Capital flight — myths versus realities

Lately, nearly everyone from all shades of opinion is eager to throw in his or her two cents on the highly topical subject of capital flight from Bangladesh. However, most of their thoughts and ideas are far remote from the real world. So are their prescriptions to stem the outflow of money.

Most intriguing is the wide divergence of opinions and estimates regarding the size of the funds siphoned off across our national boundary. For instance, a report in a leading daily in its December 17, 2014 issue says, "the amount of money flown out of Bangladesh……in 2012 stands at $1.78 billion". This is a gross understatement, to say the least. A report, prepared by two economic reporters of a widely circulated daily, draws on a study made by the Global Financial Integrity (GFI), a Washington-based research organisation. I don't know who these people are and the level of their integrity but the amount of $1.78 billion is ludicrously small compared to at least an estimated $15 billion that flies annually to foreign lands. The Financial Express, which has a reputation for accuracy, also picked up this story of the $1.78 billion (New move to contain illicit financial flows, March 19, 2015).

This trio of well-known economic reporters of the two dailies and many others, including learned men from the think tanks, were obviously mesmerised by the high sounding name of the organisation with operational base in the capital of the world's most powerful nation. It epitomises the age-old weakness of blindly putting our trust on anything that comes out from beyond the proverbial seven seas and thirteen rivers. A little probing is called for before swallowing the doctored data thrown in the melee by the research organisations.

Another duo in another Dhaka daily in its August 07, 2014 issue (Bangladesh Bank moves to check hundi system) suggest that different "estimates by the bankers suggest that hundi is being used to facilitate transactions of over $250m annually". I don't know what to make of this number except to rue at the height of ignorance that rules the roost.

To be honest, the secrecy with which transactions in the hundi market is carried out does not lend itself to an accurate estimate of its size. Nevertheless, one can piece together plenty of signs to make an intelligent guess by examining the demand and supply sides of foreign exchange in the free market known variously as kerb market, secondary market, black market, parallel market, hawala market and what is more popular in this country-- hundi market.       

On the demand side, the major outlet for hundi money is without doubt smuggling of goods into Bangladesh. We have a gap -- a very big gap, indeed -- with India in informal trade. The long meandering porous border, notwithstanding the barbed wire fences, is the favourite hunting ground for the burgeoning smuggling community for the flourishing informal trade, which may be almost as big as the formal bilateral trade between the two countries. A study says that 20,000 to 25,000 cattle, worth around $81,000, are thought to be smuggled across the border every day. Food, consumer goods and textiles are the other most popular commodities from India. Recent reports suggest that the inflow of Indian goods is now about $5.0 billion per year. On the other hand, exports from Bangladesh through informal channel is only about half a billion dollar.  

The story does not end with India. It straddles the entire globe. Dubai, for instance, is where we get almost all our gold from, clandestinely of course. It comes in torrents -- all 65 to 70 tons of it. (Tackling the menace of gold smuggling, Syed Ashraf Ali, the Financial Express, April 10, 2014). It costs close  to Tk 200 billion (about $2.56 billion) a year.

Under-invoicing of imports is another variation of smuggling. The merchandise comes through legal channel but at a much reduced invoice price. The reason is simple-dodging a part of import duty and taxes especially in respect of luxury goods attracting high import duty. Another variation is import of luxury goods declaring these as, say, capital machinery that enjoy duty free or low duty access. The difference between the real price and invoice price is sent to the suppliers through free market. The size of the fund flowing away from the country through hundi for under-invoicing is estimated to be anything over $5billion. Referring to a source in the World Bank's Bangladesh outfit, an English daily says that 61 per cent of money in the kerb market is absorbed by under-invoicing.  How much money is whisked away through the hundi system? Swiss National Bank's 2013 Annual Report says that deposits by Bangladeshi citizens at various Swiss banks rose by 62 per cent year-on-year in 2013 bringing the aggregate amount of deposits to 372 million Swiss francs (about $401 million).

Malaysia has turned into a favourite destination for parking black money. The report I last read says that 3,000 bounty hunters have paid the equivalent of at least $81,000 each for buying a property in that country under their Second Home programme. The total outlay on this programme alone is at least $243 million.

Many Bangladesh nationals have obtained permanent residency in the USA, Canada and Australia by investing huge sums of money for investment in business or buying property (New move to contain illicit financial flows, Financial Express, March 19, 2015). The attorneys of those countries hold seminars in the capital's posh hotels to induce these investors. Can you guess who the attendees in these so-called seminars are?

Some $2.0 billion quietly leaves the country through the courtesy of manpower exporters to buy job opportunities abroad. Several studies, including half a dozen or so done by this writer, concluded that nearly Tk. 200,000 is spent for purchase of a job card, known in the Gulf region as 'akama' and for navigating through various channels abroad. The cost is much higher for other countries in Europe and North America.  And there are innumerable boys and girls of ours studying abroad-something like 60,000 in India alone. The queue for visits abroad for medical treatment abroad is also pretty long. These are what the IMF calls current account payments under Article V111. Bangladesh has also put in place a system to allow remittances through banks but the official formalities are rather complex and dilatory and at times expensive. They quietly turn to the free market operators.

If you thought foreign companies operating in Bangladesh are immune from this malaise, you are probably suffering from a delusion. Legions of foreign workers work in the country without permission. They send money through the kerb market. And many multi-national companies transfer money by overpricing the raw material and on the pretext of services provided by the head office.

Mentioning the sources of demand for foreign exchange is easy but the challenge to quantify it in terms of money is not. An easier, though not foolproof, way is examination of the supply side of foreign exchange in the black market.

Supplies come from indenting commission retained abroad by the Bangladeshi agents of foreign suppliers and kickbacks received from them for obtaining award of contracts. One example is the money paid by the foreign suppliers to the account of late Arafat Rahman Koko in Singapore. A small amount gets into the stream through under-invoicing of exports and over-invoicing of imports but, contrary to popular perception, the amounts are not large enough to warrant serious concern. Another source that is not easily discernible is the money sent from abroad through the hundi market to finance terrorism or simply to plant new ideologies. Money allegedly sneaking into Bangladesh to support political parties, especially on the eve of elections, also swell the foreign exchange kitty of the free market operators.

The lion's share of foreign exchange that gets into the hundi market comes from about 7.5 million Bangladesh workers and Diaspora abroad. Several studies, including one done by the World Bank a couple of years ago, suggests that close to 40 per cent of the remittable money of the expatriates is diverted to the hundi market. It means that out of the estimated remittable savings of $25 billion of the expatriates, $15 billion comes via official channels while the remaining $10 billion is parked in the hundi market. To these another $4.0 to 5.0 billion dollar from other sources can be added to account for the total supply in the free market, say $15 billion.

Why money gets into the hundi market? The reason is simple-exchange control, tax evasion and fear of expropriation by the authority. People need foreign exchange for a variety of purposes not recognised by the exchange control authority like investment or buying property abroad or simply parking black money away from the prying eyes of the taxation and other authorities.

     How do they send money abroad? There are many ways of shifting money from Bangladesh. One of the articles the writer fished out from web site says that a building in Chittagong is known as hundi building. They possess the lamp of the kind held by Aladin of Arabian Nights fame. One rub and foreign money goes out or comes in at a speed quicker than Aladin's giant. There must be similar outfits in the capital catering to the needs of the burgeoning group of the capital's fortune hunters.

The writer is a retired central bank official and author of books on banking and foreign exchange. The views expressed are his own and do necessarily reflect those of FE. [email protected]