The missing 'political will' to rein in money laundering
On the last day of October, Bangladesh Financial Intelligence Unit (BFIU) published its annual report revealing that suspicious transactions and activities mostly through banking channels have increased by 62%.
The anti-money laundering agency found documents that had been over-invoiced by 20 to 200%, during the 2021-22 fiscal year. The findings of the report come at a time when the country is suffering from gradual depletion of its forex reserves.
The Business Standard talked to Zahid Hussain, former lead economist at the World Bank, Dhaka office, and Ahsan H Mansur, executive director at Policy Research Institute, to understand the implications of the BFIU report.
"Without punitive action, data release only has academic value"
Zahid Hussain, former lead economist of World Bank's Dhaka office
BFIU's annual report says there were suspicious trades through over-invoicing. It is 'suspicious' in the sense that the suspicious transaction reports (STR) are yet to be proved.
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BFIU provides the data to law enforcement authorities to investigate whether the allegations of money laundering are right or wrong.
We know that the lion's share of the laundered money is transacted by import over-invoice. Hence, stopping over-invoicing is crucial to check money laundering.
How do you restrict over-invoicing? We know that products traded internationally have individual HS (harmonised system) codes. The product price during the time of contract signing must be mentioned in the invoice documents. When the invoices are submitted to the National Board of Revenue (NBR), it is possible to cross-check the prices to find out whether they are realistic or exaggerated. There can be minimal differences, depending on seller-to-seller and country-to-country contracts. But huge differences can be detected while processing the submitted documents. And that is the right time to ask for an explanation from importers about any exaggeration, and the authority can then stop the transaction if necessary.
Earlier, there was a pre-shipment inspection system by third parties. NBR scrapped the option as some problems arose in it. Still, Bangladesh can verify the price [mentioned in the invoice] with the help of Bangladeshi missions abroad. There are designated officials in the mission who can collect price data from the customs of the exporting country and the suppliers. Moreover, there are websites that post international commodity prices.
Lastly, there is the Washington-based think tank, Global Financial Integrity (GFI), that publishes country-wise reports annually. Why don't the government officials take ideas from the GFI report? The GFI experts are experienced and they clearly mention what methods they have applied to prepare their report.
GFI monitors international trades from both ends. It looks at the value of import invoice and the customs documents of exporting countries. GFI identifies the outflow or inflow by comparing the export-import documents.
Surprisingly, the BFIU officials have said that the GFI report lacks credibility. It is noteworthy that we don't find GFI analysis on Bangladesh since 2016. Why? Because, Bangladesh has stopped providing data to GFI.
I would like to suggest the officials concerned take visible actions and show results, instead of only saying that the number of suspicious transactions has been increasing over the years.
Who is facilitating outflows? Presumably, over-invoicing is done to syphon off a big amount of money. Does the government not know who the big shots are? It does. If you can recognise the parties and identify the malpractice, why don't you take action?
If the money launderers are spared from punitive actions, data release about the trend will only carry academic value. Journalists will report and economists will provide their opinions. That's all. Because, if the money is laundered, it will be tough to bring it back.
To change the trend, political will is crucial. Legal action against the exposed crimes [of money laundering] should be visible to all. Unfortunately, we have not yet seen such preventive measures.
'Money laundering increases in times of political unpredictability and economic downturn'
Ahsan H Mansur, Executive director at Policy Research Institute of Bangladesh
Money laundering increases in times of both political unpredictability and the economic downturn. Elections for the national parliament are coming up, and money laundering will rise as a result.
'Who will save me if there is a change of government? I best start saving money in order to get by' - that is the psychology at play here.
In general, money laundering occurs for a variety of reasons. One of them is a nation's long-term economic prospects, which relate to the next generation.
My money will automatically be invested overseas if my children reside there. Most kids who receive their education overseas do not return home. Therefore, parents usually want to save money and move to the country where their children are residing. This is their choice, and you cannot halt this through administrative action.
The second reason for money laundering is corruption. Any country with a high level of corruption also generates opportunities for money laundering, which are impossible to prevent through administrative measures.
Money laundering takes place through over-invoicing and under-invoicing (an invoice with a listed price that is higher or lower than what a company actually intends to charge a client). You can stop over-invoicing if the valuation department of the customs department works efficiently. Thanks to technology, we can find out the actual pricing on the Internet. And through an investigation, one can be made to face consequences if over-invoicing is uncovered.
But unfortunately we don't follow these steps; over here, bribing talks. When I am over-invoicing some order, I will have to pay a higher customs duty. But one can reduce the duty paid through unauthorised transactions of money, aka bribing. This way, my money gets out of the country and on top of that, I didn't have to pay proper customs duty. Over-invoicing would have decreased if taxation operated as intended.
On the other hand, under-invoicing is simpler. For instance, I might order goods for Tk100, but on documents, I might put it as Tk70. In this approach, I can avoid negotiating a backroom deal with the tax department.
Of course, in order to combat corruption and the underground economy, political goodwill is required. However, in practice, this is very challenging because the government's departments of customs, taxes, and police are themselves involved in corruption and money laundering. It might have succeeded if the most powerful politicians were sincere and willing to reform, but we haven't witnessed that yet.
Another tool for money laundering is hundi. In this case, the dollar doesn't have to come to the country at all. For instance, a foreign resident Bangladeshi wants to transfer Tk2 crore to his family in a Bangladeshi village. When he transfers it through hundi, the local agent gives the family Tk2 crores in Bangladeshi money, and the dollar is then laundered to another nation. This entire transaction is taking place without touching Bangladesh's soil or any of its systems.
This is one of the main causes of the current foreign exchange and remittance crises.
Although we have laws and regulations, neither is applied nor followed. Unfortunately, the laws won't be upheld because of how serious and profoundly corrupted the system is.
