In an effort to document economy, dismantle manipulations of foreign currency markets and money laundering, the Federal Government has notified Foreign Currency Accounts Rules, 2020 w.e.f. 9th October 2020.

Another condition of the Financial Action Task Force (FATF) fulfilled by the PTI government. Free use of foreign currency account outside Pakistan stopped by the government. Suspicions foreign currency accounts found involved in money laundering.

According to the details, the strict condition of the Financial Action Task Force (FATF) fulfilled, the Ministry of Finance and the State Bank of Pakistan issued a new notification.

 

CONDITIONS IMPOSED

According to the notification issued, it will not be possible:

• to transfer foreign currency accounts from foreign exchange companies.
• Free use of foreign currency account outside Pakistan stopped.
• SBP permission require before using a foreign currency account abroad.

According to the notification:

• remittances abroad will be legalized.
• Suspicions of money laundering through foreign currency accounts identified
• Remittances from overseas banking channels can be credited to foreign currency accounts.

The finance ministry says:

• the money for exports and services will not be credited to the foreign currency account.
• An individual foreign currency account will be able to credit money from another individual foreign currency account.

According to the Ministry of Finance, under the schemes of the Government of Pakistan:

• the principal amount or profit of the investment can be credited.
• Currency declared to Pakistan Customs from abroad will be credited to the foreign currency account.

 

FOREIGN CURRENCY ACCOUNTS RULES, 2020

As explained above in A.2, the Section 4 has already imposed conditions for some transactions which are promoting trade-based money laundering in Pakistan. Now these has been operationalized through Rules as per power given in Section 5(4) of PERA.

 

The FG has now imposed restrictions on deposit in foreign currency accounts (whether through direct remittance or otherwise) on account of following:
(a) Payment for goods exported from Pakistan.
(b) Payment for services rendered in or from Pakistan.
(c) Proceeds of securities issued or sold to non-residents.
(d) Any foreign exchange borrowed from abroad.
(e) A foreign exchange purchased from Authorized dealer, exchange company or money changer.
However, these credits would be possible if allowed or permitted by SBP.

No restrictions have been levied on following transactions:

• Intra account transfer between two foreign currency accounts.
• Credits such as interest or profit in relation to any government scheme.
• Foreign currency brought in from abroad and duly declared at the point of entry into Pakistan with Pakistan Customs may be credited in the account.
• Withdrawal from foreign currency accounts.

 

POINTS TO BE CONSIDERED

Following practical difficulties and issues may arise due to implementation of these rules:

1. Credits in foreign currency accounts through foreign exchange purchased from authorized dealers, exchange companies or money changers was not restricted prior to implementation of these rules.
   Restricting such credits will pose sever practical difficulties for individuals who use such foreign currency accounts for the purpose of remittances of education expenses abroad, investment in foreign securities, investment in foreign currency savings accounts, etc.
   The restriction means such individuals may only feed their foreign currency accounts through other foreign currency accounts (which will also ultimately drain) or through a foreign source. Such restriction will ultimately drain out foreign exchange reserves of more than $ 7 billion kept in such foreign currency accounts.
2. These restrictions have been implemented through rules which are generally used to implement procedures. A legal anomaly may arise in this case that whether rules may be used to implement such restrictive amendments in parent Acts and Ordinances. There are a number of Superior Court Judgments which have laid down the principal that rules and regulations are subservient to main body of the statues. These rules cannot be implemented unless they are aligned with main body of the statutes.
3. E-Commerce industry in Pakistan is growing at a rapid pace and more and more young professionals are engaged in providing IT and IT enabled services from Pakistan to foreigners. They receive their payments in foreign exchange through money exchanges etc. due to non-availability of global financial plate forms (like PayPal) in Pakistan.
   These professionals also have to pay for digital tools in foreign currency which they manage through their foreign currency accounts. Such restriction will only create hurdles for already struggling E-Commerce market in Pakistan despite tremendous global opportunities and demand for Pakistani freelancers. Ultimately, they will create offshore companies and foreign accounts and will route their funds to these accounts instead of bringing into Pakistan.

 

BACKGROUND:

PROTECTION UNDER FOREIGN CURRENCY ACCOUNTS (PROTECTION) ORDINANCE, 2001 [“ORDINANCE”]

As per Section 3 of Ordinance no person holding foreign currency account shall be deprived of his right to hold or operate such account or in any manner be restricted temporarily or permanently to lawfully sell, withdraw, remit, transfer, use as security or take out foreign currency there from within or outside Pakistan. As per Section 5, this law had overriding effect over Foreign Exchange Regulation Act, 1947, the Customs Act, 1969, the Income Tax Ordinance, 1979, or any other law for the time being in force.

PROTECTION UNDER PROTECTION OF ECONOMIC REFORMS ACT, 1992

As per Section 4 of Act, All citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons entitled and free to bring, hold, sell, transfer, and take out foreign exchange within or out of Pakistan in any form.

However, this general liberty will not be available to:
(a) Any foreign exchange borrowed under any general permission given by SBP under Section 4(1) of FERA
(b) Any payment from abroad for goods exported from Pakistan
(c) Proceeds of securities issued or sold to non-residents
(d) Any payment received from abroad for services rendered in, or from, Pakistan
(e) Earnings or profits of the overseas offices or branches of Pakistani firms and companies including banks,]
(f) Any foreign exchange purchased from an authorized dealer money changer or exchange company in Pakistan for any purpose.
(g) Cross border or inland movement of foreign currencies in cash exceeding US$10,000 or equivalent subject to such annual ceiling as may be prescribed by the SBP.

As per Section 5(4) of Act, The SBP or other banks shall not impose any restrictions on deposits in and withdrawals from the foreign currency accounts and restrictions if any shall stand withdrawn forthwith. However, the Federal Government may make Rules governing deposits in and withdrawals form the foreign currency accounts.
This Act has overriding effect over Foreign Currency Accounts (Protection) Ordinance, 2001.

SBP’s FOREIGN EXCHANGE MANUAL

As per Regulation 4, an authorized dealer shall buy or borrow any foreign exchange from, or sell or lend to, or exchange with, any person not being authorized dealer, only with approval of SBP.

SBP’s FRAMEWORK FOR MANAGING RISKS OF TRADE BASED MONEY LAUNDERING

The SBP had issued Framework for managing risks of trade-based money laundering and Terrorist Financing vide Circular No. 4 dated 14 October 2019 which inter alia require banks to verify prices underlying contracts on post transaction basis and report suspicious transactions.