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Anti-money laundering regulations and fiscal laws – I

General perception about money laundering ‘Money laundering’ in general sense means, actions and processes of projecting money acquired as proceed of crime as untainted money. This subject gained international significance from the 1960s onwards with reference to narcotics and illicit drug trade from South America, the Golden Crescent and the Golden Triangle to the western world. Weak documentation system, unorganised business structures, weak fiscal compliance and lack of governance in the public sector in under-developing countries provide greater avenues to launder money. In almost all of the cases, however, ultimate destination of tainted funds is developed world. In the following articles international developments on these matters will also be discussed, however, this part is restricted to Pakistan’s legislation and developments in 2016.

Like other socio-economic-political aspects a new order also emerged on the matter of money laundering after 9/11. ‘Combating terrorist financing’ overtook the status previously held by narcotics and illicit drug trade. Now, financing of terrorism has been appropriately placed as the foremost subject to be handled by anti-money laundering regulations around the world. In the following paragraphs and a series of articles on the matter, we will try to understand the primary concept of anti-money laundering.

Revelations about offshore companies in 2016 generated people’s interest in this subject on an unprecedented scale. This is commonly termed as the ‘Panama Leaks’. Initial feeling in general, was that all offshore companies and assets are created of the funds laundered from Pakistan. Public at large, therefore requires basic understanding of the subject.

Pakistan’s regulatory status on anti-money laundering provisions In Pakistan, the primary regulation dealing with this subject is the ‘Anti-Money Laundering Act’, 2010, the ‘Anti-Money Laundering Regulations 2015’ and the ‘Anti-Money Laundering and the Combating the Financing of Terrorism (AML/CFI) Regulations for Banks and DFIs’ issued by State Bank of Pakistan dated December 26, 2016.

The Anti-Money Laundering Act, 2010 (AML Act) has not defined the term AML. Nevertheless under Section 3 of the Act a person is taken to be involved in the offence of money laundering if he:

(a) Acquires, converts, possesses, uses or transfers, knowing or reasons to belief that such property is proceeds of crime;

(b) Conceals or disguises the true nature, origin, location, disposition, movement or ownership of property, knowing or reasons to believe that property is proceeds of crime;

(c) Holds or possesses on behalf of any other person any property knowing or having reason to believe that such property is proceed of crime; and

(d) Participates in, associates, conspires to commit, attempts to commit, aids, abets, facilitates, or counsels the commission of the acts specified in clauses (a), (b) or (c).

This is very wide definition that requires detailed deliberations to examine each and every aspect of the matter. This will be undertaken in the following articles on the subject. In the present article we emphasise the relationship with actions under the Income tax laws and the present AML law.

Before proceeding further it would be better to place the definition of money laundering as contained in Section 3 of the Indian Prevention of Money Laundering Act, 2002.

Section 3 of that Act defines money laundering:

“3. Offence of Money-laundering: Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering”(emphasis is ours)

There is a fundamental difference between the Indian and Pakistan definitions. As per our understanding in the Indian definition there are two acts in question to form a money laundering event. These are (i) availability of proceeds of crime and (ii) projecting it as untainted money. Pakistan’s definition is a step further. Here only the availability, including use, of proceed of crime is considered as an act of money laundering. This appears to be an aggressive approach that requires reconsideration.

Notwithstanding the Indian law, if we concentrate on Pakistan law there are two essential elements in this offence. First is the identification of ‘property in question’. There has to be some property identified to initiate proceedings under the AML. Unless the property is identified proceedings essentially remain an enquiry or a suspicious.

The second step is identification of the crime that has resulted in that property. Crime is a very wide term. The AML has defined the said term in a restricted manner under 2(q) as under:

“(q) ‘proceeds of crime’ means any property derived or obtained directly or indirectly by any person from commission of a “predicate offense’ or a ‘foreign serious offense'”.

‘Predicate crime’ under the Act means an offence specified in the Schedule to the Act.

‘Foreign serious offense’ means an offence against the law of a foreign state stated in the certificate by or on behalf of the government of that foreign state and which if would have been committed in Pakistan would have been classified as predicate crime.

Predicate crimes under the Pakistan law The AML Act, 2010 includes as a Schedule the list of predicate crimes. It includes various statutes and the action under those acts which are defined as predicate crimes. This means that properties acquired, through such acts as have been identified in those statutes, will be treated as proceed of crime and holding or acquiring the same shall be treated as an act of money laundering. As stated earlier under the AML Act, 2010 a very wide definition of money laundering has been adopted and it is therefore required that same should be comprehensively understood in that particular context unless amended.

Financial and fiscals crimes included in the predicate crimes In this article, we would limit our discussion to the list of predicate crimes included in the Schedule of the AML Act, 2010 which relates to statutes relating to finance and tax matters. These are:

1. Foreign Exchange Regulations Act, 1947;

2. Securities & Exchange Act, 2015

3. Customs Act, 1969;

4. Sales Tax Act, 1990;

5. Income Tax Ordinance, 2001; and

6. Federal Excise Act, 2005.

Crimes referred to in other statutes and relevant; however, the following paragraphs restrict the discussion on the AML Act, 2010 and Income Tax Ordinance, 2001. These provisions were inserted in AML regulations in 2016. The subject matter of the discussion in this article is the relevance/interaction between these two different statutes.

Nature of law relating to concealment of income under income tax laws and AML In this connection at the outset, the foremost question is the link between AML regulations and the matter of taxability of income and evasion of taxes under the income tax laws. These are, in principle, two subjects dealing with different aspects of financial transactions. There can be indirect relationships and outcome, however direct relationship between these two subjects is the matter in question. The salient features of the respective regulations may be summarized as under:

(a) Income tax laws deal with the taxation of income; these also provide for procedures for identifying and taxing concealed and undisclosed income. Intrinsically, income tax regulations are not concerned with legality of business or otherwise. All incomes exceeding a certain sum, whether or not from legal business, are to be taxed under the income tax laws. There can be situations where the businesses are legal, such as trading in commodities, etc., whereas tax due to state on such activities, if any, is not paid. It is described as concealment of income and non-payment [evasion] of tax. In short, concealment of tax does not necessarily mean that the said funds are projected as untainted money; and

(b) Anti-money laundering laws essentially deal with the provisions and regulations which identify and prohibit the manners through which properties acquired through an act of crime, whatsoever, are placed into regular system of finance and banking. It is in principle, concerned with illegal businesses only. In short, it is the process of placement, layering and integration of property being proceed of crime. In this case there is a necessary linkage between evasion of tax and projecting the same as untainted money.

We are not aware of any other jurisdiction including India where penalties and prosecution, under the fiscal regulations are included in the predicate crime under anti-money laundering regulations

Amendments in 2016 in the AML law In Schedule to the anti-money laundering law the following inter alia have included in 2016 in the list of predicate crime. The predicate crimes as per the Schedule to the AML Act includes following sections of the Income Tax Ordinance 2001:

1. Section 192: Prosecution for false statement in verification;

2. Section 192A: Prosecution for concealment of income;

3. Section 194: Prosecution for improper use of NTN; and

4. Section 199; Prosecution for abatement.

All such cases will be treated as predicate crime only if the tax sought to be evaded is Rs one million and above.

In order to understand correct and complete perspective of the matter being raised in this article it would be essential to understand the nature of the crime under the income tax regulations. Concealment of income under Section 192A of income tax regulations interalia include ‘suppression of any sale, production or receipts chargeable to tax under the Ordinance’. This provision essentially encompasses a wide range of wrong acts. Nevertheless, this provision does not, in any manner, necessarily conceive that business or activity where there has been a suppression of sales or production is illegally conducted activity and the money so accumulated/acquired has been projected as untainted money. The default or penal action of the person engaged in such activity is an action of evasion of tax due from that business. There may not be an action of placement, layering and integration of funds generated from evasion of tax to regular banking and financial systems which is deemed to be necessary ingredient of AML. Income Tax laws provide mandatory penalties for such action under Section 111 of the Ordinance and prosecution under the provisions of Section 192A of the Income Tax Ordinance, 2001 before civil court including imprisonment can be charged on that person. Once that action is undertaken the question before the legislature should have been whether the crime charged under Section 192A of the Income Tax Ordinance can concurrently be treated as AML. In short, the question before us is whether or not concealment of income and resultant evasion of tax due, without any further action of layering and integration is an act of money laundering that has to be prosecuted under the AML Act. The apparent answer is in the negative; however, the law says otherwise.

The Indian law on the subject of anti-money laundering being Prevention of Money Laundering Act, 2002 is almost similar in nature to the AML Act, 2010 of Pakistan. However, as indicated in the earlier paragraphs India has not made the error of including offences like the one spelled out in Section 192A under the AML Act. In India only the offence of willful attempt to evade tax under Section 51 of the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act 2015 (Black Money) is treated as a predicate crime under AML of India.

An in-depth analysis of the two statutes reveals that the matter of concealment of income and evasion of tax under the income tax proceedings and AML regulations needs to be revisited also on account of multiplicity of regulators. Under the AML law, the prime agency dealing with the matter is Financial Monitoring Unit (FMU), a body constituted under the AML Act, primarily and appropriately located at the State Bank of Pakistan. Income tax proceedings are handled by various departments and Federal Board of Revenue. We do not find any provision to deal with the enforcement of predicate offence being Section 192A or similar sections in the AML law.

In the case of income tax proceedings as referred above, prosecution is undertaken by income tax authorities and matters end up with the Special Judge designated to undertake such prosecution. In this situation the role, the manner of involvement and issue of any notice by FMU concurrently do not seem to be a proper and an appropriate operation of law. Unless otherwise amended every action of 192A and any other provision of Income Tax Ordinance would require concurrent action by income tax authorities and FMU. This is equally true for all other fiscal regulations.

The second and the important question is the extent of charge of the state over proceed of a crime. As per the AML Act the charge of the state is over the ‘whole proceed’ of crime not the sum limited to tax evaded or can there be a definition that crime is limited to the amount of tax. On the other hand, income tax laws’ ambit is limited to the amount of tax being evaded. If we reexamine the matter then it means that by including the concealment of income in the AML Act, 2010 the state may have obtained the right to take into possession the ‘whole property’ not only being a portion being state’s share in the form of tax. In commercial and financial terms this is a very important difference and this aspect needs clarification from the regulators.

Furthermore, there is a concept of ‘limitation of time’ under the Income Tax Ordinance, 2001. It would be presumed that such time limitation, which is five years from the date of acquisition of assets, being proceed of crime, will also apply to the AML Act. There is also need to reexamine and clarify that aspect.

Both AML and actions under the income tax laws for unearthing concealed income and severe action against tax evaders are important for the state, however, as explained in the aforesaid paragraph there is a need to clarify the matter as to whether or not all the offences under the Income Tax Ordinance, 2001 referred to in the Schedule to the AML Act, 2010 should be included in the AML Act, 2010. In case if such ‘inclusion’ is to be retained then there is a need to provide a practical mechanism for undertaking actions under the respective statutes. The present state of affairs is problematic both for the citizens and the state of Pakistan. We support effective implementation of AML and anti-tax evasion practices in Pakistan. There is, therefore, a need for practical synchronization of these two subjects.

Suggestions and solution The summary conclusion of this discussion is:

(i) The definition of money laundering as contained in Section 3 of the AML Act, 2010 needs to be suitably amended;

(ii) The fiscal crimes included in the list of predicate crimes as per Schedule to the AML Act, 2010,specially those inserted in 2016, relating to income tax law need be reexamined; and

(iii) The re-examination, as suggested above, should at initial stage include only those offences of evasion of tax which are proceeds of an illegal business or accumulation of money not allowed under any act / prohibited under any other law. Unless such amendments are made there cannot be proper and effective implementation of the AML Act, 2010.

Syed Shabbar Zaidi, "Anti-money laundering regulations and fiscal laws – I," Business Recorder. 2017-09-09.
Keywords: Law and Humanities , Drug Trade , Offshore companies , Money laundering , Tax laws , Fiscals crimes , Income Tax , Terrorism , Pakistan , AML

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