hereunder: Loss of Foreign Exchange due to flight of illegally earned money, wrongfully borrowed loans, misappropriated amounts, bribe money, drug money and other proceeds of criminal activity, money laundering and inward remittances through Hundi/Hawala system. (The inward remittances through Hundi are caused by two factors i.e. differential in the banks’ exchange rate and the open market exchange rate and lack of public confidence in the banking system due to frauds, delays etc. Industrial activity in the country virtually came to a halt due to liquidity crunch in the major local banks. Since wrongfully acquired loans were not repaid, the banks faced cash shortage that in turn became a major impediment in the way of genuine industrialists or entrepreneurs. Industrial activity has also suffered due very high power rates, as those rates were negotiated with the Private Power Producers for apparent personal considerations without prudently assessing the requirements and prevalent economic conditions (Most officials of the Private Power Board at that time are now absconding in foreign countries). So long as Money Laundering was favourable to their economies, the Western World ignored the whole issue. Under lenders’ pressure, Pakistan was obliged to remove all controls from the exchange markets. The protection of Economic Reforms Act, 1992 became a major source of money laundering in Pakistan. Efforts for containing the damage were initiated only after 9-11 and under foreign pressure. However flight of capital has continued unabated. The increase in inward remittances through banking channels is apparently a temporary phenomenon and is due to extinction of the differential between open market and banks’ exchange rates. It has also been caused due to the American pressure on the Hundi dealers in Middle East. Agricultural production has been adversely hit (particularly in the Punjab) due very high rate of corruption in the Agricultural Development Bank and bad /fraudulent loaning by the said bank’s employees. Fraudulent schemes such as Cooperatives, Finance Companies, Kia Pride, Taj Company, New City etc wiped out life savings of middle class families and thus contributed to increase in the poverty level. Corruption has also been a cause of political instability in the country, resulting in the removal of four successive governments.
Training requirements for Investigators
The Federal Investigation Agency is equipped with locally trained and experienced field officers who are capable of investigating offences defined in the schedule of FIA. However, on account of financial constraints, the Agency lacks in proper staffing, technical and scientific instruments and requisite modern expertise to meet the challenge of today and to combat all kinds of prevailing Economic crimes especially the maniac of money laundering. The position at National Accountability Bureau is also the same. It is suggested that adequate local and foreign training programs be introduced for investigating officers of FIA and NAB of the ranks of Inspectors and Assistant Directors with a view to create requisite skill, expertise and knowhow regarding the investigation of Economic Crime with special emphasis on money laundering. The training may be imparted on Local and International Laws, on Economic crime & money laundering with relevant Criminal Procedure Codes and Evidence Act so that they can become conversant with the procedure of investigation and admissibility of evidence in respect of foreign countries also. Training is also required in respect of national and international banking practices as well as normal trading practices and procedures in Pakistan and abroad, which might involve Economic crimes and money laundering. Adequate training in cyber crimes, computer/Credit Cards frauds, Electronic Transfers of funds and other crimes of modern-age is also essentially required for all tiers of investigators. Requirements of the investigating agencies for machinery /equipment and other financial & technical resources have to be fulfilled in the same manner as has been done for the Motorway Police. There is also the need to increase international liaison and cooperation for the purpose of conducting effective investigations into the Economic crimes specially the Money Laundering. It is imperative to collect rapid information from all the countries from where the money is suspected to have been laundered. Since the present laws obstruct the supply of such information internationally, there is a need to increase international liaison and cooperation for mutual exchange of information.
Current legal position of money laundering offences
As a matter of fact, at present there is no law in Pakistan against money laundering. The act of money laundering itself does not constitute an offence punishable under any provision of law. However, money laundering, if established can be used as an evidence in cases of corruption, kick-backs, smuggling of drugs and tax evasion etc. etc. At present there is State Bank of Pakistan’s prudential Regulation No.XII only which relates to “Prevention of Banking Channel for the purpose of money laundering and other unlawful trade”. Keeping in view the rapidly changing scenario of the world, it is imperative for
Pakistan to make effective legislation on money laundering by declaring it as cognizable offence with adequate punishments. Efforts in this connection are under way and necessary legislation is in the offing.
Need for access to the banks accounts and financial transactions inside and outside the country
The information with regard to any account of a Bank or financial Institution in Pakistan is a privileged one and all Investigating Agencies except NAB are denied the supply of any such information without the orders of a Session or High Court. Similarly the Investigating Agencies are unable to get any information from foreign banks. Only the NAB Ordinance 1999 has empowered its Investigating Officers to obtain information with regard to any bank account in Pakistan. However, this Ordinance too is ineffective regarding bank accounts in foreign countries. There should be legislation with some internationally recognized procedure and understandings so that such information may be acquired to combat the evil of money laundering
Access to record of different departments of Central Board of Revenue.
The Income Tax and Wealth Tax Returns/Statements, which are essential documents to assess and compare the declared and undeclared wealth of an individual, are considered as privilege documents and excess is not allowed to the Investigating Agencies. This law needs to be amended.
Need for creating public awareness
It may be interesting to mention that till recently money laundering was not considered an offence in Pakistan and generally the public especially businessmen as well as Bureaucrats and Politicians took it as a routine transaction. Even the bankers who try to observe the State Bank’s Regulations were helpless because of money changers and “Hawala Makers” who are known for this business. There is a need to create awareness and educate the public with regard to the seriousness of this act and its consequences, particularly in view of the recently enacted legislation.
Banking sector needs tougher controls. Till such time that the nationalized banks are sold to the private sector and even after that it will be necessary to exercise strict control over the system. The immunity from prosecution granted to the bankers in the NAB Ordinance is proposed to be replaced with legislation or statute that is in line with the judgment of Sindh High Court in 100CLC896.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Annual Report of the Federal Investigation Agency, Islamabad “Who Owns Pakistan” by Shahidur Rehman “Pakistan, A Dream Gone Sour” by Roedad Khan “Kaun Bara Badunwan?” by Mujahid Hussain “The Laundrymen” by Jeffrey Robinson “The Money Lenders” by Anthony Sampson The Data and typologies of White Collar Crime by the National White Collar Crime Center, USA United Nations Manual on Anti-corruption Policy. Economic Survey of Pakistan 2001-2002 FATF reports on money laundering FATF recommendations
Cases Banks involving Bankers only Banks involving non-bankers Foreign Banks ADBP (Involving bankers also) ADBP Not involving any bankers but others NDFC/RDFC/PICIC/NIT P.I.A.C. O.G.D.C. P.T.C.L Pak Steel Mills Corp. RECP SLIC Customs Enquiries Departments Banks involving Bankers also Banks not involving any bankers but other persons Foreign Banks ADBP (Involving bankers also) S.P.S.O H.S.S.O NDFC/RDFC/PICIC/NIT P.I.A.C. O.G.D.C. P.T.C.L. Pak Steel Mills Corp. R.E.C.P. S.L.I.C K.E.S.C. 187 115 4 28 32 11 1 2 26 1 1 26 4 3,885.955(M) +$5,25.14265 4,911.988 (M) 193.340 (M) 24.899 (M) 26.999 (M) 1,133.795 (M) 12.5 (M) 1,400,000 (M) 15.782 (M) 1,387,000 (M) 20 (M) 65.675 (M) 1.350 (M)
Enquiries Amount Involved 129 2376.486 (M) + $ 284648 88 1015.083 (M) 14 87 48 11 4 6 10 66 19 6 10 1 17.168 (M) + $ 152900 9.75 (M) + $ 861554 7.254 (M) 161.985 (M) 2386.740 (M) 155.230 (M) 42.500 (M) 15.567 (M) 1264.265 (M) 516.725 (M) 217.680 (M) 44.356 (M)
Companies defaulting in payment to Privatization Commission Name Bid Price 110 63.57 28.8 189 30.5 63 36 14.58 79.2 42.28 2,750 270.68 756.84 456.84 40.52 152.3 60.2 66.67 64.28 86 30.1 52.28 13.2 49.7 63 17 452 60 Date Amount Overdue 84 46.37 12.28 22.89 37.45 22 24 26 0.9 49 74 10 2.179 116 56.03 240.32 40.48 13.07 13.65 28.49 30.37 14.17 25.15 1.5 12.06 24 180 13.07
1. National Cement Dandot 2. Pak PVC Ltd. 3. Ravi Engineering 4. Textile Machinery Corp 5. National Petro Carbon 6. Bara Vegetable 7. Crescent Factories 8. A&B Industries 9. Suraj Ghee 10 Pak Hayee Oil 11 Dhaunkat Rice 12 Shikarpur Rice 13 Wah Cement 14 Baluchistan Wheel 15 National Fibre 16 Pak China Fertilizer 17 Naya Daur Motors 18 Sindh Alkali 19 Sindh Ceramics 20 Metropolitan Steel 21 Sh Fazalur Rehman Ghee Mills 22 Quaidabad Woolen Mills 23 Haripur Vegetable 24 Kakhel Industries 25 Asif Industries 26 Chillton Industries 27 Crescent Industries 28 Pak Dyes & Chemical 29 Ittehad Chemical 30 Swat Ceramics
28.5.92 8.2.92 7.1.96 5.10.96 26.7.92 5.1.93 16.3.93 5.1.93 25.7.95 28.6.93 25,5,92 3.2.92 6.5.923 12.1.93 1.10.92 31.5.922 23.54.92 25.1.93 8.7.92 19.5.92 5.1.93 26.7.92 5.1.93 -
Excerpts from ‘Who Owns Pakistan’ by Shahidur Rehman.
“How else it should be called when: • a sugar mill set up with tax payers money at an estimated cost of Rs.300 million is sold for a token price of Rupee one, • The government majority shares in Pakistan’s biggest chain of hotels are dished out free to a social climber, by giving him loan to facilitate the purchase and then writing it off, • a business shark manages to secure 38 loans totaling Rs.3.5 billion through fake collateral, escape when found out and is living abroad, • an unknown entity is granted a loan of Rs.1.18 billion without any collateral on a telephone call and the banker who sanctioned the loan ends up as a federal minister, instead of ending up in prison, • all five loans worth Rs.500 million of a businessman heading FPCC Committee for Revival of Sick Industrial Units are written off, • 12 foreign currency loans of an industrial tycoon, amounting to Rs.672 million are converted into a rupee loan and rescheduled so that repayment will start in year 2002 instead of 1990. When the matter is raised in the Supreme Court, the tycoon who has expanded his business abroad is granted another loan to repay the rescheduled loan. • 80 industrial units including 32 biggest units set up by public and private sector in last 50 years are sold for a partly amount of Rs.10 billion. New owners are defaulting in the payment of Rs.4 billion to the Privatization Commission and liabilities of the privatized units worth tens of billion Rupees in local and foreign currencies are being paid by the Government of Pakistan i.e. the tax payers. • 1,500 individuals and firms make use of 80 percent of the total bank credits, Rs.130 billion are stuck up in bad loans and Rs.8.2 billion have been written off. While the public demands recovery of stuck up loans, the government has come out with schemes to reschedule the loans and grant new loans to the same defaulters. • the common men bear the burden of 100 different taxes prevalent in the country but the super-rich are provided escape routes of exemptions and tax holidays. 180 of them in the payment of income tax alone. If you still question the title of the book, please consider this: The House of Habib has about 90 units in its fold, Mian Mohammad Mansha is director on boards of 45 companies, Ittefaq controls at least 29 units, Sadruddin Hashwani has 25 companies, Monnoos have 18 textile mills and sugar mills, Farooq Hassan of Hassan Associates lives in a house insured for 4 million dollars, the house built by Bashir Ahmad of Escort group over 40,000 square feet in Gulberg Lahore has a library custom made in London, Farida Saigol lives in a house sprawled over 68 kanal of land in a posh locality, Seth Abid has invested Rs.5 billion in real estate in Lahore and his front men control Lahore Stock
Exchange, Wadera Ghulam Mohammad Mehr owned 100,000 acres and Ghulam Mustafa Jatoi owns 80,000 acres. It is these people, their like, kith and kin who own Pakistan, for whom the system works. Their true worth is not known even to the government. My investigations have revealed the top 44 business groups own assets worth Rs.500 billion or equal to the size of Pakistan’s budget. Yet they pay marginal income tax. In several cases no tax at all. Is the question Who owns Pakistan inappropriate? First Nawaz government in 1990 argued that “In economic terms, the government has suffered a cumulative loss of Rs.27.8 billion on the operations of corporations under the Ministry of Production and resultantly, the inefficiency of the public sector has deprived the national exchequer of large amount of funds which would have contributed to the social sectors and industrial growth”. Water and Power Development Authority (WAPDA). In 1990 Prime Minister Nawaz Sharif was in such a hurry to privatize WAPDA that he refused to accept a World Bank loan to finance the study for privatization of WAPDA and awarded it, out of Government of Pakistan funds to Independent Resource Group (IRG) of United States to complete it in a short period of time. In last seven years only Kot Addu Power Plant has been privatized for 215 million dollars. However only 153 million dollars was deposited in the government account, after deductions for the fee of the consultant and other conditions attached to the sale. With an installed capacity of 13,600 MW, WAPDA is proposed to be split in 21 companies comprising one company each for eight area electricity boards, ten thermal projects, two under construction hydel projects at Chasma and Ghazi Barotha and a national grid company. This is gigantic task for Privatization Commission, considering the scale of corruption in WAPDA and performance of the Commission in the deal with Kot Addu Power Company. Karachi Electric Supply Corporation. With an installed capacity of 1,690 ME it is proposed to be privatized as a single entity. According to a report in daily. The News, Islamabad of April 15, 1998, the company is facing a shortfall of Rs.32 billion and has decided to defer all its foreign exchange liabilities of Rs.10.8 billion due to aggravating financial crises. In 1996, Privatization Commission had assessed KESC total assets at Rs.33 billion. It has debit liability of Rs.22 billion. United Bank Limited. On April 12, 1998, the State Bank of Pakistan announced that it was accepting a plea of the new UBL management to inject Rs.21 billion into the United Bank to prepare it for privatization. The amount to be invested in United Bank Limited is in excess of the total proceeds of privatization of 90 industrial and financial units in last seven years and makes a mockery of the process of privatization. Habib Bank Limited. The team of 14 Citibankers who have taken charge of Habib Bank at an annual cost of Rs.150 million per annum are reported by Sultan Ahmad to have stated that the liabilities or bad loans of the government banks are far more than acknowledged. Opposition leader Benazir Bhutto in a letter to Governor State Bank alleged that Habib Bank has allowed all the defaulter to absolve themselves of any claim, by paying 25 percent of the outstanding amounts, which would greatly reduce the value of the bank. The fact
was confirmed by Habib Bank, in a clarification reported by the newspapers on April 15, 1998. Pakistan State Oil, Oil and Gas Development Corporation (OGDC), Pakistan Petroleum Limited (PPL), Sui Northern and Sui Southern Gas Companies have a circular debt of Rs.70 billion, in addition to their own individual debt, Pakistan International Airline has total short term and long-term external liability of 360 million US dollars. All the other units marked for privatization are sunk up to the neck, into the quagmire of debt and their financial position is deteriorating because no serious efforts is being made to arrest it. In these circumstances, the assessment that privatization would yield 10-80 billion dollars is nothing but self-deception. Privatization formula rooted in corruption, further being corrupted. The formula worked out by Privatization Commission in 1991 passed on the liabilities of the privatized units to the people of Pakistan and assts to the new owners. It appears in hindsight, that those who designed it, were not interested in fetching a fair price of the privatized units, but to facilitate their sale to favorites at throwaway prices. The most important step in privatization in Pakistan or anywhere else is the evaluation or putting the price tag on the units marked for privatization. Next in importance is the decision whether the units should be sold through stock exchange or auction. If they were to be sold through auction, should government divest all its share or simply majority shares? The formula worked out by the Privatization Commission provided different approaches for units of different categories. It provided that industrial units, bids should be invited for majority sharers i.e. 51 percent of the equity. However, the management of the privatized industrial units was to be handed over to the new owners after a down payment of 40 percent of the bid (for 51 percent shares). In case of banks, bids were invited for 26 percent of the equity but the new management was required to acquire the balance 74 percent of the shares over a period of time. In respect of utilities like Pakistan Telecommunication, WAPDA, KESC and gas companies, management was to be transferred to a strategic investor; preferably a foreign multinational after it acquired 26 percent of the stakes. The formula for handing over the management to private owners, acquiring 26 percent stake was criticized by both the national and international press. It was argued that the method of handling over the control of an undertaking to an individual or group, upon their acquiring 26 percent of equity is extremely suspect, since the normal corporate practice was to pass on the control, at the purchase of 51 percent of shares. “It could be that it has been made easy to facilitate the purchase of what one might call the whole of Pakistan”, an article by I A Hassan, in daily. The News of Islamabad of June 2, 1991 observed. The formula also provided that Employees Buyout will have 10 percent preference over other bidders and that the workers of the privatized units will have a right to Golden Handshake whose cost would be equally shared by the Privatization Commission and the new owners. It was this corrupt formula which
facilitated bogus employees buyout and the sale of the family silver at throwaway prices to the favorites. It was hammered by Finance Minister Sartaj Aziz in his speeches and press conferences that in respect of industrial units, banks and utilities, even after privatization government would retain between 49 to 74 percent of the shares and would thus, benefit from dividends in profits of these companies resulting from the efficiency of the private sector. The hollowness of this argument and craftiness of the privatization formula is evident from the fact that first unit privatized in 1991 i.e. the Muslim Commercial Bank has built hefty reserves but not announced a single dividend during last seven years, thus, depriving the government which still owns 49 percent equity, of its share in the profit. Some of the most profitable units like National Fibers, Zeal Pak Cement, Pak-China Fertilizer and five of the six privatized engineering units stand closed because they were bought by politically influential and unscrupulous element to strip these units of their assets and not to improve their operational efficiency.
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