VZCZCXRO7495
RR RUEHLH RUEHPW
DE RUEHIL #3546 3151232
ZNR UUUUU ZZH
R 101232Z NOV 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 9903
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHML/AMEMBASSY MANILA 3071
RUEHBUL/AMEMBASSY KABUL 9368
RUEHNE/AMEMBASSY NEW DELHI 3998
RUEHLO/AMEMBASSY LONDON 9054
RUEHKP/AMCONSUL KARACHI 0583
RUEHLH/AMCONSUL LAHORE 6317
RUEHPW/AMCONSUL PESHAWAR 5162
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS ISLAMABAD 003546 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ETRD PREL PGOV PK
SUBJECT: MONEYCHANGERS ARRESTED TO PRESERVE FOREIGN EXCHANGE 
 
¶1. (U) Summary.  At least four money changers, including a CEO of a 
leading foreign exchange company, were arrested on November 8 by 
Pakistan's Federal Investigation Agency (FIA) for smuggling and 
illegal cross border transfer of foreign exchange.  The FIA is 
closely watching other exchange companies to curb further 
cross-border smuggling of dollars.  According to FIA sources, the 
case has been registered under the Foreign Exchange Regulations Act, 
which does not specify severe penalties for such crimes.  FIA 
sources estimate that foreign exchange sent out of country could be 
in the millions of dollars.  The rupee appreciated from 81 to 80 
rupees per USD after the arrests.  Portfolio investment flight has 
put downward pressure on the rupee, especially net outflows of USD 
253.52 million from the stock market since July 2008.  End summary. 
 
¶2. (U) The FIA arrested four members of Khanani and Kalia 
International (KKI, a leading exchange company headquartered in 
Karachi) in Lahore, Karachi, and Gujranwala last week for illegally 
transferring foreign currency abroad.  The most prominent are Javed 
Khanani, CEO of Khanani and Kalia International and General 
Secretary of Exchange Companies Association of Pakistan, and Munaf 
Kalia, Director of Khanani and Kalia International.  For the last 
three weeks the State Bank of Pakistan (SBP) has been reviewing 
exchange companies to ascertain the causes of recent rupee 
depreciation and requested the government to clamp down on exchange 
companies suspected of involvement in illegal transfer of dollars. 
After the arrests the rupee appreciated from 81 to 80 rupees per 
USD. 
 
¶3. (U) The Director of Interpol at FIA, Syed Asif Akhtar, said that 
the case has been registered under the Foreign Exchange Regulations 
Act of 1947 (FERA) for capital flight, which does not require severe 
penalties for such crimes.  FIA alleges that KKI was involved in 
physical transfer of foreign currency from Pakistan and ran a Hawala 
or Hundi business.  Hundi and Hawala systems are explicitly banned 
under section 4 of FERA.  However, since they conduct undocumented 
business it is difficult to identify or monitor them.  Akhtar also 
said that they are still not sure how much foreign exchange has been 
transferred as the investigation is still underway but their 
estimates are in the range of millions of dollars. 
 
¶4. (U) On November 6, an FIA team raided a franchise of KKI in 
Gujranwala and arrested two employees, with evidence of illegal 
currency transfer.  FIA then raided the head office of KKI late 
November 7.  FIA took all records, computers, hard disks and data of 
foreign currency transactions and sealed the office.  Two forensic 
experts are analyzing the seized computer records.  Future raids and 
arrests will be made in the light of information retrieved. 
 
¶5. (U) A delegation of exchange companies met FIA officials in 
Karachi to petition for the release of the KKI employees.  The 
request was denied.  These arrests have caused concern among money 
changers in Lahore, as FIA continues to monitor money changers for 
illegal transfers.  Some money changers who normally did business on 
Sundays remained closed on November 9, for fear of FIA raids. 
According to one of their representatives, their business will 
remain closed on Monday as well. 
 
¶6. (SBU) In addition to flight of capital through illegal means the 
equity markets of Pakistan have also witnessed the capital outflows. 
 The net outflow from the Convertible Rupee accounts during November 
1 to November 7 has been USD 1.497 million while the net outflow 
from July 1 to November 7th has been USD 253.52 million.  Together 
these have put a pressure on rupee. 
 
¶7. (SBU) Comment.  The arrests are symptomatic of a deteriorating 
liquidity crisis in Pakistan, as foreign exchange reserves have been 
depleted to less than one month's imports and external financing 
fails to materialize.  The enforcement measures may encourage 
transmission of more remittances from expatriates through the formal 
banking sector, which could improve banks' foreign exchange balance 
sheets.  Unfortunately, they could also feed speculation and promote 
capital flight.  End Comment. 
 
 
PATTERSON