Flight of capital and economic hemorrhage

This is not the first time that capital flight from Bangladesh has hogged the headline. The news has appeared intermittently with a growing sense of concern as the outflow of money has been almost wholly illegal, barring the infinitesimal amount of what is known in international finance as 'hot money', which is repatriation of capital in portfolio investment by foreign investors. Being legal, there being no lock-in system in force in the stock market, also accounting for a small percentage of total market capitalisation, such transfer raises no ripple in the money market, not to speak of a crushing wave. But almost continuous transfer of capital in an illegal way and in substantial amount has an insidious effect on the economy.
Use of 'transfer of capital' would appear to be inappropriate in the case of Bangladesh as only in the case of export money takes flight physically from the country. This takes place when exporters resort to under-invoicing quoting the prices of imported goods in excess of their actual cost. Before doing this there is collusion between the importers and the foreign suppliers of goods and also perhaps complicity of the correspondent foreign bank. Money legally held by Bangladeshi importers leave the country apparently on legal grounds, on the basis of invoices received by importers from their suppliers and presented by them to the concerned Bangladesh authorities but the amount paid to suppliers over the actual prices of imported goods becomes illegal because it is paid not to cover genuine cost. This amount is sequestered by the foreign supplier in the account of the foreign bank used by the importer. Thus, part of the legal money paid to suppliers becomes illegal and remains off-shore. In case of exports, the illegal capital is not transferred to Bangladesh but to the foreign bank account of Bangladeshi exporters. It is the amount shown in excess of actual value of goods exported by Bangladeshi exporters. The money paid through under-invoicing never reaches Bangladesh and so there is no incidence of 'flight of capital'. Whether there is flight of capital or not, the amount deposited to the account of Bangladeshi importer and exporter is illegal in the eye of law.
Bangladesh has lost between $ 6.0 billion and $ 9.0 billion to illicit 'outflows' (in the broader sense) in 2014 according to Global Financial Integrity (GFI) report. Bangladesh is reported to have lost $ 75 billion due to trade mis-invoicing (over-invoicing and under-invoicing) and other unrecorded outflows between 2005 and 2014, according to the GFI record. The GFI analysed discrepancies between bilateral trade statistics and balance of payments data, as reported to the International Monetary Fund (IMF), to detect flows of capital that were illegally earned, transferred or utilised. Illicit trade outflows ranged from 9.0 to 13 per cent of Bangladesh's total trade amounting $ 70.07 billion in 2014 and 7.0 to 11 per cent due to trade mis-invoicing and 2.0 per cent due to balance of payment leakage (incorrect statements covered euphemistically as 'errors and omissions').
The GFI report, Illicit Financial Flows (IFFs) to and from developing countries: 2005-2014 provides low and high estimates of IFFs. As per the low estimate, $ 6.06 billion moved out of Bangladesh through IFFs. The amount stands at $ 8.97 billion if the high estimate is taken into account. It has been pointed out that the amount of IFFs that took place on the basis of high estimate is large enough to finance three Padma Bridges. Bangladesh ranked 28th out of 150 countries in term of illicit transfer of money in 2014 if the low estimate is taken into account. On the basis of the high estimate the country stands at 21st place. In 2013, the GFI report placed Bangladesh at 26th spot which is better than the figures of 21st. The situation in respect of illicit money outflow is not only continuing unabated, it is getting worse.
Though IFFs take place not only through mis-invoicing but also on account of balance of payments leakages and money laundering, 87 per cent of illicit financial outflows between 2005 and 2014 were due to fraudulent trade mis-invoicing. Preventive measures have to focus on this practice vigorously. The GFI report recommended that policy makers should require multi-lateral companies to publicly disclose their revenues, profits, losses, sales, paid taxes, subsidiaries and staff level on a country-to -country basis. While this complicated and time-consuming method can be used, immediate results can be found if customs authorities compare the prices of goods imported and exported quoted in the invoices with the standard current prices of the same in the international market. Necessary data may be obtained from IMF, World Trade Organisation (WTO), International Trade Centre (ITC) and various international trade organisations as well as national trade bodies. The economic and commercial wings in Bangladesh Embassies abroad can also collect these figures from the market and the trade bodies of the countries concerned. This is part of their routine official work and it is not understood why this channel has not been used regularly by the customs authorities.
Another means of detecting illegal money transfer, particularly through hundi, will be to collect information on Bangladeshis who have bought homes in Malaysia and Canada, two favourite countries of Bangladeshis looking for second home. Here also our embassies can play a leading role.
The problems of trade mis-invoicing and money laundering have been known for quite some time. Though most of the measures that can reduce, if not totally stop, the financial hemorrhage are within the capacity of the concerned authorities of the country, it is puzzling that so little has been done to date. After the latest GFI report and its startling finding about illegal money outflows from Bangladesh and its assigned ranking in the global context there is no room for addressing the problem in a routine manner. As has been suggested by a columnist in an English daily, three committees should be formed, one from the public sector, one comprising representatives from the private sector and the third with international experts. This will facilitate a cross-checking of facts and figures and findings by the three committees that will work independently. It has been estimated that the works of the three committees may cost about Tk 600 million (60 crore) but the financial returns will be many times over. What is more, attacking the root cause will have a sound beginning which will put a break on financial hemorrhage that has become a bane for the economy.
hasnat.hye5@gmail.com