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Foreign currency rules

There is no denying the fact that dealing in foreign currencies is a fact of modern life and it is considered imperative for international trade and finance.

Transacting trade in foreign currencies is one of the essential requirements of modern economic system and such transactions are aptly regulated. Regulating financial transactions of foreign currencies has assumed tremendous importance after the illegal transfers of currency from one place to the other.

Pakistan is currently in the grey list of FATF and the dominant debate is ongoing about money laundering and how to prevent it.

In order to allay the reservations of the FATF, the federal parliament has recently approved a set of rules specifically relevant to this aspect and quite naturally foreign currency-related aspects also fall under its purview.

These set of rules are aimed at plugging loopholes in the transactions of foreign currency in line with the suggestions of the FATF. In this context, the federal government has notified Foreign Currency Rules 2020 with the express intention of documenting economy, dismantling manipulations of foreign currency markets and preventing money laundering.

The Section 3 of the new ordinance specifies that 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 therefrom within or outside Pakistan.

As per Section 5, this law has an 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.

As per Section 4 of Act, all citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons shall be 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:

• Any foreign exchange borrowed under any general permission given by SBP under Section 4(1) of FERA

• Any payment from abroad for goods exported from Pakistan

• Proceeds of securities issued or sold to non-residents

• Any payment received from abroad for services rendered in, or from, Pakistan

• Earnings or profits of the overseas offices or branches of Pakistani firms and
companies including banks

• Any foreign exchange purchased from an authorised dealer money changer or exchange company in Pakistan for any purpose.

• 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 from the
foreign currency accounts.

This Act has overriding effect over Foreign Currency Accounts (Protection) Ordinance, 2001.

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

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 requires banks to verify prices underlying contracts on the post-transaction basis and report suspicious transactions.

As explained above, Section 4 has already imposed conditions for some transactions which are promoting trade-based money laundering in Pakistan.

Now, these have been operationalised through Rules as per power given in Section 5(4) of PERA.
The federal government has now imposed restrictions on deposit in foreign currency accounts (whether through direct remittance or otherwise) on account of the following:

• Payment for goods exported from Pakistan

• Payment for services rendered in or from Pakistan

• Proceeds of securities issued or sold to non-residents

• Any foreign exchange borrowed from abroad

• A foreign exchange purchased from Authorised dealer, exchange company or money changer.

However, these credits would be possible if allowed or permitted by SBP.

No restrictionshave 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.

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

1. Credits in foreign currency accounts through foreign exchange purchased from authorised dealers, exchange companies or money changers was not restricted prior to implementation of these rules. Restricting such credits will pose severe 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 statures. These rules cannotbe 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 platforms (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.

This article originally appeared in The Weekender and has been reproduced with permission

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Disclaimer: The views expressed in this article are solely of the author and do not represent ARY policies or opinion.