“Pakistan is going through a critical phase” – this is a phrase we have been hearing since our childhood. 77 years have passed, yet nothing seems to change. What is preventing the situation from improving? What is creating the hurdles in economic growth? What is the exact reason behind our instability?
The answer to the above questions is very simple, ‘Corruption’ in the form of tax evasion and money laundering. This menace has destabilised the economic growth and financial stability of our beloved country.
Every year, we hear hundreds of stories regarding the public getting deprived of essential services e.g. healthcare, education and infrastructure. This deprivation is associated with illicit flow from government revenues amounting to Billions of Rupees. The undocumented economy of the country provides a haven for delinquents to exploit the loopholes associated with weak regulatory and legal frameworks and utilise the same for tax evasion and money laundering.
Tax evasion and money laundering are interlinked financial crimes. Both involve maneuvering the system through financial transactions to conceal wealth. Taxes are evaded by underreporting the income, inflating deductions, or hiding assets in offshore accounts to minimise tax liabilities. On the other hand, money is laundered by concealing illegally obtained funds by channeling them through a series of complex transactions so that they may look like funds from legitimate sources. Unfortunately, the stability of Pakistan is getting damaged day by day as heavy amounts of wealth remain unreported and circulate out of official financial systems due to the informal and undocumented economy.
The informal systems of money transfers i.e. ‘hawala’ and ‘hundi’ are key players in the facilitation of tax evasion and money laundering. Another method of tax evasion is real estate under-invoicing which provides channels for criminals to move illicit wealth easily. Weak regulatory enforcement has raised the need for stronger legislative measures and more stringent oversight. Weak property tax laws and legal loopholes in the banking sector facilitate tax evasion and money laundering.
Pakistan has paid heavy costs for financial crimes, especially corruption in the form of tax evasion. The tax-to-GDP ratio is consistently falling below global benchmarks due to widespread tax evasion which not only results in billions of rupees flowing out from government revenues but also forces the government to be dependent upon external loans and IMF packages to maintain public spending. Similarly, the outcomes of money laundering are an unstable economy, reduced investments, and uncontrolled inflation.
Benami properties are a legal loophole that lets the rich and powerful mask their true wealth, often at the cost of justice
The situation gets worse when the public and investors lose faith in government and state institutions. Pakistan stayed on the FATF grey list because its efforts to fight money laundering and terrorism financing were seen as insufficient. As a result, the country faced severe consequences in the shape of decreased trade and foreign investment because it couldn’t meet international standards on anti-money laundering (AML). To keep a solid standing in the global financial scene and maintain economic credibility, there is no choice but to confront the issues of tax evasion and money laundering head-on, with real authority.
The most desired sector used by criminals for illicit financial transactions is the real estate sector in which undervalued transactions are made to launder money and evade taxes. “Benami” properties (assets registered under fictitious names) are a typical and preferred method of hiding assets and avoiding taxes by financial criminals. Benami properties are a legal loophole that lets the rich and powerful mask their true wealth, often at the cost of justice
Another source of significant loss of precious tax revenue for any state is smuggling, under-invoicing, and over-invoicing which are also key methods of money laundering. The leak of the Panama Papers further exposes how the politically exposed persons (PEPs) and senior government bureaucracy exploited offshore shell corporations to hoard riches from corrupt practices while avoiding taxes, thus denting the economy beyond measure. Given the threat of additional economic fallout and the importance of maintaining global financial stability, Pakistan needs to implement comprehensive AML reforms and expand the tax net to non-tax-paying businesses and individuals.
One of the overwhelming challenges for developing countries is the recovery of illicit assets made by criminals in foreign lands. This process becomes arduous without strong global cooperation and that can be done through Mutual Legal Assistance Treaties (MLATs). The achievements of Malaysia and Nigeria relating to asset recovery serve as a case study for all. Pakistan can learn a lot from them and asset recovery can be boosted by implementing strong policies based on the same models. The very first step to start with is to improve the digital payment systems in Pakistan. This action will effectively reduce capital flight through unofficial money channels, thereby helping to control tax evasion as well.
The major reasons behind Pakistan’s economic instability are tax evasion and money laundering. To achieve sustainable economic growth and stability, a complete action plan must be devised demonstrating the determination to safeguard economic independence. Pakistan is facing a turning point as the dynamics around the world are changing with every passing day. The choices made today will determine the nation’s economy tomorrow.