2800 individuals fleecing Pakistan of US$1bn; $10bn lost annually to trade-based money laundering.

Irshad Salim — An ongoing investigation in Pakistan is leading to a possible use of ‘gift back arrangements’ as a money laundering mechanism by the country’s high-net worth individuals. Smuggling — almost 4 percent of GDP is another menace hitting the country — an emerging market recently classified by Morgan Stanley.

Officials at the Anti-Money Laundering (AML) cell of the Intelligence and Investigation-Inland Revenue suspect that some 2,785 Pakistanis may be guilty of fleecing the country of a whopping US$1 billion (Rs102 billion) for tax year 2016 alone, by declaring cash injections and assets as ‘gifts’ from relatives who belong to either out of the tax net or with no known source of income.

Under Pakistani law, money or assets received in the form of gifts from parents, siblings and spouses, don’t fall under the tax net. Yet the authorities are suspicious and with good reason.

During the routine scrutiny of high net worth individuals, the investigating cell observed that in many tax returns, declared incomes and taxes paid on these incomes were very nominal. However, the accompanying wealth statements of these individuals, which has been made compulsory to file by the FBR, show the net assets running into hundreds of millions of rupees and even higher.

Trend has been observed that in many cases the net assets are gradually increased in wealth statements over a period of only few years, without there being any taxable income behind the accretion.

The amount of gifts claimed by these individuals run in tens of millions of rupees. In few cases, gifts even to the tune of rupees one billion and higher have been declared by individuals, reported local media outlets.

Members of many prominent families of the country are found among the receivers of huge amounts of cash as gifts, reported The News.

In three of these cases, individuals declared gifts of over Rs1 billion, with the highest amount of gift received being Rs1.7 billion. Second highest amount of gift received is Rs1.25 billion, and the third highest is Rs1 billion.

The 18th century slogan ‘no taxation, without representation’ may need to be turned on its head for these high-net worth individuals, commented the Daily Times in its editorial on the matter.

“The famous slogan had become a battle cry for American settler colonists in their fight against taxation by the British Parliament in which their interests were not represented. The idea was that citizens should pay due taxes to a political authority representing their interests. In Pakistan, representation of interests throughout various corridors of power has never been much of a problem for citizens of high-net worth in terms of assets and income, the paper wrote.”

However, with the country’s tax-to-GDP ratio hovering around 10 percent at least since the 70s — when the latest tax collection capacity has been estimated at around 22 percent of GDP — it is apparent that Pakistan’s wealthy have not been keen to reciprocate, the paper wrote in its editorial.

“Yet even if the AML cell does conclude that those under investigation are guilty – that does not give us the complete picture.”

Pakistan’s tax evasion problem runs much deeper. And smuggling worth $9 billion annually remains an unavoidable drain to the economy — it’s the largest pie in the informal economy sector, said one analyst.

According to the latest report by the US State Department’s International Narcotics Control Strategy, Pakistan loses around $10 billion annually to trade-based money laundering.

“A concerted effort is needed to tackle this issue, the editorial said, “starting with strengthening of the tax collection infrastructure as well as accountability of tax officials. A plan evolved with widespread political consensus on documentation of the economy needs to figure prominently in this effort.”

One Comment

  • Mustafa Abdullah says:

    In recent reports Nawaz Sharif has received cash gifts of millions from his sons in UK.This is on record. U may check

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