ECONOMIC CRIMES

A look at the problems that hurt a country’s economy

Economic crimes exist in many forms and are subject to punishment in accordance with their degree of severity. Although economic crimes are common in the developing countries, the developed part of the world, too, is not immune to such acts. In this article, some kinds of economic crimes are briefly discussed.

1. Illicit business activity

Business activity undertaken in violation of law, including creation of business agreements that the law of the land prohibits, qualifies as illicit business activity. These activities could range from human trafficking to narcotics trade, prostitution, smuggling, etc.

2. Illegal financial activity

Illegal financial activities are non-violent in nature but they result in financial losses, caused due to many of its hues, especially fraud. For example, hundreds of Pakistani ATM users lost their hard-earned money because of unauthorized cash withdrawals by hackers in recent months. Other illegal financial activities include money laundering, corruption, tax evasion and providing funds for financing organized crimes, etc.

3. Pseudo-business activities

Business activities carried out with notional capital and notional goods are called pseudo-business activities. For example, a number of dummy businesses/firms registered under the Sales Tax Act, 1990, generate fake/flying invoices to benefit genuine businesses soar to facilitate them in benefitting from concessionary regimes and special schemes introduced for export-oriented sectors including textile, leather, sports, carpets, surgical instruments, etc., under SRO 1125 of 31 December 2011. Such businesses do not conduct actual sale/purchase of goods or services, rather they engage only in paper transactions. The “Double Shah” scam that caused huge financial losses to thousand of Pakistanis provides an apt illustration of pseudo-business activity.

4. Customer deception

Consumers have the right to expect that a business will not mislead or deceive them relating to the value or quality of goods and services it provides. It is illegal to mislead consumers through luring advertisements and giving a misleading impression about price, value and quality of the product. Examples of deception include a transport company giving the impression that it takes freight by air, but it actually sends it by road. Likewise, a real-estate agent advertises a property for less than the minimum price provided by the seller.

5. Tax evasion by legal entities

Legal entities are those bodies or business concerns that are established and perform functions in accordance with the prevailing laws of a country. The primary objective of a business entity is to maximize profit. And because profits are taxable, business entities try to shift portion of profit to jurisdictions which are either tax havens or where tax rates are low. Such business entities exploit tax laws and rules regarding transfer pricing, thin capitalization, etc. Because of complex business models such as matrix-type organizational structures, hub structures and co-entrepreneurial structures, the tax authorities are not able to cope with the issue of base erosion and profit-shifting by the large business concerns. Some other ways of tax evasion include non-declaration of correct revenue receipts, overvaluation of expenses, claiming expenses not allowed under tax statues, etc.

6. Tax evasion by individuals

Individuals, especially those having high net worth, evade taxes by concealing income, non-declaring or under-declaring the value of assets and wealth. Normally, individuals do not declare income from all sources and all their wealth and assets to the tax authorities. Furthermore, they exploit tax measures such as exemptions, reduced rates and tax credits. For example, foreign remittances are widely used to explain sources of wealth in the wealth reconciliation statements though such remittances are managed solely for this purpose. The extent of tax evasion by individuals in Pakistan could be estimated from the fact that only 1.2 million taxable persons file returns. The Federal Board of Revenue (FBR) collected just Rs 200 billion out of potential Rs 4,000 billion, which is merely 5 percent of the country’s potential. In view of low tax base and huge tax evasion, the Prime Minister announced a tax reform package in the recent past which, when implemented, will include reduced tax slabs for individual taxpayers, increased threshold of taxable income and one-time tax amnesty scheme.

7. Pollution

Pollution has serious consequences for economy. It decelerates economic growth by jeopardizing the health of the labour force, premature deaths, resource degradation, etc. According to the recent ‘Lancet Commission on Pollution and Health’ report, almost one in four premature deaths in Pakistan is attributed to pollution. Pollution also causes illnesses that prevent people from adequate working. Furthermore, pollution has a reducing impact on children’s intelligence quotient (IQ) levels and their educational and cognitive performance. Soil, air and water are different dimensions of pollution. Laws preventing pollution are applicable on the individuals, legal persons and organization that cause pollution. It is because manmade contaminants, which consist of a large variety of contaminants or chemicals, are the main causes of pollution. Therefore, it is obligatory on all people to prevent pollution and take measures for preventing or reducing different forms of pollution. Law imposes responsibility on all units and individuals to prevent pollution.

8. Illegal cutting of forest vegetation and destruction/deterioration of forestland

Many are the direct and indirect advantages of forests. Direct advantages include provision of timber, fuel wood and several by-products. Indirect benefits are moderation of climate, increase in humidity, control of erosion and improved quality and quantity of horticultural crops. That is why stress has been laid on increasing the tree cover in the country that, presently, is around 5.2 percent – experts opine that for sustainable agriculture growth the tree cover should be 25 percent of the total area of the country. The share of forestry in the GDP is very small showing that this has been a neglected area since long. Different types of forests exist in Pakistan but their productivity is not significant. Moreover, illegal cutting of trees by timber mafia and smuggling has also done damage to the forests. Alpine, temperate, scrub, bela, irrigated, riverian and mangroves are different types of forests. Farm forestry has a great potential and is adopted by many advanced countries due to positive effects of trees on crops and crop production. In the country, the farmers grow trees on their farms but not on scientific lines. They have no proper knowledge of tree species and its market value; hence, they do not follow recommended production technology. Timber market is not well organized in Pakistan.

9. Other economic crimes

Other economic crimes include violation of subsoil protection requirements, violation of rules on the movement of radioactive, bacteriological or toxic substances, materials and radioactive waste, violation of ecological security requirements, concealment of data or deliberate disclosure of unauthenticated data on environmental pollution, failure to meet the obligations of taking remedial action against the consequences of environmental violations and violation of the regime of the administration and protection of the state fund protected natural resources, etc.