KARACHI: Federal Board of Revenue (FBR) had tasked Directorate of PCA South to carry out sector-based audit of solar penal importers to check twin aspects of over-invoicing and trade based money laundering (TBML).
An official said once the cases are lodged, cases may be referred to Intelligence & Investigation for lodging of FIR.
State Bank of Pakistan also recently asked federal ministries to develop a list of reputed solar panel importers who can be permitted to import solar panels without the risk of money laundering and over-invoicing and the audit findings of FBR can be appropriately helpful in this respect. Director PCA South, Mr. Sheeraz Ahmed has submitted a report to FBR mentioning 63 solar panels importers who over-invoiced import value of Chinese origin solar panels while many importers were found to have a very weak financial worth to finance heavy imports and huge cash funds were found to have been deposited in the bank accounts of said importers. Total over-invoicing was detected at Rs. 70 billion against 63 importers.
Mr. Sheeraz Ahmed, Director PCA South constituted a team comprising of Additional Director Gulam Nabi Kambo, AOs Abdul Gaffar, Hubban Ch., Fahad and Rehan, to carry out sectoral audit.
In view of higher number of importers/auditees, it was decided not to approach solar panel importers instantaneously without firming up findings viz-a-viz over-invoicing and trade-based money laundering based on desk audits which were carried out on the basis of WeBOC / customs data and market surveys for verification of retail prices of solar panels for work-back calculations to cross-check import values.
Furthermore, to check possibility of use of illicit funds to finance imports, as provided under Section 26 B of the Customs Act, 1969, reliance was made on IRS’s taxpayers’ profile and sales tax / income tax return declarations and bank records to check proportion of cash transactions to determine obscurity of money trail and legitimacy of funds that were used to finance imports. TBML risk was evident due to use of vague descriptions and apparent over-invoicing amounting to more than Rs. 69 billion. To rule out use of black-money (illicit origin of funds) for TBML, the Directorate strategized to carryout following audit verifications:
Verification of return filing status under sales tax and income tax regimes to verify bonafide / genuineness of importing companies (to rule out use of dummy / shell companies).
Verification of ownership and business addresses to check physical existence and genuineness of the importers.
Verification of income tax declarations to ascertain financial worth (equity and liabilities) of the importers viz-a-viz import volumes to ascertain whether imports were financed by the owners / proprietors or through some obscured source.
Verifications of bank records to check money trail, origin of funds and quantum of cash deposits, that are used to obscure money trail.
Scrutiny of 90 days import data confirmed that during last five years (2018-2023) minimum import values of Chinese origin solar panels ranged between US$ 0.08 to 0.16 per watt. To further ascertain objectivity of declared import values, workback calculations (through deductive method) were applied on the retail prices of Chinese origin solar panels as prevailing in the local retail market of Karachi and it was determined that bonafide import values of Chinese origin solar panels should have ranged below US$ 0.22 per watt.
Contrarily, WeBOC data revealed that many GDs of the solar panel importers were declared at much higher import values i.e. US$ 0.23 per watt or above. By setting the over-invoicing benchmark at (minimum) Rs. 40 million during last five years, the cumulative over-invoicing was detected in 6,232 GDs of 63 importers amounting to Rs. 69.5 billion; as declared import values of solar panels ranged between US$ 0.23 to US$ 2.26 per watt.
Scrutiny of import data and income tax declarations of 39 importers reflected high disparity between financial worth (equity and liabilities) and import volumes, such that 39 importers having financial worth of Rs. 14.7 billion, imported solar panels worth more than Rs 201 Billion (Annex-C). Similarly, scrutiny of bank-account records of 44 importers confirmed heavy cash deposits amounting to Rs. 47 billion (i.e almost 24% of the total bank deposits worth Rs. 193 billion). In many instances, heavy amounts (10 million or above) were deposited in the bank accounts as “cash transfers” in a single transaction, while in case of many bank accounts, yearly quantum of cash transactions was more than Rs. 20 million, that places said importers and bank accounts under high-risk suspected category for money laundering considerations in terms of FMU’s reg flag indicators.
Scrutiny of financial flows revealed that import remittances were questionably transferred to third countries like UAE, Singapore, Switzerland etc. 22 importers (with imports remittances worth Rs. 50 million or more), transferred Rs. 16.5 billion to third countries (especially UAE and Singapore) whereas respective imports of solar panels had originated from China. Commercial banks allowed transfers of import remittances to third countries without any NOC from the Chinese exporters in violation of Foreign Exchange Regulations and SBP’s instructions vide “Framework for Managing Risk for Trade Based Money Laundering and Terrorist Financing”.
For instance, M/s Bright Star Business Solution Pvt. Ltd. (NTN 7290188), the leading importer of solar panels (also the leading offender of over-invoicing amounting to Rs. 30.6 billion) received cash deposits worth Rs. 14 billion (35% of total bank deposits), while the importer transferred Rs. 47 billion out of Pakistan against solar panel imports. The importer filed Nil income tax return for the FY 2020-21, and did not file income tax return for the FY 2021-22; while transferred import remittances worth Rs. 20 billion during these two financial years. Similarly, M/s Moon light Traders (SMC) Pvt. Ltd. transferred Rs. 23.7 billion out of Pakistan against solar panel imports while the importer did not file income tax return for the FY 2020-21 and filed Nil return for the FY 2021-22, and transferred import remittances worth Rs. 11.7 billion during said two financial years. Bank statements indicate business association between the said two suspected importers which, cumulatively, transferred Rs. 70.7 billion out of Pakistan on the basis of duty/tax free imports of solar panels, while their combined over-invoicing quantum stands at Rs. 37.7 billion in 2,925 import GDs. Upon physical verification, both units, located in the same commercial plaza of Peshawar, were found to be closed.
PCA South has submitted its findings to FBR for legal action in terms of Customs Act, 1969 and AML Act, 2010.