Capital flight: Anti-money laundering regulations need to be strongly enforced

Capital flight through money laundering and other means in Bangladesh has been in the news for quite sometime. The Bangladesh Bank has issued circulars to banks from time to time to stop this rot that undermines the economy. The ministry of finance has also framed rules and regulations to thwart the moves of those who resort to money laundering and capital flight. It is not known how successful have been these measures.
Money earned by the nationals of a country should remain within its borders either as savings kept in banks or financial institutions and as investment. When this does not happen and money is illegally kept abroad in banks or invested in various forms capital flight is said to take place. This phenomenon is common to both developed and developing countries. In the case of developed countries, capital flight takes place mostly to evade taxes. There are a number of safe havens where black money is not taxed nor any question asked about their source. For developing countries also tax evasion works as an incentive. Along side this safety and security of black money beyond the reach of authorities contribute to this practice. Political instability creating uncertainty also plays a role. In Bangladesh all these factors are responsible for money laundering and capital flight. The growing volume of black money amassed in recent years has given a fillip to this illegal activity.
The illicit outflows of funds ate away 1.1 per cent of Bangladesh's GDP (gross domestic product) according to the report 'Illicit Financial Flows and Development Indices 2008-2012' released recently by the Global Financial Integrity (GFI), a Washington-based think tank. Illicit outflows of funds from Bangladesh equal 38.5 per cent of the combined official development assistance (ODA) and foreign investment the country received between 2008 and 2012, according to the study.
As a result of the capital flight the per capita loss stood at $6.84. The loss could fund 58.9 per cent of the country's education spending or 30.1 per cent of health spending. The loss due to capital flight amounts to 12.1 per cent of the total revenue of the country, according to the study that covered 82 countries.
It has been estimated that on average $1.31 billion was taken out of the country a year between 2003 and 2012. According to a recent report, Bangladeshi citizens' deposits with various Swiss banks rose by 36.02 per cent year-on-year in 2014. The amount went up to 5006 million Swiss francs last year from 372 million francs in the previous year, according to the latest data of Swiss National Bank. The present report, the latest in a series by GFI, provides a comparison of illicit financial flows from some of the world's poorest nations and compares those values to some traditional indicators of development. The indicators include GDP, total trade, official developments assistance plus foreign direct investment, public expenditure on education and health services and total tax revenue among others. The ratio of illicit financial flows to a country's tax base demonstrates the opportunity cost of capital flight.
Domestic spending on fundamental sectors such as education and health are often overshadowed by the amount of illicit money flowing out of the country. With it is associated the domestic resources that could be mobilised to address basic human needs.
Of the 82 countries, 40 per cent had capital outflows that exceeded spending on education. A similar percentage represented illicit outflows surpassing health expenditure.
According to the GFI report there is an inverse relationship between illegal outflows of funds and a country's ranking on the UN Human Development Report. When illicit flows are high a country's development score tends to be low. Bangladesh has fared worse on account of this in the human development ranking. This negative relationship is caused by a significant loss of domestic resources as tax that could have been collected by the government or capital that could have been utilised by the economy if flight of capital did not take place through trade over invoicing or other means of money laundering.
The study has found strong connection between high levels of capital flight and prevalence of poverty. A plotting of illicit outflows against the number of people living on $1.25 per day and those living on $2.0 per day shows that in case of high capital flight poverty rates are high at both levels.
The GFI report said that in many countries the factors that are associated with nascent economies, e.g., trade, foreign investment, development assistance and tax revenue are often undermined by illicit flows.
The GFI report has called for combined action by authorities at international levels to assist countries that have high levels of illicit capital flight. It has also recommended to help those countries that have high percentages of their economy affected by the phenomenon. It has pointed out that special focus should be made on tackling trade over-invoicing which accounts for the vast majority of illicit outflows as well as on mitigating the opacity in the global financial system. Among other recommendations made is the adoption of clear and concise sustainable development goals to reduce by half the trade-related illicit financial flows by 2030.
The report has exhorted countries to significantly boost their customs enforcement by equipping and training officers to better detect malpractices in trade transactions. Regulators and law-enforcement authorities should ensure that all of the anti-money laundering regulations which are in force are strongly enforced. About 61 per cent of the capital flight from Bangladesh takes place through over-invoicing in trade transactions. With this information it should not be difficult for customs officials to curb the illegal practice.  
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