Legitimizing Dirty Money

Legitimizing Dirty Money

Promulgation of Finance (Amendment) Ordinance) 2012, by the President on 24 April 2012, just one day before the scheduled session of National Assembly, was certainly an undesirable and questionable act, though not strictly against Article 89 of the supreme law of the land—Constitution of Islamic Republic of Pakistan. In emergent situation when the Senate or National Assembly is not in session, the President can promulgate any Ordinance having life of 120 days, unless it is disapproved by the elected members before the date of expiry. What was the emergency that necessitated this Ordinance? Nothing, except protection of tax evaders, who have made (or intend to make) enormous investment in shares, but cannot explain the source of their funds.

Money laundering facility has been provided to all kinds of criminal persons and networks—rent-seekers, terrorists, drug traffickers, arms sellers, extortionists and tax evaders.

Two disturbing features of the Ordinance are:

  • Where a person has made any investment in the shares of a public company traded on a registered stock exchange in Pakistan from the date of coming into force of the Eighth Schedule [inserted on 24 April 2012 through a Presidential Ordinance] till June 30, 2014, enquiries as to the nature and sources of amount invested shall not be made provided the amount remains invested for a period of 120 days in the manner as may be prescribed and tax on capital gains, if any, has duly been discharged in the manner laid down plus a statement of investments is filed with the Commissioner along with the return of income and wealth statement for the relevant tax year within the due date as provided in section 118 of Income Tax Ordinance, 2001.
  • Where a person has made any investment in the listed securities, enquiries as to the nature and source of the amount invested shall not be made for any investment made prior to the introduction of Eighth Schedule, provided that a statement of investments is filed with the Commissioner along with the return of income and wealth statement for tax year 2012 within the due date as provided in section 118 of Income Tax Ordinance, 2011 and in the manner prescribed and the amount remains invested for a period of 45 days up to June 30, 2012, in the manner as may be prescribed.

The above two provisions of the Finance (Amendment) Ordinance, 2012 were justified by official circles on the following grounds:

  1. The revised capital gains tax (CGT) regime would improve documentation and collection from investments made in the stock exchanges.
  2. FBR collected merely PKR 418 million from the CGT during 2011, reflecting low collection as compared to the projected revenue of Rs. 4 billion.
  3. Under the revised CGT regime, stock market would attract new investments which would further increase revenue collection.

This nation has a right to know who the big investors at the stock markets have been. Why are they incapable of explaining their source(s) of investment? Why these fat-cat investors need to be given protection from scrutiny of the origin of their funds? Why have the provisions of the Income Tax Ordinance, 2001 made inoperative debarring tax authorities to inquire about the source of money invested or to be invested in the stock markets?

The Securities and Exchange Commission of Pakistan (SECP), the initiator behind this Ordinance, claimed that it would provide a boost to the markets, and the “ultimate goal is increase in state revenues”. For the law-abiding taxpayer it was just a slap on his face. Legitimizing dirty money, generated from informal or black economy, at the State level in the name of increasing revenue is simply deplorable. Why not instead, confiscate all such assets created out of illegal activities?

Moves like the Finance (Amendment) Ordinance, 2012 failed miserably to promote the fundamental purpose of the stock market: promoting IPOs (initial public offers). This “favour” for stock exchanges was totally unjust as there were less than 25 IPOs floated from 2008 to 2014. The government should have given incentives to new industries, creating new jobs in underdeveloped areas, rather than amnesty to tax evaders and money launderers. The fundamental question is whether such amnesties do actually lead to positive long-term changes from the societal point of view or promote money power through accumulation of wealth? A well-functioning and robust stock market is not possible unless there is positive growth in the industrial sectors through IPOs.

It is a curious paradox that while funds for worthwhile industrial and business growth and public benefits are scarce in Pakistan, there is colossal unaccounted, untaxed, hidden money circulating in the economy in search of further undercover gains. The corrupt and corrupting elements ruling and controlling Pakistan are ever ready to give legal cover to dirty money—permanent immunity is available under the garb of Protection of Economic Reforms Act, 1992 and section 111(4) of the Income Tax Ordinance, 2001. But a few powerful ones in 2012, knowing it was last year of rule,  did not want to have their trace in any remittance process so they  invented a new device for money laundering in the form of Ordinance issued by Asif Ali Zardari for own benefit—the rest was just a cover-up. Immunity announced by the Finance (Amendment) Ordinance, 2012 was meant for the looters of national wealth having fake (benami) accounts at the stock exchanges to protect their ill-gotten wealth and further fleece small investors in the name of “boosting volumes”. In fact, they enhanced their “profits”—the noted brokers were their fund managers. The Ordinance helped tax evaders, drug barons, terrorists and plunderers of national wealth to make more money. This immunity was in conflict with section 3 of the Anti-Money Laundering Act, 2010 defining the acts that constitute “money laundering”. It is pertinent to mention that section 2(f)(vii)(a) of this Act covers all kinds of instruments traded at the stock exchanges.

Pakistan is facing multiple challenges on the economic front: reckless borrowing by the government for meeting its day-to-day expenses and lack of resources for rapid infra-structure improvements, meeting trade deficits, fiscal deficit and balance of payments, and what not. One of the factors responsible for failure in revenue generation is the speed with which black money is generated every day—courtesy mafia-like operations of apex revenue authority that include amongst others, missing containers, refund scams, smuggling and under invoicing.  In the context of the prevailing grave challenge to combat terrorism, together with money laundering operations funding the criminals, and the problem of ever-growing black money, which according to independent experts is about twice the documented economy, there is an urgent need to launch an asset-seizure legislature, rather than giving legal cover to tax cheats and money launderers at stock exchanges and elsewhere.


The views expressed in this article are those of the authors and do not necessarily represent the views of any organization with which they might be associated.

Huzaima Bukhari

Author: Huzaima Bukhari

The writer is the editor of “Taxation” and a partner at Huzaima & Ikram. She specializes in the areas of international tax, corporate and commercial laws. She has co-authored many books with Dr. Ikramul Haq and contributed various articles on public finance, taxation and the economy to Pakistani newspapers and international publications including the Amsterdam-based International Bureau of Fiscal Documentation. She has previously been associated with the Civil Services of Pakistan and has also been teaching tax laws at various institutions including government-run training institutes in Lahore.

Dr Ikramul Haq

Author: Dr Ikramul Haq

The writer is an Advocate of the Supreme Court and specializes in constitutional, corporate and tax laws. He is a partner at Huzaima & Ikram and Huzaima Ikram & Ijaz. He has studied journalism, English literature and law and is the Chief Editor of “Taxation” and part of the visiting faculty at Lahore University of Management Sciences (LUMS). He has also co-authored many books with Huzaima Bukhari and regularly contributes articles to various Pakistani newspapers and international journals on a variety of issues of public interest.