Capital flight is a reality in most of the developing countries including Bangladesh. There is, however, a misperception that capital flight is always harmful and illegal. That's why the term 'capital flight' is sometimes used by many to mean 'illicit financial flow.' The fact is that capital flight may be both legal and illegal. Though there is no universally accepted definition, `a large-scale exodus of financial assets and capital' from one country to another country is generally acknowledged as capital flight.
It is also not easy to determine the amount of capital flight from a country during a certain period due to different modes and estimates of capital flight. When foreign investors from a country repatriate their profit to home countries, it is a legal capital flight through the formal banking channel. When an individual or entity transfers tax-evaded income even through formal banking channel, it is illegal capital flight, and although transferred through formal channel, it may not be possible to indentify it as capital flight or trace the real transferor of the financial asset.
It is easy to manipulate the formal channel for illegal capital flight in a country like Bangladesh where financial governance is weak. A number of indirect or proxy indicators may, however, provide an idea about the extent of illegal capital flight.
DEPOSITS IN SWISS BANKS: Bangladesh-linked fund in different banks in Switzerland is such an indicator. Over the years, Bangladesh-linked deposits in the Swiss banks have become a matter of discussion. The latest figure, revealed last month, showed that the sum of Bangladesh-linked funds in the banks of Switzerland declined modestly in 2019 to CHF (Swiss Franc) 613.27 million or Tk 54.76 billion, a drop of 1.49 per cent from CHF 622.55 or Tk 55.59 billion in 2018.
Every year, the Swiss National Bank (SNB) releases its annual report titled 'Banks in Switzerland 2019' which also provides the data on the money held by different nationals and entities. Though the SNB statistics do not say anything about the nature of the money, the popular perception is that a major portion of the money deposited in the Swiss banks is either black money or money stashed from different countries.
Policymakers and regulators in Bangladesh, however, seem perplexed about the Swiss banks' deposits. It is reflected in different comments and explanations on the Bangladesh-linked money in Swiss banks. Sometime they say tough action would be taken against those who stashed money in Switzerland, one of the largest tax havens in the world. Again, sometimes they say that the government would take steps to bring back the money from Swiss banks. Nothing happened so far. Bangladesh Bank also said that it would take initiatives to discuss with the Swiss central bank on exchange of information. Interestingly, Bangladesh Bank come-up with an analysis of Bangladesh-linked money in Swiss banks in 2016. It prepared a explanatory note which said that around 10.0 per cent of such deposits were accounted for individual clients while rest of the amount is deposited by banks for trade transaction purpose. Thus, according to Bangladesh Bank, there is very little amount of money actually stashed away from Bangladesh.
Though this explanation has some merits, the central bank needs to do more exercise. For instance, it may analyse the 'locational banking statistics' available with the Bank for International Settlement (BIS). This scribe tried to go through the BIS data and find that Bangladesh-link fund in Swiss banks (non-banks or individual) came down to US$ 63.0 million in 2019 from $83.0 million in 2018 and $97.0 million in 2017. The figure is, however, outstanding or stock at the end of the period and may not provide complete picture. Nevertheless, the finance ministry and central bank need to do a comprehensive exercise in this regard to obtain a clear picture. It is to be noted that Bangladesh-linked clients of the Swiss banks may also deposit money in the name of shadow entities or shell companies.
OUTWARD FDI: Outward foreign direct investment (FDI) is also considered as a kind of capital flight which is legal. When entrepreneurs and businessmen of any country move to invest abroad by transferring their capital and financial assets to other countries to set up a venture or unit, it is outward FDI for the first country or the country of origin. According to the latest World Investment Report (WIR 2020), prepared and released by United Nations Conference on Trade and Development (UNCTAD), global outward FDI or FDI outflows was recorded at US$1.31 trillion in 2019 while the inward FDI or FDI inflows stood at $1.54 trillion. Ideally, the amount of global inward and outward FDI should be equal though there remains a mismatch due to underreporting or non-reporting of outward FDI by some countries. UNCTAD received inward FDI data from 174 countries and outward FDI data from 143 countries for the report.
In Bangladesh, like other developing countries, it is the inward FDI that always get importance. Outward FDI, however, also drew attention in recent years mainly due to the consideration on capital flight. The amount of outward FDI from Bangladesh is still very small compared to inward FDI. The UNCTAD report showed that in the last year (2019) there was actually negative outward FDI. In the country, the highest amount of net outward FDI was recorded at $142 million in 2017. Interestingly, Bangladesh Bank doesn't release outward FDI data regularly although it publishes survey-based half-yearly inward FDI data in detail. It was in 2015 when Bangladesh Bank last released outward FDI data. It, however, furnishes a summary data of outward FDI to UNCTAD for the WIR. It is difficult to understand why the central bank is not unveiling outward FDI statistics. By not releasing this, it simply widens the scope of speculation and misunderstanding on capital flight.
Bangladesh Bank defines outward FDI as direct investment abroad which includes 'assets and liabilities transferred between resident direct investors and their direct investment enterprises.' It also includes 'transfers of assets and liabilities between resident and non-resident fellow enterprises', provided that the eventual 'controlling parent is resident'. The definition follows the definition set by the International Monetary Fund (IMF) in its Balance of Payments Manual (BOPM).
In this definition, residents mean 'all individuals, households, enterprises or other organisations operating in Bangladesh, regardless of whether they are citizens of the country or not, and/or are owned by Bangladeshi citizens or foreigners.' It is because these 'units have their centres of economic interest' in the country. Branches, subsidiaries and affiliates of foreign banks and enterprises operating in Bangladesh and persons who normally live in Bangladesh for one year or more are considered Bangladeshi residents irrespective of their citizenship.
Whatever the definitions and parameters of outward FDI are, it is the data transparency that matters most, especially when the country is gradually easing the capital control by allowing Bangladesh-based entities to invest abroad. As the capital account is not convertible, anyone or any entity wishing to invest abroad needs to take prior approval of the central bank. Over the years, a number of entities have got the approval to invest in other countries. Despite allowing direct invest abroad on case-to-case basis, neither the annual report of Bangladesh Bank, nor any other relevant publication mentions anything in this regard.
Though the detailed balance of payments report, published annually, includes the outward FDI, it is not possible to derive the amount of outward FDI from the report as it requires very intricate statistical exercise. Thus, it is time for Bangladesh Bank to release the amount of recorded outward FDI on a quarterly or half-yearly basis to make the matter transparent. Data transparency will be a helpful tool to fight illegal capital flight.
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