Illicit cross-border financial flow is not uncommon. It happens in all countries. With globalisation it has become more complex. Recent increase in illicit financial flows (IFFs) has created concern in the development policy discourse around the world. The large amount of money that goes outside the country illegally could otherwise be used for financing development expenditures and social sectors.
The recent estimates of the Global Financial Integrity on IFFs to and from developing countries during 2005-2014 are another revelation on the extent of IFFs in Bangladesh. According to the report Bangladesh has lost an amount that ranges from USD 6 to 9 billion through trade misinvoicing and other unrecorded outflows. More disturbing is the fact that IFF is highest in Bangladesh among the least developed countries.
IFF is not a new phenomenon and we are not discussing the issue for the first time. However, with new information coming in every year we may dig down further to understand the reasons behind such outflows. IFFs can occur in developed countries even with a liberal capital account where foreign currency transfer is not so difficult. The source of the money may be related to drug trading or other illegal businesses. These countries attempt to address the problem through regulatory and high supervisory measures which are of course not foolproof.
The difficulty in stopping IFFs is due to the fact that the inherent nature of money is mobile which cannot be stopped by law. Funds will flow from one place to another as long as it creates more opportunities in terms of higher returns and more safety. This mobility cannot be stopped through the spirit of patriotism. The causes lie somewhere else.
First, the tax regime can play a role in keeping the money inside the country, particularly for investors. Absence of competitive tax discourages potential investors to reinvest their surplus in the country. Second, the political situation plays a very important role in the movement of resources from countries. In Bangladesh political uncertainty associated with political regime change always haunts people. But crony capitalism is not in favour of these changes. The love for hard currency abroad was also clear during the period of the caretaker government in 2007-08. People have become more cautious now. Ilicit capital flight from Bangladesh saw a higher trend since 2007 following the political turmoil of the time. The high trend continues till now as they do not want to face the same situation following a regime change.
The high outflow also indicates people's preferences for a safer life outside the country. As the affordability of a large group of people has increased over time, they purchase property abroad and send their children for higher studies overseas. In many cases mothers accompany the children. Many students, after completion of their studies, find jobs in developed countries and settle down. These Bangladeshis working abroad can legitimately open accounts in foreign banks and purchase property in those countries. There is no issue here. But many take money from Bangladesh to purchase property. How do they do that? The transferred money may not necessarily be ill-gotten or tax-dodged. But they find ways to transfer that out. The transaction cost of transferring the money may be high. So the tax arguments do not fully hold in such cases. Even if tax is reduced, these 'peace-loving' people will still continue to protect their money and their lives. Hence when we argue for flexibility of foreign exchange regime on account of medical treatment and higher education at a limited scale we have to ensure that these groups do not take advantage of such flexibilities. That is of course a challenging task given our capacity to oversee and monitor IFFs.
The problem of IFFs is indeed very difficult to address. As long as there is black money in the economy there will be continuous outflow of money from the country used to buy a second home in Malaysia or open an account in Swiss banks. Moreover, the receiving countries welcome resources, even though global watch on financial flows across border has increased. Thus the IFF-receiving countries also bear responsibility. International collaboration is essential for reducing IFFs. Many countries have now entered into tax information exchange regime to track financial flows. Better disclosure of income from various sources is necessary for such arrangements to work effectively.
In Bangladesh a number of laws exist to prevent financial crimes including IFFs. The Money Laundering Prevention Act, 2012 has expanded the types of reporting agencies required to report suspected transactions. The law has been made stricter and includes provision for fines and imprisonment. The Act was amended in 2015 through an ordinance.
Bangladesh Financial Intelligence Unit has been working under Bangladesh Bank. This unit can nominate other agencies including Anti-Corruption Commission and the police to investigate money laundering cases. National Board of Revenue can probe cases involving customs and the Department of Narcotics Control has the authority to deal with drug-related cases.
These are significant initiatives indeed. The success of these initiatives is, however, still limited. The capacity of various organisations, particularly in case of data mining, analysis and forensic accounting, should be enhanced for better outcome. Capacity development and further digitisation are needed for more effective measures.
The writer is the Executive Director of the Centre for Policy Dialogue.