Foreign Exchange

Management

27th October-2015
NIBAF - Islamabad

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 Hawala
 Hawala is an informal value transfer system based
on the performance and honour of a huge network
of money brokers, through which money is
delivered internationally without actual transfer of
money from one territory to another. It is a parallel
or alternative remittance system that exists and
operates outside of, or parallel to, traditional
banking or financial channels.

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 Uses of Hawala
 - Settlement of Under-invoiced/Over-invoiced
trade activities
 - Financing of smuggled goods
 - Transferring of ill-gotten money
 - Money Laundering
 - Terrorist Financing
 - Settlement of Overdue Export Proceeds
 - Financing of Gold Imports

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– Sources of Hawala?
 Home Remittances (Both Legal and Illegal
Immigrants)
 Commercial Remittances
 Proceeds of Narcotics Trade
 Smuggling of foreign currency from Pakistan
 -
Concept of CHAMAK
Concerns of International Community related to
ML/TF
 FATF/APG
Legality of Hawala
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 FATF Recommendation 14
 Countries should take measures to ensure that
natural or legal persons that provide money or value
transfer services (MVTS) are licensed or registered,
and subject to effective systems for monitoring and
ensuring compliance with the relevant measures
called for in the FATF Recommendations. Countries
should take action to identify natural or legal
persons that carry out MVTS without a license or
registration, and to apply appropriate sanctions.

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Three necessary requirements for FATF Recommendation 14

1. Registration or Licensing of Money

Transmitters both natural or legal persons
including their agents
2. Money Transmitters should be subject to FATF
Recommendations including R-14
3. Ability to impose sanctions on Money
Transmitters when they (i) remain
unregistered / unlicensed and (ii) are non-
compliant to FATF Recommendations
 Why informal channels?
 There is no common understanding of what is
meant by informal as opposed to formal channels.
Regulatory frameworks differ from country to
country, what may be formal in one may be
informal in another.
 Another difficulty is that what may start off as
formal transaction (for example, giving money for
transfer to a regulated money transfer agent) may
become informal at a later stage as the funds
involved are distributed through informal player.
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 Why informal channels?
Contd….
 In many countries the transaction is legal if the same is
initiated by a registered entity and an audit trail is
available. Whether the dealing counterpart of that entity
in the recipient country is legally operating or not,
whether the funds actually move or not, and what
settlement mechanism is used; may not be a concern of
these countries from where the transaction has been
initiated. This deficiency in approach is being exploited
by informal players globally. In reality the main
difference between a formal and informal transaction is
the subsequent settlement between the two entities
involved in cross border movement of funds.
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 What is the solution to combat informal
channels for remittances?
 At the first place, there is a need to take a holistic view
of the situation. The movement of funds through
informal channels is a global issue and not a problem
associated with a particular region or countries. There is
a need to view every cross border transaction as an end-
to-end transaction. There should be authorized legal
entities performing the function of financial
intermediation in both sending as well as receiving
countries. The regulatory authorities in both the
countries involved in a remittance transaction should
put in place necessary regime in this respect.
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 Contd…. What is the solution to combat
informal channels for remittances?
 In Pakistan, State Bank of Pakistan has already made it
mandatory for all financial institutions operating in Pakistan
to take its approval before entering into any remittance
related arrangement with any overseas entity. Before
granting approvals, it is ensured that the overseas entity is
duly licensed by the relevant authority of that country and is
being supervised effectively by the licensing authority.

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 Contd…. What is the solution to combat
informal channels for remittances?
 It should be mandatory on transaction initiating entity to
actually move funds alongwith the instructions for payment
in the recipient country. The netting-off of transactions
should be forbidden for all entities involved in remittance
business.
 There is a need to encourage banking sector to be actively
engaged in remittance business. They should be realized of
the business case in this area as officially recorded
remittance flows to developing countries has already
reached to around U.S. $406 billion in 2012. Pakistan
presents a perfect example whereby a tremendous growth in
remittances has been achieved through active engagement
of financial institutions of the country in remittance
services. 11
 FATF Recommendation 32
Cash Couriers:
 Countries should have measures in place to detect the
physical cross-border transportation of currency and bearer
negotiable instruments, including through a declaration
system and/or disclosure system.
 Countries should ensure that their competent authorities
have the legal authority to stop or restrain currency or
bearer negotiable instruments that are suspected to be
related to terrorist financing, money laundering or predicate
offences, or that are falsely declared or disclosed.
 Countries should ensure that effective, proportionate and
dissuasive sanctions are available to deal with persons who
make false declaration(s) or disclosure(s). 12
 Declaration system refers to a system whereby
persons are required to pro-actively submit a truthful
declaration to the designated competent authorities.

 Disclosure system refers to a system whereby

persons are required to make a truthful disclosure to
the designated competent authorities upon request.

 A predicate offence is a crime that is a component of

a more serious criminal offence. For example,
producing unlawful funds is the main offence and
money laundering is the predicate offence. 

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 Need for Kerb Market
- Restrictive FX Regime
- Education
- Health
-Travel

- Convenience due to less formalities

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 Money changing & Remittance Business- Historical
Perspective
Money Changing Business Remittance
Business

Pre-1991 Certain established firms, hotels, and other organizations catering to Only banks were
foreign tourists were allowed only to purchase foreign currency and doing
were required to surrender the same to banks on monthly basis. remittances.

1991-2001 In 1991, SBP invited applications for grant of Authorized Money As above
Changer’s (AMC) licenses. It was the first time that general public
was permitted to get into the business. AMC’s were permitted to
purchase and sell foreign currency. The dealings between AMC and
its customers were required to be documented.
 Ex-Money Changers
Their Role & Activities

 Ex-Authorized Money Changers (AMCs) were allowed to deal

only in sale and purchase of foreign currency notes and coins.
 They were not allowed to effect remittances.
 However, practically a number of Money Changers were involved
in the remittance business.
 There were about 370 Authorized Money Changers in the country
as on June 01, 2004. The number of un-authorized money changers
was even much higher, may be in thousands.
 Due to very large number, it was practically impossible to
effectively monitor their activities.

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Transition of Money Changers
into Exchange Companies

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Fate of the Authorized Money
Changers
 Since as early as July 30, 2002, SBP made it very
clear and categorical to each AMC that their
business is to be corporatized in the form of ECs
and their licenses would not be renewed beyond
30th June, 2004.

 Since then these AMCs were informed from time to

time and discontinuation of their business as AMC
w.e.f. July 01, 2004.

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 Need for the Exchange Companies

 In order to bring a proper corporate culture in the

money changing and remittances business, the
need for establishment of Exchange Companies
was realized. Requirement of the documentation
of the forex transactions was also one of the most
important factors.

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 Exchange Companies
Scope of Business

 Exchange Companies are authorized to deal in

foreign currency notes, coins, postal notes, money
orders, bank drafts, traveler's cheques and
transfers.
 Exchange Companies are prohibited to engage in
any other activity such as deposit taking, lending
etc.
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 Formation of Exchange Companies in 2002

 Promulgation of Foreign Exchange (Amendment) Act 2002 -

legal cover for ECs
 Framing of rules/ regulations for ECs
 Issuance of NOC by SBP to the company before issuance of
license
 Registration as a company under company law (SECP)
 Minimum Capital Requirement is Rs. 200 million
 Liquidity Reserve (SLR 25% of capital with SBP)
 Exposure limit (50% of the capital)
 Fit and proper test of Sponsors, Directors and CEO
 Regulatory oversight – Offsite Monitoring, Onsite Inspection
and Enforcement. (through show –cause notices, warning
letters and suspension of one or more activities or license)
REGULATIONS FOR
EXCHANGE COMPANIES

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Exchange Companies ‘A’ – Regulations

 Minimum Paid-up Capital Requirement is Rs.200 million.

 25% of the paid-up capital of Exchange Companies will be
maintained as SLR with SBP.
 The Exchange Companies shall limit their exposure at the close
of business each day at a level not higher than 50% of their
capital base.
 Exchange Companies are required to document all of their
transactions.

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Cont’d…

Exchange Companies ‘A’ – Regulations

 The company shall conduct the exchange business only from the
premises approved by the State Bank. The premises should
preferably be located at an easily accessible location and shall be
relocated only after obtaining prior approval from the State Bank.

 The companies are required to equip themselves with necessary

qualified staff to properly manage computerized reporting to the
State Bank.

 All dealings between an Exchange Company and its customers are

to be supported by official receipts. Every receipt provided to the
customer must be sequentially numbered and also bear the name of
the customer, date, nature of transaction i.e. sale/purchase/transfer,
currency dealt, exchange rate and signatures of dealer/authorized
employee 24
Cont’d… Exchange Companies ‘A’ – Regulations

 For currency exchange transactions exceeding USD 2,500 (or

equivalent in other currencies) the name, address and copy of ID of
the customer is required to be obtained.

 For transactions involving international transfers/remittances, the

names, addresses and other particulars of both the remitter and
beneficiary are required to be mentioned on the receipts regardless of
the amount.

 For the purpose of annual statutory audit, the Exchange Companies

shall appoint only those auditing firms that are on the approved list of
the State Bank for audit of banks.

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Cont’d… Exchange Companies ‘A’ – Regulations

 The company shall fully abide by all the regulations,

instructions, directives, circulars and other communications
issued by the State Bank and provide its records and
documents to the examination, inspection and supervision of
the State Bank.
 SBP has the right to suspend/revoke a license at any time.
Before a license is revoked, the Exchange Company shall be
given notice mentioning the reasons for the revocation and
the company has to explain its position.
 Exchange Companies of both categories can not enter into
business related agreements with each other or with outside
parties without obtaining prior approval/clearance in writing
from State Bank of Pakistan. 26
Cont’d…
Exchange Companies ‘A’ – Regulations
 ECs are not allowed to keep their Nostro accounts overseas.
They can only keep their foreign currency accounts with
banks in Pakistan. All inward and outward transactions are
required to be routed through these accounts.
 Exchange Companies (A&B) are required to take prior
approval of State Bank for all transactions of US $ 50,000 or
above (or equivalent in other foreign currencies) on account
of outward remittances or sale of foreign currencies to the
customers. However, this requirement is not applicable on
sale of foreign currency to the banks/exchange companies.
 All sale and outward transactions of USD 35,000 or above
shall be conducted through crossed cheque/DD/PO issued
from the personal account of the customer.
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Exchange Companies of ‘B’ Category

With the formation of Exchange Companies, the

then Money Changers were allowed to continue
to function till June 30, 2004. However, during
that period, no new licence for Money Changing
business were issued. Further, renewal of existing
Money Changers’ licences was discontinued with
effect from 1st July, 2004.
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Exchange Companies of ‘B’ Category

 Majority of the AMCs could not come to terms with

the ECs as there was a general lack of mutual trust
and unwillingness to give up control from both
sides.

 SBP reacted to the situation proactively and a series

of meetings with the representatives of AMCs were
held in order to accommodate AMCs with small
financial means.

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Exchange Companies of ‘B’ Category
Scope of Business and Rules &
Regulations
 In order to accommodate remaining AMCs, SBP allowed
establishment of ECBs

 A minimum of 5 AMCs were required to form an ECB so

that maximum number of AMCs could be accommodated
in this system

 ECBs were allowed a limited scope of business i.e. only

the sale & purchase of FCY notes & coins.

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 Exchange Companies of ‘B’ Category
Scope of Business and Rules & Regulations

 Minimum paid-up Capital requirement is Rs. 25 million.

 Liquidity Reserve Requirement is 10% of the Paid-up

Capital

 Such companies can have Exposure Limit upto a

maximum of 10% of their Paid-up Capital
 These Companies have to properly document all their
transactions

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 Exchange Companies of ‘B’ Category
Scope of Business and Rules & Regulations

 ‘B’ Category Companies are allowed to setup branches.

However, these companies are not allowed to have
franchise arrangements or payment location booth
arrangements which are specifically meant for Full-
fledged Exchange Companies
 These companies are required to adopt proper Internal &
External Audit mechanism
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Current Status of ECs & ECBs

 There are 26 full-fledged ECs operating in Pakistan.

 Almost 200 Franchises have been approved by the SBP.

 New scheme resulted in formation of 33 Exchange

Companies of ‘B’ category. However, at this time 27 ECBs
are operative.

 Aggressive campaign and coordinated efforts resulted in

accommodation of more than 90% of the AMCs in the form
of obtaining Franchise Arrangement from E.C.s or
formation of E.C. (B)s.
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 Current Status of ECs & ECBs
Contd…
 A small percentage of AMCs indicated their intention to
exit Money Changing Business.

 Only 27 AMCs out of 378 remained un-decided as of 30 th

June, 2004.

 W.e.f. Ist July, 2004, no person other than an Exchange

Company is authorized to conduct foreign exchange
business.

 It was ensured through SBP,BSC Field Offices to ensure

that no money changer operates beyond 30th June, 2004.

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 Movement of FCYs through
the Airport
 Full-fledged Exchange Companies are allowed
to export FCYs other than US Dollars though a
well defined mechanism
 Equivalent US Dollars are required to be
brought back to the country as Cash USDs or
proceeds in the USD Accounts of Exchange
Companies or combination of both.
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 Detection and Sanctions
Inspection, monitoring & enforcement
 Regular on-site inspection mechanism, surprise visits &
off-site surveillance mechanism.
 IT related inspections with the purpose to ensure
accuracy of transactions conducted
 In order to keep a watch on the types of transactions
being carried out through ECs- Daily, Weekly and Monthly
Reports to SBP
 Administrative powers being exercised - which include
show cause notices and disciplinary actions, suspension
of one or more activities or suspension of license
 Detection and sanctions
Identification and detection of illegal/unlicensed money
remitters
 Law enforcement agencies (LEAs) take actions and have
registered a number of cases against illegal foreign
exchange/ remittance operators
 State Bank identifies them through following process:
- Whistle blowers (insiders)
- Complaints
- Banking Inspection Deptt. of SBP.
- Media reports/ press clippings
- Mystery shopping/ surprise visits
The recent Law enforcement actions have further created
deterrence against illegal money remitters
THANK YOU

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