Importers launder billions in lieu of solar panels trade: FBR

ISLAMABAD: Startling revelations have come to light regarding the illicit commercial activities of solar panel importers, involving a staggering over-invoicing and money laundering amounting to Rs69 billion over the past few years.

These revelations were disclosed by the Federal Board of Revenue (FBR) in a report submitted to the Senate Standing Committee on Finance. The committee’s chairman, Senator Saleem Mandviwalla, presided over the meeting.

According to the FBR’s investigation, seven private companies have allegedly been involved in this over-invoicing scam. These companies have been identified as Moon Light Trading Companies, Asad Ullah Enterprises, Smart Impex, Ehsan Importer and Exporters, SH traders Sehar International, and Delta Trading Company.

Among these companies,  Moon Light tranding, SH Traders, Sehar International and Delta Trading are not listed in the FBR data, while Asad Ullah Enterprises, Smart Impex and Ehsan Importer and Exporter have not been registered with the concerned authority and organisation.

The FBR report further reveals that solar panels, owing to their duty-free import status and the absence of sales tax on local supply, have become a high-risk item for over-invoicing and trade-based money laundering (TBML) in recent years. Between 2017 and 2022, there has been a significant surge in solar panel imports, accompanied by the emergence of shell and dummy companies exploiting duty- and tax-free imports for illicit financial activities.

In October 2022, the FBR initiated a comprehensive audit of solar panel importers, uncovering over-invoicing in 6,232 Goods Declarations (GDs) filed by 63 importers, with a total amount of over-invoicing reaching Rs69.5 billion.

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Following the audit, two FIRs have been filed against M/s Bright Star Business Solution (Pvt) Ltd and M/s Moonlight Trader (SMC) Pvt Ltd. These two importers were implicated in over-invoicing, obstructing audits, and utilizing illicit funds for imports in violation of the Customs Act of 1969. These importers transferred a substantial amount of Rs72.83 billion out of Pakistan concerning solar panel imports from FYs 2017–22. The combined over-invoicing in 2,718 import GDs amounted to Rs37.76 billion, reflecting abnormally high imported values.

Sales tax declarations further indicated that the solar panels, initially imported at Rs72.83 billion, were sold locally for a significantly lower value of Rs45.61 billion, revealing clear over-invoicing at the import stage. Both importers were found to be located in the same building in Peshawar, and their bank statements indicated mutual fund transfers, suggesting a business association.

Income tax records suggest that these two importers operated as fictitious entities, using illicit funds exceeding their legitimate financial worth. An investigation is warranted to understand how commercial banks permitted such fictitious companies to transfer substantial funds without conducting due diligence and KYC risk assessments, resulting in the transfer of Rs72.86 billion out of Pakistan in violation of State Bank of Pakistan regulations.

The State Bank of Pakistan has issued a “Framework for Managing Risk for Trade-Based Money Laundering and Terrorist Financing,” which includes “Red Flag Indicators” communicated to commercial banks for compliance. However, it appears that the banks did not apply these red-flag indicators when dealing with fictitious solar panel clients and customers.

Data analysis has also uncovered a fiscal fraud scheme known as “layering,” where solar panels were imported from China but import remittances were transferred to third countries, particularly the UAE and Singapore, using commercial invoices from UAE- and Singapore-based companies. Commercial banks, in many instances, ignored the heavy use of cash deposits and transactions, despite FMU instructions.

The FBR said that further investigation is ongoing to uncover additional information and potential involvement of other entities in the solar panel sector. It said that banks are being approached for investigation due to their critical role. Audit findings underscore the pressing need for enhanced monitoring and regulatory measures by commercial banks to combat over-invoicing, TBML, and illicit financial flows, the FBR said.