Illicit Financial Flows (IFF)—which means “money illegally earned, transferred, or used that crosses borders”—have become a real global problem. It is a problem at scale: a PwC survey from 2018 suggests that global money laundering transactions accounted for roughly USD 1 trillion to USD 2 trillion annually, or some 2 percent to 5 percent of global GDP. Illicit flow of money enables illegal trades, such as human trafficking, drug trafficking, prostitution, terrorist funding and gambling, and these are some of the major problems that the international community is trying hard to eradicate.
IFF significantly affects global, regional and local economies. From slowing down development and growth of financial systems to affecting foreign trade, IFF’s negative impacts are myriad. And the world is trying its best to address this problem in all its forms.
Bangladesh is also bearing the brunt of IFF. According to the United Nations Conference on Trade and Development (Unctad)’s LDC (Least Developed Countries) Report 2019, released on November 20 this year, more than one third of Bangladwesh’s total tax revenue—36 percent to be exact—illegally flew out of the country in 2015, which has predictably negatively affected the country’s tax-GDP ratio.
And this is just one aspect of the IFF problem that Bangladesh is facing: hundi, digital hundi, illicit flow of money through trade mis-invoicing—which accounts for 80 percent of IFF—are some of the more pressing IFF issues Bangladesh is trying to tackle.
Bangladesh is naturally trying hard as well to eliminate this problem—especially in the wake of being hit by a wave of illegal casino and gambling business in recent times. The central bank has recently issued a circular restricting the use of cross-boundary financial transactions through international credit cards (read: international payments made from Bangladesh for online purchases using international credit cards).
The Bangladesh Bank circular read, “International cards are, in general, intended to be used by cardholders while on travel abroad… Cardholders shall, for online payment through ICs, submit Online Transaction Authorisation Form (OTAF) to the ADs... On being satisfied about the legitimacy of the transactions declared on OTAF duly filled in/submitted by cardholders on mobile application, internet platform or in hardcopy, ADs will activate the respective ICs for international transaction, and after execution of the transaction, the same shall be deactivated immediately.”
The message being communicated through this circular is simple: online payment made using international credit cards is being discouraged. The cross-boundary payment option for international credit cards will remain deactivated, and will only be activated upon the verification of an online transaction authorisation form (OTAF)—which international credit card holders will now have to fill up and submit for every international transaction online—by the concerned banks.
And while the move by the central bank to address the problem of IFF is commendable, we must ask ourselves if this is the right way to tackle this complicated issue, and if addressing these small issues can address Bangladesh’s IFF problem. Can restricting the cross-country financial transactions through international credit cards alone solve this IFF menace?
For one, the central bank should first ask the commercial banks if they are fully equipped to implement the circular instructions. It seems the major problem that will surface in the implementation of this instruction is the logistics required. This problem has been well-articulated by Dhaka Bank’s Managing Director Syed Mahbubur Rahman: “It is quite a tough job for banks to verify every OTAF round the clock.”
Making an international credit card transaction at 2 am in the morning—from the comfort of one’s own bedroom—would mean the concerned bank will have to review the OATF at 2 am, and upon satisfactory verification of the said form, will right away activate the card for the payment. How do we expect the commercial banks to monitor the 24/7 inflow of OATFs?
A central bank official suggested installing artificial-intelligence (AI) software along with the system to verify the OATF, which the official said would make it easier for the commercial banks to implement the circular.
This suggestion is not completely bereft of wisdom. But if the use of AI is on the table, why not directly combine AI with human insights and processes to monitor international financial transactions made through international credit cards and identify the financial criminals, rather than introducing a whole new layer of complication that is the OATF?
In the fight against financial crimes, AI, and more specifically, machine learning (ML), is already yielding good results. Global banking giants, particularly those with a strong presence in emerging markets such as HSBC and Standard Chartered, are collaborating with Fintechs or developing their own solutions to fight financial crimes. With progress of technology as it is, why create a problem to address a problem and then look for a solution? Why not cut out the middle man, and let the problem and the solution meet directly?
We are addressing a problem that deserves much more than a three-paragraph central bank circular prescribing additional layers of bureaucracy. This issue needs holistic and well-thought-out solutions that take into account the multiple dimensions that this problem presents.
And while purchase of cryptocurrency and lottery, involvement in forex trading, and participation in online casino and gambling are issues that need to be addressed, the bigger problems of hundi and mis-invoicing are posing greater threats to the economy. What measures have we taken to address these problems? And why not use technology to root these out?
Instead of limiting the use of international credit cards for cross-boundary transactions, the impact of which remains to be seen, the central bank could focus its energy on frying the bigger fish: harnessing the power of AI to help in identifying suspicious transactions across the full spectrum of IFF issues.
Bangladesh’s illicit financial flow scenario is dark, and navigating through these murky waters will need solutions that are multifaceted and comprehensive. With an economy primed for take-off, it is important that we continue to create an enabling environment, not impediments.
It is also important for us to see the forest among the trees. We must address all aspects of illicit flows, including hundi and mis-invoicing, and engage the commercial banks and financial experts to identify effective means of addressing the whole gamut of IFF.
Concerted efforts by all concerned, taking into account the views and opinions of the experts, can help us overcome this problem. It is an issue that needs cooperation and coordination. And of course, state-of-the-art technology will be helpful. But why create a solution to a problem that will itself entail creating a whole host of other solutions, particularly when we have the means to be much more direct in our approach?
Tasneem Tayeb works for The Daily Star. Her Twitter handle is: @TayebTasneem