Spearhead Analysis – 12.07.2018

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

In a recent move the Federal Investigation Agency (FIA) detained the Pakistan Stock Exchange (PSX) Chairman and Summit Bank Vice Chairman Mr. Hussain Lawai, along with three other Bankers for interrogation in a money laundering case. There is widespread speculation, given the timing of the investigation, that it is politically motivated as Mr. Lawai is close to Mr. Asif Ali Zardari. If the sole purpose of the investigation is to pressurize individuals for the upcoming elections, then this is an exercise in futility. This investigation should rather be focused on investigating the matter and achieving greater Compliance within Banking, in line with Global standards.

Mr. Lawai and the other bankers stand accused of facilitating the opening of 29 ‘Benami’ (fake) accounts in Summit Bank, Sindh Bank and United Bank Limited, where ‘beneficiaries of the Sindh government’ deposited Rs.35 Billion that was subsequently transferred to different accounts. With the Supreme Court of Pakistan taking suo moto notice of the case, an investigation is now underway led by FIA involving 32 individuals. In the meantime, as per a notification from the Securities and Exchange Commission of Pakistan (SECP), Mr. Lawai has been removed as Chairman of PSX.

The issue of establishing ‘Benami’ or fictitious Bank accounts is a practice that has been going on for decades. In fact, in a largely cash based and undocumented economy it has been the preferred mode of banking by several high profile individuals. Basically, the Bank acts as a facilitator by opening accounts in the names of ‘unknown’ individuals who are not even aware that an account has been opened in their name. These individuals could be drivers, servants, peons, and cleaners whose ID is used to set up the accounts. The accounts are then used to deposit money, which could be held in the account or transferred out to the ‘real’ beneficiaries over a period of time. Most of the deposits in these fake accounts are on cash basis.

It is an openly known secret that Banks, which engage in such activity maintain a ‘Black Book’, which maintains a record of the incoming cash and outgoing funds from these ‘Benami’ accounts. A clear form of money-laundering that is often facilitated by certain Banks. The recent case is all the more worrisome as it comes at a time when Pakistan has been placed on the Financial Action Task Force (FATF) Grey List, with the potential of being moved to the Black List unless it is able to convince the FATF that it has adopted procedures to stem the scourge of money-laundering.

As a result of the ongoing investigation by FIA, the CEO’s of three Banks – Summit Bank, Sindh Bank, and United Bank Limited – have been placed under travel restrictions. The Chairman of the PSX has been removed from his post. These actions carry considerable reputational and financial cost as the confidence of the public would be shaken in these institutions and the financial sector. It is also a fact that given the upcoming elections there is a lot of international focus on Pakistan and such news of financial wrongdoing carry considerable repercussions. It is all the more relevant given the recent decision in the Avenfield Case, which has received a lot of international press coverage.

It is a dichotomy that on the one hand the Government has allowed a Tax Amnesty Scheme to white-wash undeclared assets, which could include assets acquired through money-laundering, by paying a token tax; and on the other hand it is clamping down on Banks for potentially facilitating money-laundering activities.

The not too distant case of the closure of Habib Bank Limited (HBL) New York Branch and the payment of a hefty fine for money-laundering served to demonstrate the gaps in Compliance within Pakistani Banks. The recent case of the three Banks has once again brought to the fore the issue around the lack understanding of Compliance within the Banks. It is imperative for the Banks to institute internal Compliance systems to counter money-laundering and potential terrorist financing activities. The Banks need to invest in training, systems and processes to be compliant with international standards of Compliance so that the financial sector is perceived as stable and secure. The Compliance function within Banks needs to be strengthened and made independent to counter risk from transactions and processes. For this the Banks need to invest in human resource development by engaging in pro-active training and implementation of Compliance procedures in letter and spirit. Unless a culture of Compliance is developed within the financial institutions there is every chance that what the FIA has unearthed is but the tip of the iceberg.