Money laundering – I

Last week, the Prime Minister of Pakistan announced four fundamental steps with respect to the economic program, for immediate future. Notably, taking strict actions against money laundering activities is one of the four main objectives to be achieved. This is an important subject, especially with reference to impending FATF’s observations on Pakistan’s ranking. However, with the growing confusion on the subject, duly fueled by the amateur interpretations of some ‘media persons’; every offence in relation to tax matter is now colloquially considered to be a case of money laundering. To have clarity on the subject, a comprehensive understanding of the present state of affairs on the subject of anti-money laundering legislations, the regulatory framework in Pakistan, and the international stances on the subject is required.

In this paper, the matter has been limited to the context of ‘tax evasion’ as a predicate crime, if any, for money laundering purposes. There is a need for proper appreciation of ‘money laundering’ matters with reference to Pakistan’s society and culture in relation to international best practices, especially on the subject of ‘tax evasion’, as Pakistan is one of the few countries where Tax to GDP ratio especially in relation to ‘direct taxes’ is pathetically below international and regional norms.

Since improvement in tax collection is also one of the four objectives of the economic program, therefore, it is all the more necessary to develop/improve simultaneously implementable and practical framework for reducing tax evasion and combat money laundering activities at the same time; in line with the internationally accepted practices.

Definition of money laundering 

General definition:

Transparency International UK defines money laundering as under:

“Money laundering is the process of concealing the origin, ownership or destination of illegally or dishonestly-obtained money by hiding it within legitimate economic activities in order to make it appear legal. It can mask corruptly acquired wealth – such as bribes, kickbacks, illicit political contributions, embezzled funds and loans-as well as the proceeds of other crimes. It helps corrupt individuals to escape justice and, after the funds have been successfully laundered, they can enjoy their illicit wealth or move the money on for other purposes.”

The first principle emerging from this definition is that money laundering is not one act; it is a ‘process’ comprising of multiple acts. Nevertheless, the point to ponder is that, in general, acquisition of proceeds of crime ‘per se’ is not money laundering. If this all-inclusive approach is done away with then there are chances of confusion and imperfect prosecution of persons involved in money laundering.

In general, per the unanimously agreed upon definition of money laundering, there are three acts to complete the process of money laundering:

(i) Placement-the process of getting criminal money into the financial system;

(ii) Layering-the process of moving money in the financial system through complex webs of transactions, often via offshore entities; and

(iii) Integration-the process by which criminal money ultimately becomes absorbed into the economy, such as through investment in real estate.

EU’s Fourth Directive 

The subject of combined reading of tax evasion and money laundering started with EU Fourth Directive of 2015. In paragraph 11 of the said directive, the matter has been introduced as under:

“11. It is important expressly t highlight that ‘tax crimes’ relating to direct and indirect taxes are included in the broad definition of ‘criminal activity’ in this Directive, in line with the revised FATF Recommendations. Given that different tax offences may be designated in each Member State as constituting ‘criminal activity’ punishable by means of the sanctions as referred to in point (4)(f) of Article 3 of this Directive, national law definitions of tax crimes may diverge. While no harmonization of the definitions of tax crimes in Member States’ national law is sought, Member States should allow, to the greatest extent possible under their national law, the exchange of information or the provision of assistance between EU Financial Intelligence Units (FIs).”

In the paragraphs to follow, the article guides the reader through the different stances of various jurisdictions on the subject and the implications thereon.

Pakistan’s Definition 

Under the Anti-Money Laundering Act, 2010 of Pakistan, the offence of money laundering has been defined in Section 3 as:

“3. Offence of money laundering.-A person shall be guilty of offence of money laundering, if the person:-

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

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

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

Explanation-I.-The knowledge, intent or purpose required as an element of an offence set forth in this section may be inferred from factual circumstances in accordance with the Qanun-e-Shahadat Order, 1984 (P.O. 10 of 1984)”.

India’s Definition 

The Indian Prevention of Money Laundering Act, 2002 defines money laundering as:

“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.

If we compare India’s definition with Pakistan’s then it transpires that in Pakistan apparently inter alia even an act of acquiring proceeds of crime may be treated as a money laundering offence. This is clearly not the intention of the law as will be explained in the following paragraphs. For that purpose, there is a need to identify the source of present status of Pakistan’s law in order to achieve proper approach in application. On enquiry, it appears that closest regulation in structure is UK’s provisions relating to proceeds of crime act where ‘money laundering’ is a part. In simple sense, Indian definition, to the extent of an academic debate, is appropriate and more in line with overall concepts.

United Kingdom’s Position 

In the United Kingdom (UK), money laundering offences are created by

Part 7 of the Proceeds of Crime Act, 2012 (POCA) and include:

— The principal money laundering offences; and

— The reporting offences which, with one exception, only apply to those operating in the “regulated sector”.

It is also an offence under POCA to attempt, conspire, incite, aid, abet, counsel or procure the commission of a principal money laundering offence.

Principal money laundering offences

To establish that a principal money laundering offence has been committed, it is necessary to prove that:

(a) The alleged offender has:

(i) Concealed, disguised, converted or transferred criminal property; or removed criminal property from the jurisdiction, or

(ii) Entered into or become concerned in an arrangement which he knew or suspected facilitated the acquisition, retention, use or control of criminal property by or on behalf of another person; or

(iii) Acquired, used or had possession of criminal property; and

(b) The alleged offender:

(i) Failed to make an authorized disclosure and does not have a reasonable excuse for not making such a disclosure; or

(ii) In relation to (a) (iii) above only, acquired, used or had possession of the property for adequate consideration.

For each of the principal money laundering offences, the conduct referred to in (a)(i), (ii) and (iii) above must concern “criminal property” and, as such, it must be established that:

(a) The relevant property constitutes a person’s benefit from criminal conduct or represents such a benefit (whether in whole or in part, and whether directly or indirectly), and

(b) The alleged offender knew or suspected that the property represents such a benefit (this is a subjective limb).

The test for “criminal property” has an inbuilt assumption that there has been “criminal conduct” and, accordingly, there must be a predicate offence in order for criminal property to exist. Conduct which constitutes a criminal offence in any part of the UK is capable of forming a predicate offence for the purposes of money laundering. Tax evasion constitutes a criminal offence under the English law and, accordingly, is a predicate offence for money laundering. Further, the Criminal Finances Act, 2017 has further extended the scope of those provisions.

Comparative Analysis

The notes issued by UK Inland Revenue, whilst explaining the aforesaid provisions, have stated that traditionally, money laundering has been viewed as the ‘processing’ of all illegal or ‘dirty’ money derived from the proceeds of any illegal activity (e.g. the proceeds of drug-dealing, smuggling, fraud, theft, tax evasion, or handling of stolen money). This takes place through a succession of transfers and deals until the source of illegally acquired funds is obscured and the money takes on the appearance of legitimate or ‘clean’ funds or assets. This conventionally meant that tax evasion itself is not a money laundering offence. Other acts which obscure that evasion constitute the minimum requirement to be classified as money laundering. Nevertheless, in recent times, the UK IRS has held that mere possession of proceeds of tax evasion in someone’s pocket is sufficient for money laundering to have taken place. This approach, in this writer’s view, is a step further and need to be examined properly.

Pakistan’s Status for List of Predicate Crimes

Prior to the amendment made in the law in 2016, matters relating to tax evasion, especially income tax, were not part of the list of predicate crime under the anti-money laundering laws. In 2016, an amendment was made in the list of predicate crimes as laid down in the Anti Money Laundering Act, 2010 and the under mentioned offences as laid down in the Income Tax Ordinance, 2001 were included in the list of predicate crimes, in addition to already existing provisions relating to sales tax and federal excise.

“Section XIIA The Income Tax Ordinance, 2001

192 Prosecution for false statement in verification – where tax sought to be evaded is ten million rupees of more

192A Prosecution for concealment of Income-where tax sought to be evaded is ten million rupees or more

194 Prosecution for improper use of National Tax Number [Certificate] where tax sought to be evaded is ten million rupees or more

199 Prosecution for abetment – where tax sought to be evaded is ten million rupees or more.”

This writer is of the view that inclusion of actions of prosecution under Section 192A instead of proceedings under Section 111, which is the action against concealment, is deliberate and it would be incorrect to assume that a simple matter of concealment of income and other subjects referred above can be termed as money laundering activities under the AML law. This aspect has been explained in the following paragraphs.

Analysis of Amendment Made in 2016 in ML laws

In Pakistan, in 2016, the provisions of some sections of the Income Tax Ordinance, 2001 as identified in the earlier paragraphs, were included in the definition of predicate crime of ML, 2010. For the purpose of this analysis, only one section has been adopted as a test case. For this purpose, one of the sections included, being Section 192, is examined as under. Section 192A states:

“192A. Prosecution for concealment of income.-(1) Where, in the course of any proceedings under this Ordinance, any person has either in the said proceedings or in any earlier proceedings concealed income or furnished inaccurate particulars of such income and revenue impact of such concealment or furnishing of inaccurate particulars of such income is five hundred thousand rupees or more shall commit an offence punishable on conviction with imprisonment up to two years or with fine or both.

(2) For the purposes of sub-section (1), concealment of income or the furnishing of inaccurate particulars of income shall include-

(a) the suppression of any income of amount chargeable to tax;

(b) the claiming of any deduction for any expenditure not actually incurred; or

(c) any act referred to in sub-section (1) of section 111.”

A strict application of this section would reveal that if any person acquires any property out of tax concealment being suppression of income then in addition to the proceeding under Section 192A, said person can also be charged to AML proceedings under the law. Is it so simple? In Author’s view, it is not so.

AML Not to Apply on Fiscal Offences

There is another important issue that requires examination in the context of 2016 amendment in the AML Act. Under Section 41 of Pakistan AML Act, there cannot be any action under the AML law, unless following procedure to be followed.

Section 41 of the AML Act states as under:

“Act not to apply to fiscal offences.- (1) Except with prior consultation of FMU, an investigating or prosecuting agency shall not charge any person with the offence of money laundering in relation to a predicate offence punishable under the Sales Tax Act, 1990 (VII of 1990) and the Federal Excise Act, 2005.

(2) In relation to the laws specified in sub-section (1), o offence other than the following shall be notified as predicate offence, namely:-

a. Sub-Sections 11 and 13 of Section 33 read with section 2(37) of the Sales Tax Act, 1990; and

b. Sub-section (3) of section 19 of the Federal Excise Act, 2005.”

This actually means that AML act is effectively not applicable on fiscal offences at initial stage. It is, in author’s view, either an omission of law, as insertion of 2016 relating to income tax have not been included in the provision of Section 41 of AML Act, 2010 or it means that law envisage that fiscal offences relating to income tax, though listed in the predicate crime, ‘per se’ at the initial stage do not constitute predicate crimes, therefore, there is no need for going through a process of section 41 in these cases. Author considers it as a deliberate action. In fact, it is a view that no consequential amendment is required in Section 41 of the ML.

Pakistan’s definition is closer to UK’s definition in POCA which is essentially a comprehensive law not limited to AML. This leaves gaps in our case, which need to be immediately clarified in order to properly implement both the provisions of the income tax law and AML. The present regulatory framework is legislatively correct; nevertheless, it requires appropriate dissemination of knowledge.

Is Tax Evasion a Predicate Crime for AML Act, 2010?

The question whether tax offences can trigger a charge of AML has been long debated. Arguments raised by those who disagree with the inclusion of tax offences under AML are linked to the nature of the criminal property, and to the fact that proceeds from tax evasion are usually intermingled with lawfully earned money. In particular, what derives from tax evasion is not a concrete profit, but a tax saving. By contrast, a predicate offence should generate new wealth, and not an undue advantage such as, say, the avoided impoverishment of the particular property.

There is still a raging debate on whether the proceeds of tax evasion should be regarded as criminal property susceptible to AML. However, a judgment confirmed that the concept “proceeds of crime” can refer to an economic gain, which is added to the assets of the accused.

Nevertheless, in another recent judgment, the similar Court dismissed the charges for AML in respect of the proceeds of corporate tax evasion, despite recognizing that the conduct did constitute a predicate offence, because the accused person participated in the commission of tax evasion, as a shareholder of the company.

From the above discussion, we may conclude that even in western societies, where they have included tax evasion in the list of predicate crimes, the recognition of fiscal crimes as a source of criminal property is still controversial. The whole doctrine is still under question and validly so.

It is a fact that revised version of the FATF Recommendations includes tax crimes among the designated offences. Tax evasion and AML are two separate phenomena which are linked to each other, because often the first is used to create funds utilized for criminal purposes, and that money launderers and tax evaders use the same financial tools and subterfuges to get around the law; the effects of both forms of conduct are the distortion of economic competition and of the allocation of resources. Nevertheless, the aforesaid discussion would definitely lead to the conclusion that Pakistan’s legislation, especially in relation to income tax law, has adopted an appropriate approach and there is no reason to abuse the same.

For the sake of brevity, the matter relating to sales tax and federal excise have not been discussed in the aforesaid discussion.

Conclusion

1. The aforesaid discussion can, therefore, be summarily concluded as under:

(i) Anti-money laundering operation is an imperative need of Pakistan and is also the recommendation of FATF and other relevant international agencies;

(ii) Money laundering is not a single act. It is a process involving multiple acts, therefore, acquisition of proceeds of crime is not a money laundering under the generally acceptable definition;

(iii) Pakistan has included ‘Prosecution’ under the Income Tax Ordinance, 2001 in the list of predicate crime in 2016 for the purpose of AML law. This implies that money laundering proceeding can only be initiated if the matter reaches to a stage of prosecution. Any action or proceeding of tax evasion, for which proceeding under Section 192A and others have not yet been undertaken, do not constitute money laundering under the anti-money laundering legislation. This is in line with the universally acceptable practice. Nevertheless, there is lack of comprehension on the subject that leads to wrong and imperfect application; both under the income tax and money laundering laws;

(iv) Pakistan is by and large compliant to FATF regulations in incorporating tax evasion and anti-money matters in legislation and is ahead of many countries, including India on this subject. This matter needs to be properly represented before FATA; and

(v) In Pakistan, there are many loopholes in the taxation system, including provisions relating to presumptive taxation, property valuation and others which may encourage money laundering activities in the country. There is a need to improve the system. This matter will be dealt in Part II of this paper.