By Irtiza Kazmi
KARACHI: Many overseas Pakistanis earn their income legally abroad and send money home to support their families or invest. However, when remittances are sent through illegal channels such as Hawala or Hundi, serious risks and consequences arise despite the lawful origin of the funds. Using illegal money transfer methods not only jeopardizes the safety of the funds but also exposes senders and recipients to legal penalties, tax scrutiny, and broader economic harms.
Here are some of the points reflecting the hidden costs of Illegal money transfers:
Lack of Documentation and Traceability
Illegal money transfer methods operate outside the formal banking system, leaving no official paper trail or documentary evidence. This absence of documentation creates significant problems for the remitter, especially when returning to Pakistan and needing to prove the lawful transfer of funds. Without bank receipts, official remittance records, or transaction confirmations, it becomes nearly impossible to demonstrate how the money was brought back into the country. This lack of traceability raises red flags for tax authorities and financial regulators, who may classify such funds as “unexplained income”.
Exposure to Tax Evasion Allegations
Pakistan’s Federal Board of Revenue (FBR) and Financial Monitoring Unit (FMU) actively scrutinize undocumented or suspicious money transfers. Funds sent through illegal channels often do not appear in formal financial records, exposing recipients to allegations of tax evasion. Investigations have revealed cases where large sums were transferred through multiple transactions to various beneficiaries without proper tax payments, leading to legal probes and asset seizures. Legal Penalties and Criminal Charges Illegal foreign exchange trading, including Hawala and Hundi, is prohibited under Pakistan’s Foreign Exchange Regulation Act (FERA) of 1947.
Violators face severe penalties such as imprisonment for up to five years, fines, and confiscation of involved currency. Additionally, because illegal transfers often overlap with money laundering activities, the Anti-Money Laundering Act 2010 applies, imposing harsher punishments including imprisonment up to 10 years and heavy fines.
Difficulty in Proving Legitimate Earnings
A common scenario involves a worker who earned money legally abroad but used informal channels to send funds home. Upon returning to Pakistan, they lack official proof of how the money was transferred. Without bank statements or remittance receipts, tax authorities may question the source and legitimacy of the funds. This can lead to prolonged investigations, freezing of assets, or demands for back taxes and penalties. The inability to substantiate the origin and transfer of funds creates ongoing legal and financial risks. Broader Economic and Social Consequences Illegal remittance channels undermine Pakistan’s financial system by promoting unregulated cash flows that escape taxation and regulatory oversight. This weakens the country’s ability to track legitimate foreign inflows, hampers economic planning, and damages Pakistan’s international reputation. The widespread use of illegal transfers contributes to the loss of billions in potential tax revenues and foreign exchange reserves, which could otherwise support national development projects.
How Legal Remittance Processes Protect Your Earnings and Prevent Fraud
Using formal, legal remittance channels is essential to protect hard-earned money, ensure compliance with Pakistani laws, and avoid the costly consequences of illegal money transfers. Legal remittance processes safeguard funds and prevent issues like money laundering and fraud through a comprehensive framework of regulatory compliance, customer verification, transaction monitoring, and secure operational practices. Customer Due Diligence (CDD) and Know Your Customer (KYC) Legal remittance service providers (RSPs) verify the identity of their customers before processing transactions. This KYC process involves collecting and authenticating personal information and establishing the beneficial owner behind the transaction. It ensures funds are sent and received by legitimate individuals or entities, reducing the risk of money laundering or terrorism financing.
Transaction Monitoring and Suspicious Activity Detection
RSPs implement continuous monitoring systems to track transactions for unusual patterns or behaviors indicating fraud or money laundering. Suspicious activities such as unusually large transfers, multiple small transactions/transfers involving high-risk countries trigger further investigation or reporting to regulatory authorities. Compliance with International AML/CFT Standards Legal remittance channels adhere to Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) regulations based on globally accepted frameworks like those from the Financial Action Task Force (FATF). These regulations mandate licensing, registration, and ongoing compliance monitoring of remittance providers, ensuring strict oversight and robust internal controls to prevent misuse of funds.
Use of Advanced Technology and Risk Management
Many legal remittance providers employ AI-powered risk management tools analysing transaction data in real-time to identify fraud patterns and high-risk transactions. Technologies include multi-factor authentication, encryption protocols, counterparty screening, and machine learning algorithms that enhance fraud detection and prevent unauthorized access to funds.
Secure Communication and Verification Protocols
To prevent fraud, such as phishing scams or fraudulent payment instructions, legal remittance processes incorporate multi-channel verification methods. Changes in payment details are verified through multiple trusted communication channels, reducing scam risks. Secure portals and encrypted communications protect sensitive financial information during transfers.
Transparent Record-Keeping and Reporting Legal remittance services maintain detailed records of all transactions, providing a clear paper trail for regulators and customers. This transparency aids auditing and accountability. Providers are also required to report suspicious transactions to relevant authorities, contributing to the fight against financial crime. Sending money to Pakistan through illegal channels exposes both sender and recipient to serious risks including tax evasion allegations, legal penalties, and criminal charges due to the lack of documentation and traceability. Illegal transfers also harm Pakistan’s economy by undermining financial regulation and causing loss of tax revenue.
Conversely, legal remittance channels protect your funds through stringent customer verification, continuous transaction monitoring, adherence to international AML/CFT regulations, and advanced technological safeguards. These measures ensure your transfers are safe, transparent, and compliant with the law, preserving the integrity and stability of the financial system. For workers and investors alike, using formal, legal remittance channels is essential to protect hard-earned money, comply with Pakistani laws, and avoid costly consequences.
