Introduction
Money laundering can be defined as legitimising illegally obtained money (black money) through legal channels.
It generally involves three main steps:
- Placement
- Layering
- Integration
The scattered reports create confusion about the origin of the money to give it a legitimate appearance. First, black money is introduced into the financial system through legitimate investments. In the second step, the launderer converts the funds and moves them away from their source by wiring or transferring funds via multiple accounts worldwide. Sometimes the launderers ‘layer’ the money through investments or payments for goods or services. After the successful placement and layering of the black money into the legitimate financial system, the launderer moves to the third step, integration. In this phase, the money re-enters the economy by legitimate channels, including real estate investments, asset acquisitions, and investments in business ventures(Anti-Money Laundering Forum). Besides, the real estate sector has been declared high-risk for legitimising black money, primarily due to the lack of development and implementation of a proper framework to regulate this industry.
This article by the Iqbal Institute of Policy Studies will discuss the importance of registration of real estate agents with the Federal Board of Revenue (“FBR”) to devise an implementation framework for mitigation of the money-laundering crisis.
Pakistan’s placement in FATF Grey List
To combat the issue of money laundering, the Financial Action Task Force (“FATF”) was established by the G-7 Summit (Paris) in 1989 to develop universal measures and policies for national governments to effectively implement anti-money laundering strategies (FATF FAQs). FATF places countries in two main lists; the black list contains non-cooperative countries or Territories (NCCTs) that support terror financing and money laundering, whereas the grey list serves as a warning for countries involved in terror financing and money laundering (FATF Publications). Pakistan was placed in the FATF grey list in 2018 due to its inadequacies in aligning anti-terrorism laws with the FATF Standards, terror-financing, and money laundering. Subsequently, Pakistan was given two concurrent action plans to remove the FATF grey list. In terms of the Money Laundering Action Plan 2021 (“ML Action Plan”), Pakistan has addressed four (4) out of seven (7) items. For the Terror Financing Action Plan 2018 (“TF Action Plan”), Pakistan has mitigated twenty-six (26) out of twenty-seven (27) tasks (Sherani, 2021).
For the ML Action Plan, the four (4) items addressed by Pakistan include the amendments in Mutual Legal Assistance Act 2020, transparency of beneficial ownership information, AML/CFT supervision of the designated non-financial businesses and professions (“DNFBP”), and implementation of financial sanctions for proliferation finance by DNFBPS. The remaining three (3) items left to be addressed are investigation and prosecution of money-laundering cases, confiscation of assets, and UN listings (Sherani, 2021). Moreover, the only item left unaddressed for the TL Action Plan is the investigation and prosecution of senior leaders of the UN-designated terror groups (Latif, 2021).
Why is the Registration of Real Estate Agents with FBR Important?
The real estate sector has been declared a high-risk sector for money laundering by the FATF. The real estate market is ideal for launders to legitimise their black money through investments in land, plots, residential, and commercial projects. Under the Anti-Money Laundering Act 2010, FBR holds power to license/register the Designated Non-Financial Businesses and Professions and regulate the activities of DNFBPs to prevent money laundering and terrorism financing. In line with the implementation of the ML Action Plan, the government of Pakistan has been actively working to regulate and supervise the DNFBPs. Recently, the FBR has issued a notification for mandatory registration of Real Estate Agents as DNFBPs. Under the notification issued by FBR, the businesses operating with unregistered Real Estate Agents will be suspended effective from 1st January 2022 (Rana, 2021).
FBR is a prodigious step to regulate real estate agents, with the real estate sector being the second largest sector in Pakistan’s economy after agriculture. The registration of real estate agents has several benefits, including monitoring financial transactions, regularisation, imposition of specific conditions and rules for business, reducing the gap for corruption, and making a competitive threshold for registered agents. Moreover, the registered agents will have to operate under specific by-laws to counter the integration strategies of money launderers and to report suspicious financial activities. The forthcoming implications of this decision are massive, with real estate education being the up-and-coming trend in Pakistan. Furthermore, real estate agents are regulated in most of the world’s developed economies. For example, in the USA, real estate agents are regulated by each state through the specific rules and regulations devised for such purposes. The candidates must enrol in a pre-licensing course and pass the real estate licensing examination to be eligible to become authorised real estate agents. On average, it takes approximately four (4) to six (6) months to complete the required courses and pass the licensing examination (Kaplan, 2021).
Conclusion
Financial institutions’ integrity and regulatory framework are important for direct foreign investments. Issues of money laundering and terrorism financing have severely damaged Pakistan’s reputation in the international market. While Pakistan is still placed on the FATF grey list, FATF has recognised Pakistan’s commitment and positive efforts to combat money laundering and terrorism. The support of a minimum number of three (3) member countries is required for Pakistan to step out of the FATF grey list. However, due to the damaged integrity of our financial institutions, Pakistan has not been able to receive the required support for the past three years. The registration of real estate agents is a positive step taken to meet the right ends; to devise an implementation strategy to mitigate the money-laundering crisis and formulate a practical anti-money laundering framework. Additionally, the registration will benefit the real estate agents to garner exclusivity in the real estate market. It will also build credibility and provide them with better networking opportunities along with the risk minimisation benefits of sham transactions.
