Money-laundering risk and preventive measures in Pakistan

Publication Date27 Jul 2020
Pages699-714
DOIhttps://doi.org/10.1108/JMLC-02-2020-0016
AuthorIrfan Hassan Jaffery,Riffat Abdul Latif Mughal
SubjectAccounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime
Money-laundering risk and
preventive measures in Pakistan
Irfan Hassan Jaffery
Department of Financial Monitoring Unit, State Bank of Pakistan,
Karachi, Pakistan, and
Riffat Abdul Latif Mughal
Department of Management Sciences,
Shaheed Zulkar Ali Bhutto Institute of Science and Technology, Karachi, Pakistan
Abstract
Purpose The purpose of this paperis to examine the effectiveness of anti-money laundering/combatingof
nancing of terrorism(AML/CFT) measures in Pakistan. Key variables of AML/CFT regulationsof Pakistan
are used. This study explores the impact of customer due diligence, record keeping, wire transfers,
correspondentbanking, reporting of transactions, new technology and internal controls/compliance/trainings
on money-launderingrisk.
Design/methodology/approach Data is collectedwith the help of questionnaires developed inlight of
FinancialActions Task Force (FATF) recommendationsand the AML/CFT regulations ofPakistan.
Findings Resultsshow that customer due diligence,correspondent banking andnew technology may help
control money-laundering risk in Pakistan, whereas impactof record keeping, wire transfers andreporting of
transactionsdid not have an effect on money-laundering risk. Thisstudy suggests a better implementationof
thesemeasures.
Research limitations/implications The current study was limited to Pakistani banks. For more
conclusiveresults, future studies should replicate similar studiesin other countries.
Practical implications Findings of this studymay help the State Bank of Pakistan in taking measures
to simplify the process of implementing FATF rules and regulations regarding AML/CFT, regular
monitoringand trainings to the staff of banks and development nanceinstitutions in customer due diligence,
correspondent banking and new technology. Further, it helps to take appropriate measures in resolving
banks-specicissues related to AML/CFT.
Social implications Effective AML/CFT control measureswould strengthen socio-economic growth in
a country. Further, formalization,compliance and integrity would eliminate money launderingrisk. It would
create aneconomy that works with equity and promotes transparency.
Originality/value This research paper supports implementation of AML/CFT regulations, proper
monitoringand novel supervision of banks.
Keywords Money-laundering risk, Anti-money laundering, Customer due diligence, Pakistan,
Financial Action Task Force, Money-laundering risk in Pakistan
Paper type Research paper
1. Introduction
Money laundering (ML)refers to the nancial crime which involves dealing with illegitimate
proceeds and concealment of their origin. It involves driving money from illegal activities
The authors acknowledge the support of Financial Monitoring Unit, State Bank of Pakistan and Shaheed
Zulqar Ali Bhutto Institute of Science and Technology Karachi for continuous support. Also, the authors
are thankful to Sundas Azeem (PhD Scholar and Lecturer-SZABIST Islamabad) for proofreading.
Risk and
preventive
measures
699
Journalof Money Laundering
Control
Vol.23 No. 3, 2020
pp. 699-714
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-02-2020-0016
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
and making these funds available for future use as clean money. Financial Actions Task
Force (FATF) has dened the term as follows:
A process of criminal acts for the purpose of generating prots and disguising their criminal
proceeds as it allows the use of prots without jeopardising the illegitimate source of income.
Money laundering has a negative effect on the economic and social aspects of a society.
McDowell and Novis (2001) discussed the economic consequences, including economic
instability and distortion, loss of revenues and weak integrity of the nancial system.
Socially, money laundering provides fuel to criminal activities such as corruption, drug
trafcking, terrorism, arms dealing and bribery. Furthermore, it helps criminals to avoid
prosecution, conviction and conscation of their illegal funds, while procient anti-money
laundering (AML) efforts prevent the ability of criminals to use their illegal money for
further crimes (McDowelland Novis, 2001).
Considering the importance of money laundering to an economy, this study focuses on
the strategies of the State Bank of Pakistan (SBP) for successful implementation of AML
rules and regulations in the country. Our study helps in understanding the money-
laundering risk (MLR) prevailing in the banking sector of Pakistan with the help of
variables suggestedby FATF.
We study the impact of customer due diligence (CDD), reporting of transactions,
correspondent banking, fund transfers, record keeping, new technology, internal controls/
compliance and employee trainings on money laundering, assuming that these factors have
negative impact on MLR. Further, we study the gaps in AML regulations of Pakistan with
international recommendations,challenges faced by the banks in successful implementation
of AML regulations and respondentssuggestions in the light of research outcomes.
1.1 Money-laundering process
Fanta and Mohsin (2010) categorized money into the clean money and dirty money. The
funds derived from lawful resources are known as clean money, whereas the proceeds of
illegal activities are called dirty money. According to Reuter and Trumen (2004),Money
Laundering is the transformation of criminal proceeds into assets which are difcult to be
traced back to the underlying misconduct.They describethe following three phases of the
money launderingprocess:
(1) Placement: It is the initial stage in which the proceeds generated from illegal means
are injected into the nancial system through banks and other nancial
institutions. In banks, it can be done through depositing cash into the bank
accounts, purchasing banking instruments and exchanging funds and remittances.
It is the most vulnerable stage of ML, as stringent controls and preventive
measures may stop the illegal funds to be comingled into the nancial institution.
Further, this stage provides an opportunity to identify and trace the sources of
funds to lessen the risk.
(2) Layering: After placement, the money launderer makes a complex layer over the
funds through multiple transactions to hide the source. At the layering stage,
criminals try to take away as much funds as possible from the origin, to separate
them from illegal activity. Layering is done through routing the funds into multiple
accounts at different banks, and the funds can be transmitted to other jurisdictions
with weak regulations. Off-shore accounts, shell companies and risky banking
products may also be used for this purpose. The objective is to impede the audit
trail and disguise the source of funds.
JMLC
23,3
700

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