Are we shooting blind?

The finance minister at his post-budget press conference on 10 June exhorted people to appreciate the benefits mainstreaming money laundered abroad may bring for the country. This necessarily means they can ask questions to understand the policy rationale and what can realistically be expected from it.

Recall, the FY23 budget proposes a 15% tax for disclosing immovable property abroad, a 10% tax on movable property if not brought back to the country, and 7% if moved back.

The rationale

The immediate question is whether such a facility is jurisprudential. In other words, what philosophy and expectation underpins this move?

The finance minister explained that the people have a "right" to the assets moved abroad. His cabinet colleague supplemented, "The facility is being given lawfully." The NBR chairman added, "no government agency including the NBR will question" the money. No question, no prosecution, only taxation.

Why do the asset holders deserve such benevolence? The finance minister asserted money moves out of the country for various reasons. "Some money turns illegal because of the bureaucratic system," meaning the administration of capital controls. If it stays behind the closet, "what good will that do for the country?" The government wants to give the laundered money a chance to get out of the closet and, better yet, roll the money back into the Bangladesh economy.

This is the idea. One can disagree. The counter argument being that the policy is a signal to those at the fence to learn how to bypass the bureaucratic system, declare, or bring it back as needed, and be entitled to tax generosity. This is horizontal inequity – those playing by the rules are taxed more than those stretching or breaking the rules. Be that as it may, we all have a right to our own moral philosophy that values horizontal equity differently.

The facts

It may indeed be true that not every dollar which moved was undeclared income or illegally earned. By the same token, all dollars that moved are not clean either, not just in the way they moved but the way the money was accumulated. The perception, backed by evidence from globally compiled data, is that most of it is illicit either because of the path they took to move or tax dodging or corruption.

The GFI defines illicit financial flows as "money that is illegally earned, used or moved and which crosses an international border." The World Bank, IMF, UN, and the OECD use a similar definition. Using the Direction of Trade Statistics dataset from the IMF, the GFI estimated outflow from Bangladesh at $5.9 billion and inflows into Bangladesh $7 million in 2015. Using the Comtrade dataset from the United Nations illicit outflows was estimated at $2.7 billion and inflows $2.8 billion the same year.

The variation in estimates based on data sources is remarkable. DOTS and Comtrade are produced largely independent of one another. DOTS trade flows, reported by countries directly to the IMF, are adjusted by IMF staff for sporadic non-reporting or late reporting using additional data and statistical techniques. The Comtrade database is a compilation of country trade reports with no adjustments by the UN. The coverage of trade flows in the two datasets is also different. However, both suggest the flows pertaining to Bangladesh are sizable and not necessarily a one-way street.

Why would the owners respond?

There is no enforceable way of targeting only clean money to minimise the signalling problem. The authorities therefore have taken the "second best" route to incentivize all money to at least pay some taxes if not return. The billion-dollar question literally is what the motivation behind any kind of response might be.

Why would the owners of such money want to pay taxes without leaving the destination country? Some clues began to surface as the journalists kept pressing for more details. We were told India has put forth a proposal to send back the money that PK Halder syphoned off. The Canadian government has said they will take initiatives to send back the money laundered from Bangladesh. The Canadian authorities are working on preventive measures as well.

If the money is originally clean, the owners have nothing to gain by paying taxes again to the Bangladesh government. They already have NBR's Tax Certificate. What is there to fear unless the money entered the destination country violating their laws?

The issue for the asset holder in such cases is not illegit exit, it is illegal entry. Their problem is conceptually no different from illegal immigration. When such migrants are at risk of getting caught in the destination country and face imprisonment or deportation, we don't offer them a low tax rate either to return voluntarily or to get our diplomatic support to seek compassion from the host government so they can stay legally. We do not do that because our tax policy is irrelevant to the treatment meted to them under the law of the destination country.

If the money is not clean, either because of tax evasion or because of illegal generation, the perceived risk of keeping it as is may be higher now due to tightening noose to catch laundered money. The Criminal Finances Act 2017 of the UK, Money Laundering, Terrorist Financing and Transfer of Funds Regulations of the US and Anti Money Laundering laws of EU are concerning the illicit offshore asset holders. They may want a certification at low cost to mainstream their ill-gotten wealth.

Testing a known unknown?

What gives our tax policy relevance in case of illegally moved white or black money? Does the Indian government decision to send back PK Halder's money depend in any way on the proposed policy? Is the Canadian government's intention to crackdown illicit capital inflows altered in any way by giving legitimacy to assets held abroad without requiring repatriation?

When the destination government has already acted, as in the case of PK Halder in India, or has promised to act, as in the case of Canada, what difference will our policy make to the defence of the asset holders? The answer, which is important for understanding the amount of taxes we can expect to collect, is not obvious.

Leaving aside the relevance question, experience shows the design of the scheme matters. Reference was made to Indonesia, UK, US, and Malaysia. Indonesia offered lower but rising tax rates within a nine-month amnesty window. The UK and US offered amnesty of penalties for tax evasion to money offshored to tax havens if the holders come clean paying regular taxes within a specified period. Malaysia essentially did the same. Taxpayers in all cases were told that penalty rates will be mighty higher after the amnesty period in more ways than one through G2G exchange of information. The offer we have structured has no such features.

What are the likely numbers or is our policy shooting blind? The exuberance of the proponents makes one think they must have a sense of how much assets we are talking about even if we do not know how they moved and in what form they are held. When a journalist quoted a Tk66,000 crore figure from the Global Financial Integrity findings, the response was "we do not have any information of laundering of Tk60, let alone Tk66,000 crore from Bangladesh. But when we get any information, we act against it. Many people in the country have been charged with money laundering, and many are in jail."

We also heard that 95% of the money reported to have been laundered by Bangladeshis and deposited in Swiss banks is brought from other countries. The authorities do not have any information to suspect Bangladeshis have deposited money in Swiss banks after smuggling it out of Bangladesh.

So those who have laundered money are either charged, in jail or there probably is no money worth the mention laundered out of Bangladesh. What then is the policy all about? Are we proposing a solution to a problem that may or may not exist? Is the idea to test what is out there without worrying about the test itself breeding what it is seeking to find?

Are all fronts covered?

The asset holders will be willing to pay taxes without bringing the money if they believe it will somehow make their money safe in its current location abroad. Why will anyone be allured by the 7% tax to repatriate their money? The only conceivable reason is the threat of losing it otherwise. But then why would they prefer the formal route with a tax and not the informal route back with no such tax?

If they do choose the formal route to repatriate the money, there arises a corollary question. Repatriation through the formal route buys safety at home. Could the policy then open doors to financing illicit activities in the domestic economy since the money brought back will not be subject to any question, prosecution, or tracking? Does this not undermine the legal mandate under the Money Laundering Prevention Act 2012 and the Anti-Terrorism Act 2012?

Even if there is no unintended breach of commitment to these laws, the facility surely makes the job of financial intelligence agencies more challenging. We certainly hope possibilities like these have been thought through.