‘Preventing money laundering is simply a matter of political goodwill’

Three individuals from Bangladesh have been implicated in the latest batch of Pandora Papers, taking the tally to 11. The Business Standard spoke to Dr Zahid Hussain, former Lead Economist, the World Bank, Dhaka office, to discuss money laundering and capital flight in Bangladesh.

On 3 May 2022, the final batch of the Pandora Papers was released by the International Consortium of Investigative Journalists (ICIJ). The latest release revealed the names of three more Bangladeshis - Shaheda Begum Shanti, S Hedayet Ullah and S Rumi Saifullah - who have reportedly stashed away their riches in financial safe havens to hide them from taxation and regulatory authorities. 

The ICIJ released the first batch of the Pandora Papers on 3 October 2021 and the second batch on 6 December of the same year. As of now, a total of eleven (11) Bangladeshis have been named in the Pandora Papers.  

While not necessarily illegal in all cases, such evidence of capital flight and money laundering raises many questions, especially in a capital deficient country like Bangladesh, which is in dire need of increased investment in its journey to becoming an upper-middle-income, developing economy. 

The Business Standard spoke to Dr Zahid Hussain, former Lead Economist, the World Bank, Dhaka office to discuss the implication of Bangladeshis being named in the Pandora Papers and capital flight from Bangladesh.

Three more Bangladeshi have been named in the latest release of the Pandora papers. Why are Bangladeshis buying assets abroad? Is this only to dodge taxes? Are there other factors at play? 

As the International Consortium of Investigative Journalists (ICIJ) reported, as of now, there has been no evidence of illegal financial dealings involved in the three cases you mentioned.  That being said, capital flight is an established fact in Bangladesh and many underlying factors influence this phenomenon. Although it might be a factor, it would be unwise and factually incorrect to suggest that the incentive to dodge taxes is the principal driver of capital flight from Bangladesh. 

Illustration: TBS

Why do I say this? Usually, when someone launders money abroad to dodge higher domestic taxes, those funds generally return to the country after being legalised. For instance, someone may invest parts of their earnings or wealth in a company registered in a tax haven to avoid higher taxes. Once that investment becomes legal through registration they should be able to bring that money back to the country without facing too many questions from the regulatory authorities. But as we have seen, in the case of Bangladesh, once the capital takes flight it never returns home.

And there are many hosts for these capitals as well. We have seen that capital from Bangladesh flows out to countries like Thailand, Australia, Canada and even the UK. Just look at Begum Para in Canada. The wealthy Bangladeshis are buying real estate in those regions and these purchases have no relationship with taxation. In my opinion, there are two underlying factors of capital flight in the country.

The first one is corruption. It is risky to store wealth accumulated through corruption within the country whether you save it in banks or hide it in a secret chest or invest in local assets. Because if you are convicted for graft, later on, your wealth will be at risk of being seized as well. That's why wealth accumulated through corruption is often used to purchase assets abroad beyond the jurisdiction of regulatory authorities in Bangladesh.

Secondly, the investment climate in Bangladesh is not particularly hospitable to new investors. Many investors have accumulated vast amounts of legal earnings at their disposal and are looking for opportunities to invest. Unfortunately, such opportunities are rather scarce in the country. Thus instead of leaving their wealth lying around, many of them decide to purchase assets abroad.

However, if I were to compare the two factors, corruption is the principal driver of capital flight in Bangladesh.

Given the high demand for imports, dwindling foreign reserves and remittances inflow, how concerned should we be about capital flight? What are the implications for the economy in terms of inflation, investment and balance of payments? 

According to the Global Financial Integrity report, between 70% and 80% of all capital flight in Bangladesh occurs through trade. The primary method used to do so is over-invoicing, i.e., reporting the value of an import at a level higher than the actual cost. 

Now in the last six months of 2021 and the first four months of 2022, we have observed a surge in import payments from Bangladesh. One reason for this surge might be the volume growth thanks to the post-covid economic recovery. Moreover, higher exports, as well as a rejuvenated domestic economy, also increased the demand for imported raw materials. As the economy recovered from the shock of the Covid-19 pandemic, the domestic consumer demand for imported goods also increased. 

Thanks to the recent spike in the prices of international commodities, import payments from Bangladesh have increased by approximately 45% to 50%. Bangladesh is completely dependent on the import of certain goods such as oil, gas and other imported fuels. The country is also largely dependent on the imports of fertilisers, edible oil, wheat, construction materials like rods, cotton etc. 

During the Covid-19 pandemic, trade channels, travel channels as well as informal channels like Hundi were ineffective and there were fewer opportunities to launder money. But as import payments skyrocket, I wonder whether it is entirely attributable to volume increase since higher volumes of imports allow more opportunities to over-invoice and launder money. 

On top of that, informal channels like the Hundi market were closed during covid. Now they are open. Hence, money laundering through the Hundi market has also reached the pre-Covid level.  The discrepancy between the formal exchange market and the informal market is driving clients to use the informal channels. For instance, a dollar is valued at Tk86.45 in the formal market, while its value ranges from Tk92 to 94 in the informal markets. 

Consequently, the central bank cannot but depreciate the exchange rate. Without adjusting the exchange rate, no deficit correction will be possible. Moreover, it will also limit luxury imports from abroad and ease the pressure on the central bank for import payments. Unfortunately, it will also create an inflationary pressure on the domestic economy as imports will become more expensive for the consumers. 

Does Bangladesh have sufficient infrastructure to prevent financial crimes like over-invoicing and money laundering? What sort of institutional framework should be developed? 

First, we need to think about legal infrastructure. Bangladesh passed the Money Laundering Prevention Act in 2012. It is also a member of the Asia Pacific Group on Money Laundering. There is an anti-money laundering department as well as a financial intelligence unit in Bangladesh Bank (BB). The National Board of Revenue (NBR) also has a central intelligence cell tasked with providing intelligence on money laundering. 

After 9/11, there were global concerns regarding money laundering to finance acts of terrorism. And as part of the global capacity-building initiatives, the government of Bangladesh in cooperation with international organisations like the World Bank trained BB and NBR employees to detect and prevent money laundering. Many initiatives were taken to build institutional capacity, laws were introduced and guidelines were issued. Unfortunately, these initiatives are yet to produce any visible results. 

Even worse, since 2015, the Global Financial Integrity - one of the leading sources of cross-country information on financial crimes and money laundering - stopped reporting money laundering from Bangladesh, primarily due to a lack of cooperation by the authorities to provide said information. However, anecdotal evidence as well as notorious scams by the likes of the Shikder Brothers or PK Halder indicate that not much has changed over the years in terms of preventing the capital flight from the country.

What are the ethical implications for tax havens like the Cayman Islands, British Virgin Island etc to allow laundered money in their banks?

For quite some time, the global community has been debating the ethical implications of tax havens. But it's not only the tax havens. From emerging economies like Malaysia, and India to developed economies like the US, all provide huge tax incentives and other benefits like permanent residency, citizenship etc to investors who bring in large sums of money to their economies. 

This unhealthy competition between countries to attract investment has played a significant role in capital flight from capital deficient countries like Bangladesh, which incidentally also has a poor investment climate and weak institutions. In short, capital flight is a global collective action problem and it would require global cooperation to reach a potent solution.

Thankfully, last year, at least 130 countries in an agreement brokered by the Organisation for Economic Cooperation and Development (OECD) decided on a minimum corporate tax of 15% from 2023 onwards. 

While encouraging, the implementation of this agreement will have to overcome many obstacles. For starters, the signatories have to ratify the agreement in their respective legislatures. And some countries like Ireland are arguing that the 15% minimum tax rate is too high. 

What policies would you recommend to prevent capital flight from Bangladesh?  

The government of Bangladesh has launched many initiatives designed to preclude capital flight from the country. However, there remains the question of the efficiency of the regulatory authorities and the political goodwill to counteract money laundering at its source, i.e., corruption. That is, avenues to earn through corruption, arms and drug dealings, human trafficking and the underground economy must be minimised if not entirely closed off. I believe that our law enforcement agencies are not as inefficient as usually presumed. Preventing money laundering is simply a matter of political goodwill.