Mushtaq Khan, Professor of Economics at School of African and Oriental Studies (SOAS), University of London is a leading thinker on corruption, rent seeking, economic development and political settlements.
He is the Executive Director of Anti-Corruption Evidence (ACE) research consortium led by SOAS that addresses the challenges corruption affected people and economies face and generates evidence that make anti-corruption real and provides strategic assistance to policymakers, business and civil society to combat corruption.
Recently, in an interview with The Business Standard, Mushtaq talked on money laundering, corruption and how these should be addressed in a developing country like Bangladesh.
TBS: Following the declaration of the budget for the fiscal year 2021-22, the Finance Minister of Bangladesh came under fire for saying in parliament that he did not have a list of money launderers. He also earlier said that the controversial provision to allow people to 'whiten black money' may continue in the current fiscal year as well. Bangladesh has been grappling with the issue of money laundering and black money for a number of years now. How do you look at the issue?
Mushtaq Khan (MK): Black money can mean many things. When we try to define it, we often mix up a lot of things, which often changes its meaning.
In a developing country, black money exists for many reasons. One could be that a number of transactions take place where tax isn't paid on time. For example, if you sell a piece of land or you were involved in a transaction and did not pay taxes in due time, it becomes black.
If you want to use the money, you have to whiten it first. You can do it legally if the government provides amnesty to people when they declare it and pay back taxes. You can however whiten your money illegally as well. People sometimes bribe banks to whiten money to evade taxes.
However, when someone has failed to pay tax on time, but pays eventually, that is a crime but not a comparatively big crime.
However, in more extreme cases, a criminal could steal or extort someone's money forcibly and can then whiten it - be it through government amnesty or bribing banks illegally. This is a way bigger crime and has hugely more damaging consequences for society.
When we use the same parameter to judge both crimes, that is when the problem starts.
It really is not a very major issue if someone has paid tax earlier or later. Of course people should pay tax on time, and if the government provides them amnesty to pay their taxes, there is no reason to object to that. They may learn the lesson and pay taxes on time later.
But if we provide scope for corruptly earned money to be legalised through a fine or penalty, that is when serious problems arise. When the government provides amnesty to tax delayers, criminals who acquired money illegally can also whiten their money unless great care is taken in determining what type of funds can be whitened.
Sending legally earned income abroad illegally is completely different from sending illegal finance abroad. Again, both are counted as illicit financial flows. But sometimes people with legal money need to take some out for emergencies or because they are losing faith in political stability. You can deal with the first differently to create confidence or allow some legal transfers. But you really should not let corrupt people take their money out of the country.
You have to use criminal proceedings to stop that.
TBS: Why do you think money laundering is so rampant now?
The reason why more incidents of money laundering take place in developing countries is that rich investors often do not feel secure in these countries. At the same time, those who accumulated their wealth through illegal ways are sending their money abroad.
When the political situation of a developing country worsens, rich people feel insecure to keep their money there, even if it is earned legally. This can lead to transfer of legally earned money to other countries through illegal means. This is a type of money laundering as well. But in parallel there is also a transfer of illegally earned money out using illegal processes. That is completely different.
The problem in developing countries is that there is no check and balance. People who have power for financial, political or bureaucratic reasons and tend to violate rules. When powerful people violate rules, it becomes more difficult to regulate unless other powerful people oppose.
TBS: Are the existing laws insufficient to stop money laundering?
You have to understand that you really cannot stop money laundering or corruption just by enacting laws. Those who are breaking laws are powerful in many aspects. How will a law simply stop laundering when powerful people are the major rule breakers?
You have to dig deeper. You have to figure out the ways these people break the laws and why. How are they laundering money and is it because of insecurity of legal investors or the insecurity of criminals? And what are the routes through which they are laundering? You have to do some primary research.
Also, you cannot stop all these at the same time. A developing country cannot establish a rule of law overnight. It will happen, but slowly and gradually. You have to first figure out which problems have immediate remedies.
One way to stop this is by identifying powerful groups who are hurt by specific types of corruption or laundering and making them your allies in this fight.
When two powerful groups are in conflict, and one is affected by another, for the sake of their own interest, the affected party will try to enforce the relevant rules. You have to find these people out first. For instance, when there is smuggling, some local industries are hurt, and they are the most powerful voice in putting pressure to stop the smuggling. We need to organise these forces much better.
If all the powerful groups join together to steal we really cannot do much immediately. But there are many types of corruption where one party is affected by the other. A group of tax evaders may harm other legitimate businesses. The latter need to be identified and become a pressure group.
We have to find and develop these coalitions.
Here in ACE we find many examples like this in our research. Journalists and analysts need to identify the affected powerful groups, and the ways they are affected by the corruption of other powerful groups.
TBS: Talking about money laundering also inevitably brings up corruption. As Bangladesh will graduate from LDC and we also have to achieve the SDGs, how do you think corruption is an obstacle here? Why are we failing to reduce it?
When powerful and productive industries and interests grow in society, they themselves will be an important part of the checks and balances that a rule of law requires. At some point the competing interests of the powerful ensure that they support equal treatment before the law and then and only then everyone becomes equal before the law. Historically, that generally begins to happen when the per capita income of a country reaches around $8,000-10,000 because by then you have a diverse and productive economy (unless you are an oil economy which can have high incomes without a diversity of interests).
The problem is for countries like ours that are still in transition. Here we have to target specific types of corruption and find coalitions to limit the damage. For instance, if corruption takes the form of taking loans from banks and not repaying, then development cannot be sustained. There will eventually be a banking collapse and productive investments will be low in the meantime.
If we want to keep up the growth rate, we need to address the mismanagement in the banking sector.
From a political perspective, there are some forms of corruption that are really difficult to reduce when your per capita income is low. If we say we want zero tolerance to corruption, this will not be practical. But we can target the really damaging types, particularly those where powerful interests are also adversely affected. This includes the banking sector.
TBS: So what are the next steps?
We have already come a long way. The journey will be more difficult in the coming days. Our labour intensive RMG sector brought significant changes to the Bangladesh economy. In the next step, we have to go for skill intensive investments. We need to step into more capital and skill intensive sectors, and businessmen will have to abide by laws there.
If you do not follow standards like environmental and labour laws or building regulations, you cannot protect your brand in the international market. Long term investment is necessary as well. In this regard, you will have to abide by some critical rules if you want to attract investors and maintain buyers. Investors and buyers will abandon you if you are a rule breaker in critical areas.
So, in this stage, you have to focus on some specific types of corruption. Unless these types of corruption are removed, you cannot engage in the more difficult investments that we need right now.
There are a lot of international examples on how countries eliminate corruption by creating appropriate coalitions. This is a political issue, but not party politics. It is political in the sense that a coalition of powerful people needs to be created here - industrialists, businesspeople, investors, banks, exporters, buyers and other stakeholders. You have to create a coalition who will want rule enforcement in that area not for the sake of the country but for their own interest. That is when it starts to work.
There is no example in history that creating a commission reduced corruption. History tells us that you have to bring changes sector by sector, problem by problem, through coalitions.
Bangladesh has already reached that stage. We are already experiencing situations where if business organisations do not themselves find solutions to enforcing building regulations, environment and financial regulations, they cannot achieve further success.
TBS: What do you think is holding us back?
There will always be people who will earn money through unfair means no matter what. We cannot always directly stop them from doing that, especially if they are very powerful. But what we can do is create a situation where earning money through unfair means goes against their own interest.
A developing country has many types of companies. Some achieve international standards, while some have such low capacity that even if they want to follow rules, they cannot, because they have little capital or skills. In economic terms we call them the informal sector. In countries like Bangladesh, around 80% of the economy is in the informal sector. What rules do you want them to follow?
If I go to a street vendor and ask him to follow rules, he will either end up starving, or he will offer me a bribe. It is beyond his capacity to follow rules. So, we should not immediately start by enforcing all rules on everyone. Corruption can increase if you try to make people follow rules who have no capacity yet. We have to first build their capacity. We should focus on people who already have the capacity to follow rules.
We think a small group of people are breaking the rules in our country and we will find them with torchlights of transparency. This is a totally wrong concept. Ninety percent of people are breaking laws in our country. Some are doing it deliberately; some cannot help but break it. In a low income country, even if you want to abide by rules you cannot do it.
So, a general solution like creating a commission will not help because most people will not give true evidence. We will have to come to that stage when 99% of people have nothing to hide. Till then general enforcement of all rules will not help. At this stage, we have to solve problems first and focus on anti-corruption enforcement in critical areas where the enforcement is aligned with the interests of most people in that activity.
When people have the capacity to follow all rules, a small fraction will remain corrupt no matter what. These people should always be the real target of anti-corruption. When most people are following rules, they can be targeted by an anti-corruption commission and transparency and accountability will work. Everyone will come to give evidence. But at our current stage we have to directly target the bad eggs by constructing coalitions of interest.