Illegal capital flight from Bangladesh surged 33.78 percent year-on-year to $9.66 billion in 2013 through trade misinvoicing and other channels, according to a report of Global Financial Integrity.
The highest in a decade, the amount was more than six percent of the country’s GDP and one-third of the export receipts in 2013. It is three times the size of average foreign direct investment Bangladesh received in recent times.
Analysts attribute the surge of illegal capital outflow to political violence and uncertainty that the country saw throughout 2013, particularly in the run-up to the parliamentary elections on January 5 last year.
Of the amount, $8.35 billion or over 86 percent was siphoned off through trade misinvoicing while the rest $1.31 billion could not be traced in the balance of payments data.
The illegal outflow stood at $7.23 billion in 2012, according to a revised estimate of the GFI report.
The Washington-based research and advisory organisation published the report titled “Illegal Financial Flows from Developing Countries: 2004-2013″ on Wednesday.
On average, $5.59 billion was siphoned out of Bangladesh a year between 2004 and 2013.
This high amount of illegal capital outflow puts Bangladesh at 26th position among 149 countries in the latest GFI ranking of economies exporting illegal capital. Bangladesh was ranked 51st on the previous list.
In the decade covered by the study, Bangladesh lost $55.88 billion in total because of trade misinvoicing and other unrecorded flows.
Trade misinvoicing is defined as a method for moving money illegally across borders that involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs.
The GFI report shows that the illegal capital outflow from Bangladesh tripled in 2013 from $3.35 billion in 2004.
It was mainly because the country witnessed political violence in 2013 centring the national polls. Besides, the rule of law deteriorated and investment dipped in that year, according to analysts.
Illegal capital flight also rose by 57 percent year-on-year to $6.4 billion ahead of the December 2008 national polls when the then caretaker government launched an anti-corruption drive.
According to the GFI, illegal financial flows are illegal movements of money or capital from one country to another. The organisation classifies this movement as an illegal flow when the funds are illegally earned, transferred or utilised.
While conducting the study, the authors analysed discrepancies in balance of payments data and trade statistics, as reported to the International Monetary Fund, to detect flows of capital that are illegally earned, transferred or utilised.
Since the GFI’s annual update in 2014, the existing methodology has been refined to provide a more precise trade misinvoicing calculation for a greater number of countries.
In case of many countries, the change in methodology has led to a significant upward revision of illegal flow estimates compared to those in previous GFI reports.
According to the GFI, measurable illegal flows stem from two sources: trade misinvoicing and other unrecorded flows.
Trade misinvoicing takes into account export under-invoicing and import over-invoicing, while a second source of illegal flows includes leaks from the balance of payments system.
The report found that Illegal financial flows from developing and emerging economies surged to $1.1 trillion in 2013, marking a dramatic increase from 2004 when illegal outflows totalled $465 billion.
China, Russia, Mexico, India and Malaysia were some of the biggest exporters of illegal capital over the decade.
“This study clearly demonstrates that illegal financial flows are the most damaging economic problem faced by the world’s developing and emerging economies,” GFI President Raymond Baker said in a statement.
Zahid Hussain, lead economist at the World Bank country office in Dhaka, said the good news is Bangladesh is not among the top 20 countries in terms of the size of illegal outflows.
But the bad news is Bangladesh is among the top 30 countries, and this is mainly because of the change in methodology for computing illegal outflows, he said.
The change, however, has helped project a better picture of the illegal outflows from Bangladesh, said Zahid.
“In other words, illegal outflows used to be heavily underestimated in the case of Bangladesh.”
The macroeconomist said a major concern is the increase in the size of illegal outflows which rose by almost 79 percent in only three years.
According to Zahid, political instability, corruption and weak domestic investment climate are the main contributory factors.
He said Bangladesh has adopted many of the anti-money laundering recommendations by the Financial Action Task Force. Both Bangladesh Bank and the National Board of Revenue have been investing in strengthening capacity to better detect intentional misinvoicing of trade transactions.
“Addressing corruption is the most daunting challenge. Corruption and illegal outflows go hand in hand. It will be very difficult to arrest illegal outflows without having success in anti-corruption efforts,” he told The Daily Star.
Moinul Islam, professor of economics at Chittagong University, said capital flight is increasing day by day, as businessmen and politicians are laundering money in large amounts.
“Much of the money swindled through recent scams at banks also went out of the country. Many business groups have made investments outside the country by taking money abroad through trade misinvoicing as well as hundi.”
AB Mirza Azizul Islam, former adviser to a caretaker government, said the 2013 figure of illegal capital outflow from Bangladesh seemed exaggerated.
“But it is true that illegal capital flight has gone up in recent years. Though some people claim there is no investment climate in the country, capital machinery imports are going up by 25-30 percent whereas import of raw materials is increasing by 2-3 percent. The two do not match.”
Many might have laundered money out of the country because of prolonged political uncertainty and deterioration in law and order, he added.
In South Asia, illegal capital outflow also went up in Pakistan, Sri Lanka and the Maldives.
In case of India, which ranked fourth in the GFI ranking, it went down to $83.01 billion from $92.88 billion in 2012.
The report recommends that world leaders focus on curbing opacity in the global financial system, which facilitates these outflows.
GFI maintains governments should establish public registries of verified beneficial ownership information on all legal entities, and all banks should know the true beneficial owner of any account opened in their financial institutions.
Governments should adopt and fully implement all anti-money laundering recommendations by the Financial Action Task Force’s and the laws already in place should be strongly enforced, it said.
Policymakers should require multinational companies to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis, said GFI in its recommendations.
Source: The Daily Star
