Service business

Regulation of Money Services Businesses | Political economics

Jhe flow of illegal funds is a challenge for the global community. A study conducted by the United Nations Office on Drugs and Crime (UNODC) indicates that the total volume of proceeds of crime amounts to 3.6% of the world’s gross domestic product (GDP), of which 2.7% (or $1.6 trillion) is laundered through different means. .

The International Monetary Fund (IMF) has estimated that the volume of money laundering worldwide is approximately 2.5% of global GDP. In order to reduce this volume, efforts are being made to prevent criminals from accessing legitimate financial systems so that the resources are used to create more income to overcome the challenges of unemployment, health and education, etc..

In this regard, the Financial Action Task Force (FATF) has established standards to guide member countries in formulating laws and regulations to counter this menace. The main challenges concern the movement of illicit funds. Technology now offers many ways to facilitate the transfer and movement of funds. As a result, there are threats of their misuse.

Criminals are always looking for ways to transport the proceeds of crime. The banking industry is trying to enforce basic requirements for customer onboarding, implementing know-your-customer requirements and due diligence, but some challenges remain.

Money services businesses (MSBs) are another very attractive sector for criminals, who use them as a conduit for illicit proceeds. The biggest global challenge is the operation of unlicensed ESMs which play a vital role in facilitating criminals who wish to inject illegal funds into the legitimate financial system. Criminals identify and use system failures to bypass due diligence. Moreover, offering money transfer services online without having a physical presence is another challenge. These channels are difficult to monitor and provide opportunities for criminals to evade screening requirements designed to prevent money laundering and combat terrorist financing.

Pakistan also faces the problem of unlicensed ESMs. It is one of the countries that had no formal laws to monitor money laundering activities until 2007. Similarly, there was no mechanism available until June 2004 to monitor remittances. of funds made through alternative funds transfer systems, in particular unregistered money changers. People were free to choose between traditional banks and an alternative unregistered funds transfer system. Since there were no rules or mechanisms to regulate this activity, transferring money through alternative channels was not treated as a crime.

the Report on the international counter-narcotics strategy (INCSR) pointed out that although it is illegal to operate a hawala unlicensed in Pakistan, the practice remains widespread due to poor enforcement and lack of sanctions against companies operating illegally. Unlicensed hawala/Hindi Operators are common in border regions and are widely used to transfer and launder illicit money through neighboring countries. A common method of transferring illicit funds is fraudulent commercial invoicing.

Newspaper reports have highlighted the operation of unlicensed money changers facilitating the illegal transfer of foreign currency overseas. Given the circumstances, Pakistan has a responsibility to counter the illegal operations of unlicensed money changers and must take strict measures against the main drivers of the movement of illicit proceeds. The government should devise a mechanism for registering MSBs and renewing their licenses. Rules should also be introduced to set a threshold for MSB agents to transfer funds so that their activities can be closely monitored.

Pakistan is struggling to comply with the FATF action plan. The global regulator has expressed concerns about controlling the risk of terrorist financing. Pakistan’s Mutual Evaluation Reports published by the Asia-Pacific Group highlighted anomalies regarding MSB regulation.

Pakistan is struggling to comply with the FATF action plan. The global body has expressed concerns about controlling the financing of terrorist financing. Mutual Evaluation Reports (MERs) of Pakistan published by the Asia-Pacific Group have highlighted anomalies regarding the regulation of MSBs. The report also raised questions regarding our understanding of the role of public and private sector officials in combating money laundering (AML) and combating the financing of terrorism (CFT).

Given the fact that there is a high proportion of undocumented economies, performing the due diligence process can be complex and time consuming. In this regard, regulators have a responsibility to equip their staff with advanced professional skills so that they can play an effective role in regulating this sector. Regulators must also ensure that people in this sector are aware of their responsibility to comply with regulations. For this, the publication of comprehensive guidance can be an effective method. This will help them in day to day compliance with the Foreign Exchange Handbook and the Anti Money Laundering Act 2010.

The most important factor to monitor, investigate and report is the detection of suspicious transactions and the reporting of cash transactions. As global regulators focus on combating the threat of money laundering, terrorist financing and proliferation financing, governments are required to have comprehensive AML/CFT policies and guidelines /CPF on a risk management approach to identify, assess, manage and mitigate these risks.

The Mutual Evaluation Report pointed out that there is no requirement for licensed foreign exchange traders and changers in Pakistan to declare all cash and foreign currency negotiable instruments worth more than $10,000. Pakistan amended its Anti-Money Laundering Act 2010 in 2020 and attempted to address various concerns raised in the MER. However, detecting and reporting suspicious transactions requires specific expertise. Therefore, regulators should issue appropriate guidelines highlighting the different scenarios, typologies and red flags so that the quality and authenticity of reporting can improve.

The complexity of international transactions must also be addressed. Regulatory frameworks in various jurisdictions differ in threshold requirements and criminals always exploit loopholes. Effective monitoring requires that authorities improve communication with their counterparts in other countries and execute Memoranda of Understanding for cooperation so that appropriate controls can be implemented. This cannot be done informally or by other government agencies. This will require more formal arrangements. Local agencies should be legally empowered to coordinate and exchange information with other agencies to facilitate data collection to aid financial investigations.

The only way forward is for regulators to ensure that each MSB adopts the risk-based approach, implements an AML/CFT program, properly trains its staff and implements internal controls and tests . Regulators must ensure that all MSBs meet licensing requirements. In addition, all licensed MSBs must perform customer due diligence and monitor and screen their transactions to reduce potential risks.

Pakistan’s next assessment is scheduled for February 2022. Progress in all areas will be assessed with reference to strategically important AML-CFT gaps. Pakistan should focus on compliance in every sector so that it can say goodbye to the embarrassment it has been facing since June 2018.


Abdul Rauf Shakoori is a US-based corporate attorney and white-collar crime expert. Huzaima Bukhari is a High Court Barrister and Adjunct Professor at Lahore University of Management Sciences (LUMS)