By: Muhammad Aamir Ilyas

In this era of rampant corruption, tax evasion, drug trafficking, terrorist financing and other felonious activities, benami is considered one of the simplest and easiest schemes to conceal proceeds of crimes.

A benamidar or nominee is a person who holds asset titles for the benefit of another person – most often a criminal – allowing that criminal to enjoy the fruits of his crimes without being noticed by tax and counter terrorism authorities, anti-corruption establishments, anti-narcotics forces and other law enforcement agencies. Criminals usually elect close relatives, loyal friends and trustworthy servants to be their benamidars or nominees. Assets procured through ill-gotten money are kept in these people’s names to avoid them being detected. Benami schemes also offer protection against forfeiture of assets if the criminal faces punishment.

In our society, where families and clans are close-knit and trusting, benami transactions are carried out easily and fearlessly. Moreover, in the absence of any law prohibiting benami transactions until recently, it was an attractive and simple way for white-collar criminals to launder money; the alternative being more sophisticated schemes like trade-based money laundering and the formation of shell or offshore corporations.

Interestingly, in most cases benamidars or nominees don’t even know that they are owners of palatial houses, valuable land, healthy bank accounts and luxury vehicles. Sometimes a poor relative of a criminal who can’t afford even a bicycle owns a Mercedes-Benz S-class coupe or a 7th generation BMW car – at least on paper. Likewise, many tax evaders carry out huge out-of-books transactions through bank accounts being maintained by them in the names of their poor employees who don't even receive their salaries on time.

However, a worse form of benami than these simple benami transactions is running a company with nominee directors.

Although many corporate vehicles such as companies, foundations, trusts and partnerships are used in good and law-abiding ways, it is also easy for them to be misused for various illicit activities like bribery and corruption, terrorist financing, and money laundering. Nominees are appointed as directors of dummy business concerns to carry out complex transactions within these companies to make it difficult for tax and other financial investigators to trace funds back to their true owners.

For example, a white-collar criminal may incorporate a company whose shares are allocated to his employees or friends who act as nominees while beneficial ownership remains with that criminal. Thereafter, different assets including buildings and luxury vehicles are purchased by the nominee company but used by the beneficial owner. The company also applies accelerated depreciation to all movable assets in its ownership, allowing the beneficial owner to buy back these assets at written-down values – far below cost and market price. Despite the fact that the International Account Standard (IAS) 24 clearly states that discourse of related parties transactions is obligatory, most associates and related companies don’t disclose these transactions in their final accounts. In all such cases, it remains difficult for financial investigators to establish mens rea before the court of law.

However, in order to promote transparency and accountability, the Parliament has recently passed the Benami Transactions (prohibition) Act, 2017 with the objectives of prohibiting the holding of property in benami, restricting the right to recover or transfer benami property, and providing a mechanism and procedure for confiscation of such properties. Therefore, the effective promulgation of the benami act will make it much more difficult to carry out benami transactions in the future than it would have been in the past. The act empowers the Federal Board of Revenue (FBR) to do more to counteract and punish benami transactions; section 4 clearly states, “Any property, which is subject matter of benami transaction, shall be liable to be confiscated by the Federal Government”. Moreover, all those persons found guilty of benami transactions by the tax authorities shall be subject to rigorous imprisonment for a term up to seven years under the said act in addition to confiscation of any benami property.

A large number of hardcore white-collar criminals have devised complex schemes to carry out benami transactions. They form a shell corporation or incorporate a company in offshore havens like the British Virgin Islands, Panama or Dubai with the help of nominee directors and make a subsidiary firm of that offshore company in Pakistan.

Pakistani firm carries out huge transactions and remits profits to its parent company, whose beneficial ownership lies with a non-resident Pakistani expatriate or a resident individual, without being noticed by government authorities. However, the proposed Bill of Companies Act, 2017, which has already been passed by the National Assembly, also addresses issues related to nominees and beneficial ownership by clearly defining beneficial ownership of shareholders. Section 239 of the proposed bill empowers the Securities and Exchange Commission of Pakistan (SECP) to call upon a foreign company to supply information of shareholding, including beneficial ownership of the company in connection with any inspection, inquiry or investigation. Moreover, section 452 of the bill also obligates companies to maintain a global register of beneficial ownership.

By making such changes to the law related to incorporation of corporate vehicles, the government is showing its resolve to comply with guidelines made by the Financial Action Task Force (FATF) – an independent inter-governmental body that develops and promotes policies to protect the global financial system against terrorist financing, money laundering, and the financing of proliferation of weapons of mass destruction.

It is a positive sign that our society is recognising financial crimes including tax evasion, drug trafficking and bribery and corruption as the heinous crimes they are, since they are directly and indirectly responsible for injustice, inequality and stark poverty.

The proposed repealing of the old companies ordinance of 1984 and enactment of the Benami Transactions (prohibition) Act, 2017 will provide an effective check on benami transactions.