No let-up in dubious transactions in real estate sector

FOOLS_NIGHTMARE · Oct 4, 2021

Even though improvements have been introduced in reporting requirements for real estate sector through the Designated Non-Financial Business and Professions (DNFBPs) initiative, a lot of transactions in the sector still take place in the grey area, which may pose serious challenges to the system.

“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.

He explained that the Federal Board of Revenue (FBR) and other institutions working closely with the Financial Action Task Force (FATF) had done a tremendous job in regulating the real estate, gems and jewellery sectors and other professionals through the DNFBPs initiative. Fresh information, however, suggested that some areas still remained outside the regulated network and operated as dumping ground for money while staying outside the legal system.

This, he said, had serious ramifications; because these transactions are all in cash, they do not generate revenue for the government.

Such dealings do not generate revenue for the government

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.

“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.

The official said the main reason behind such operations staying outside the regulated regime was the manpower shortage at the DNFBP directorate of FBR.

Last month, FBR simplified the reporting requirements for real estate sector players, including brokers, developers and builders recently registered as DNFBPs on the intervention of the National Coordination Committee on FATF to meet international compliance standards.

The process had been simplified to facilitate about 22,000 registered DNFBPs of real estate sector, who were finding it difficult to complete a four-page data sheet covering over four dozen questions about sellers and purchasers of property.

This was a key hitch to the completion of the only outstanding point from the 27-point action plan.

The updated mechanism has already been shared with the FATF. However, thousands remain unregistered who continue to trade open files, affidavits and certificates.

At present, only about 22,000 of over 500,000 property dealers and developers have been registered as DNFBPs.

Under the initiative, FBR has now defined the reporting and documentation requirements, role, and functions of these DNFBPs.

The director general for DNFBPs has issued instructions to all relevant departments to deal with only the registered DNFBPs to compel dealers and developers to either register themselves as DNFBPs or work under the umbrella of already registered DNFBPs.

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.