Are plot files the new prize bonds?

Bypassing FATF by buying and trading plot files from housing societies

Turns out that not only did the longest-running money laundering scheme helped in whitening the black money without any corresponding increase in affordable housing, but the continued focus on real estate is enabling the undeclared money to circumvent other steps taken by the government to comply with FATF.

Rs40,000 prize bond to be discontinued

June 2019: The federal government on Thursday gave a nine-month deadline to Rs40,000 denomination prize bonds holders to convert their saving instruments either in cash or in other securities aimed at addressing concerns of the Financial Action Task Force (FATF).

It also immediately discontinued the new draws of the 40,000 prize bonds, as the government plans a big crackdown against tax evasion. The government has allowed Rs40,000 denomination prize bonds holders to register their bonds up to  March 31, 2020, according to the Ministry of Finance.

The Rs40,000 bond is the highest denomination prize bond, out of total eight denominations, ranging from Rs100 to Rs40,000. There was Rs75-million first prize on the Rs40,000 denomination bonds.

The move will also address concerns of the global watchdogs, who are suspicious about the parking of black money through these bonds.

Two years after the above news

SBP extends prize bond encashment deadline

June 2020: a large number of prize bonds were not encashed or converted into registered prize bond, the federal government has decided to extend the encashment or conversion time by four months to facilitate the general public. Therefore, the Finance Division, Government of Pakistan has extended the last date for encashment/replacement/conversion of Rs.40,000, Rs.25,000 & Rs.15,000 denomination National Prize Bonds (bearer) up to September 30, 2021, a circular issued by the SBP said.

Last week

SBP extends Rs40,000, Rs25,000, Rs15,000, Rs7,500 prize bond encashment deadline

The State Bank of Pakistan (SBP) has extended the deadline for the encashment, conversion and redemption of prize bonds of Rs40,000, Rs25,000, Rs15,000 and Rs7,500 denominations till December 31, 2021.

As Rs.881 billion has so far been withdrawn by prize bond investors, it is hoped that December 31, 2021, will be the last extension date.

CDNS receives Rs160bn fresh deposit in two months

Sep 9, 2021: In the last year of 2020-21, investors have withdrawn Rs881 billion after the suspension of the said bond.

Replying to another question, he informed, “We paid the encashment of Rs155 billion by June 30th of this month to the investors against the suspension of prize bonds of Rs25,000.”

He said the federal government recently suspended the prize bonds of Rs25,000 and had given a six-month deadline to investors to en-cash their total savings of Rs160 billion.

The last news item didn’t mention if the Rs.880 billion that has been withdrawn has now been converted into registered securities. The amount is equal to 12% of banknotes in circulation as per SBP’s latest Statement of Affairs dated June 25, 2021.

On a weird note, SBP hasn’t updated the Statement of Affairs on its website since July 1, 2021. The SOAs are usually published on a weekly basis. It has been more than three months since SBP published its weekly SOAs. I wonder what is preventing SBP from releasing the data.

Coming back to the original topic, it appears that the black money that was earlier parked in prize bonds has made its way into plot files.

No let-up in dubious transactions in real estate sector

“There are many housing societies and market players who are trading open files worth Rs1 million to Rs10m through open certificates and affidavits in the open market and remain totally outside the regulated regime,” said a senior government official.

Such operations were initially going on between property dealers and their clients, who traded open files, but now well-known housing societies and developers had also adopted this business model, the official said.

The result is that a plot, property or asset is originally registered in the name of one individual but is transferred to another one without paying revenue to the government. Such transactions take place in the internal system of the society/developer who charges membership fees, transfer fees, sports fund, security charges and so on while allowing the transaction but without formally going into the government set-up or revenue mechanism.

In some cases, the developers and societies also use open files and certificates because they do not actually own the land they are marketing. Therefore, they tend not to formally issue allotment letters and help facilitate exchange of undeclared money or sometimes even black money.

Interestingly, the government has stopped issuing prize bonds of large denominations (like Rs40,000) to meet the requirements of FATF, but some well-known societies are openly issuing affidavits or certificates of Rs1m to Rs10m.

It appears that housing societies are in on this game, as they are making money on attesting the affidavits and promoting them as bearer instruments.

“These papers (affidavits) are like currency notes and belong to the bearers,” said the official, adding the societies even charge a fee of Rs10,000 to Rs20,000 to confirm that the affidavit was “genuinely” issued.

Under FATF, new reporting requirements for the real estate sector were introduced through the Designated Non-Financial Business and Professions (DNFBPs) initiative. However, out of approximately 500,000 property dealers, only 22,000 have registered under DNFBP.

The law has not been amended to comply with the FATF requirements, but relevant rules have been simplified to relax certain unnecessary conditions for the customer’s due diligence by DNFBPs. Now, the registered developers and builders are in a position to comply with the laid down rules and regulations without any confusion by checking the buyers’ and sellers’ names on the list of the United Nations that contains the names of 4,500 proscribed persons.

If the name of the buyer or seller is not on the list, there is no issue in carrying out the transactions. However, if any of the names are found on the UN list, the developer and builder has to immediately report it through a mobile app to the authorities concerned.

The developer and builder is also required to keep the copies of the sale and purchase agreements and the CNICs of the sellers and buyers while the customer’s due diligence is also a requirement for the builders and developers registered as a DNFBP.

Cash transaction report is also a requirement to be submitted by the developer and builder.

To summarize, the housing societies, by not reporting the particulars of the open certificate buyers to the government or updating the provincial/municipal land records, are preventing the government from earning its due revenue. Moreover, by attesting these affidavits and promoting its use as a bearer instrument, they are circumventing the FATF regulations and helping the black money circulate in the economy.