Causes, consequences and remedies against money laundering
by Ikhtiar Mohammad
A report by the central bank of Switzerland claims that the total deposit by Bangladeshi citizens in various Swiss banks totalled Tk 5,566 crore in 2016, which was Tk 4,417 in 2015, a 19 per cent increase in deposits over one year. There are speculations that foreign deposits usually increase prior to national elections out of fear and concern.
Every year on an average Bangladeshis are laundering around USD 6.5 billion out of their country.
In between 2005-2014, Bangladesh lost USD 75 billion due to trade misinvoicing and other unrecorded outflows.
According to a UN report in 2010, annually, more than 30 per cent of Bangladesh’s GDP go out of the country.
Bangladesh is now the third largest source of foreign remittance for India. Thousands of Indian executives work in Bangladesh — most of them illegally — and remit billions of dollars to India. It is interesting, neither the government nor the intelligentsia in Bangladesh seem worried about it, at all.
Ironically, someone has commented in social media that plundered money is now the second most important export item — after readymade garments — from Bangladesh. Unfortunately, it happens to be true.
In simple words, money laundering contains all activities to make the illegally earned money legal through legitimate banking channel or business transactions. It involves transfer of money taking a long path to make it legitimate in the legal source so that the origin of this money is laundered or remain concealed.
Dynamic and ever evolving, the process of money laundering is accomplished into three stages: placement, layering and integration. Placement is the first stage of the process which brings the illegal earnings into the financial system. In the second stage, known as layering, the money is moved or transferred into the financial system through multiple transactions so that its authentic origin can be hidden. The last stage is integration though which the illegal money appears legitimate in the financial system.
The fundamental cause of money laundering in any country is the evasion of tax. Same holds true for Bangladesh as well. As the source of earning this money is illegal, for example, drugs dealing, human trafficking, smuggling, bribery, gambling etc., the earner always tries to make the source remain covered with the flavour of legitimate business. Hence, to protect the illegally earned money from confiscation is another reason for money laundering.
In Bangladesh, the prime cause of money laundering is lack of political transparency and good governance which has created and encouraged corruption in all sectors of the society. The second reason is huge informal employment and unimaginably high informal transaction in the economy that left lots of undefined sources. Lastly, political instability or pseudo stability is a major concern for the riches that somehow compel them to look for external destination.
The implications of money laundering for a developing country such as Bangladesh are colossal. Money laundering diminishes government tax revenue. It leads to misallocation of resources and transfers economic power from the market, government, and citizens to criminals. It has severe social and political costs as laundered money may be used to corrupt national institutions. Reputation and trust of the financial institutions are being tarnished by involvement with money laundering.
The major consequence is extra burden on the middle class and honest formal sector tax payers whose tax burden is swelling rapidly. The vacuum of private sector investment is another major outcome of money laundering in Bangladesh.
Money laundering causes hike in price level, which triggers inflation. Gini coefficient, represents the income or wealth distribution of a nation’s residents, and is the most commonly used measure of inequality, will go higher if small part of the society holds significant portion of money of the economy.
If money is remitted to foreign country, then definitely a blow is delivered to the national reserve. Money laundering accelerates crime and illegal activity. When cost of committing crime decreases then the quantity of crime increases and vice versa, and equilibrium is created in the market when the marginal revenue (crime opportunity) and marginal cost (cost of committing crimes) equate.
Therefore, no overnight solution exists for money laundering. The definition of money laundering should scrutinise the informal transactions carefully and bring all of them under tax bracket so that the earners impel to abide by law. Good governance in the tax administration is also a prime factor to stop money laundering.
Specifically, some measures should be applied to control this crime. The government should make a strong string of financial intelligence wing in the financial sectors. The policing to unearth the crime should be intensified so that the origin of crime is contained. The government, therefore, should give some exemplary punishments to those once identified with money laundering and scrutinise the life style of suspected people. In different wings of National Board of Revenue — income tax, customs etc — experts having specialised knowledge of business, criminology and law should be appointed. In Criminal Investigation Department, Anti-Corruption Commission and Comptroller and Auditor General office, the personnel appointed should have specialised knowledge in forensic accounting, at least they should have business educational background. Furthermore, the customs authority need to be vigilant and monitor that both import and export shipments are sticking to the quantities mentioned in their Letter of Credits and both parties concerned paying the right amount of duties and taxes to the government. In addition, the banks need to check that the prices quoted by importers for their goods in their LCs are in line with the international prices.
Bangladesh government should be wary of the unusual amount of money transactions in the banking system. Furthermore, government should motivate such money to be invested into infrastructural projects or to any project which will focus on rural development. This will help to utilise such money for reinvesting into the economy and therefore benefiting mass people. For instance, tax waiver advantage can be offered if anyone buys the share of any rural development project.
However, no matter what strategies are being formulated and action plans are devised, the only key to curb money laundering throughout the world is ensuring transparency and accountability leading to uprooting corruption, which also includes misuse or abuse of power by people having authority — both in public and private domain.
Ikhtiar Mohammad is a development researcher at BRAC Research and Evaluation Division.
A report by the central bank of Switzerland claims that the total deposit by Bangladeshi citizens in various Swiss banks totalled Tk 5,566 crore in 2016, which was Tk 4,417 in 2015, a 19 per cent increase in deposits over one year. There are speculations that foreign deposits usually increase prior to national elections out of fear and concern.
Every year on an average Bangladeshis are laundering around USD 6.5 billion out of their country.
In between 2005-2014, Bangladesh lost USD 75 billion due to trade misinvoicing and other unrecorded outflows.
According to a UN report in 2010, annually, more than 30 per cent of Bangladesh’s GDP go out of the country.
Bangladesh is now the third largest source of foreign remittance for India. Thousands of Indian executives work in Bangladesh — most of them illegally — and remit billions of dollars to India. It is interesting, neither the government nor the intelligentsia in Bangladesh seem worried about it, at all.
Ironically, someone has commented in social media that plundered money is now the second most important export item — after readymade garments — from Bangladesh. Unfortunately, it happens to be true.
In simple words, money laundering contains all activities to make the illegally earned money legal through legitimate banking channel or business transactions. It involves transfer of money taking a long path to make it legitimate in the legal source so that the origin of this money is laundered or remain concealed.
Dynamic and ever evolving, the process of money laundering is accomplished into three stages: placement, layering and integration. Placement is the first stage of the process which brings the illegal earnings into the financial system. In the second stage, known as layering, the money is moved or transferred into the financial system through multiple transactions so that its authentic origin can be hidden. The last stage is integration though which the illegal money appears legitimate in the financial system.
The fundamental cause of money laundering in any country is the evasion of tax. Same holds true for Bangladesh as well. As the source of earning this money is illegal, for example, drugs dealing, human trafficking, smuggling, bribery, gambling etc., the earner always tries to make the source remain covered with the flavour of legitimate business. Hence, to protect the illegally earned money from confiscation is another reason for money laundering.
In Bangladesh, the prime cause of money laundering is lack of political transparency and good governance which has created and encouraged corruption in all sectors of the society. The second reason is huge informal employment and unimaginably high informal transaction in the economy that left lots of undefined sources. Lastly, political instability or pseudo stability is a major concern for the riches that somehow compel them to look for external destination.
The implications of money laundering for a developing country such as Bangladesh are colossal. Money laundering diminishes government tax revenue. It leads to misallocation of resources and transfers economic power from the market, government, and citizens to criminals. It has severe social and political costs as laundered money may be used to corrupt national institutions. Reputation and trust of the financial institutions are being tarnished by involvement with money laundering.
The major consequence is extra burden on the middle class and honest formal sector tax payers whose tax burden is swelling rapidly. The vacuum of private sector investment is another major outcome of money laundering in Bangladesh.
Money laundering causes hike in price level, which triggers inflation. Gini coefficient, represents the income or wealth distribution of a nation’s residents, and is the most commonly used measure of inequality, will go higher if small part of the society holds significant portion of money of the economy.
If money is remitted to foreign country, then definitely a blow is delivered to the national reserve. Money laundering accelerates crime and illegal activity. When cost of committing crime decreases then the quantity of crime increases and vice versa, and equilibrium is created in the market when the marginal revenue (crime opportunity) and marginal cost (cost of committing crimes) equate.
Therefore, no overnight solution exists for money laundering. The definition of money laundering should scrutinise the informal transactions carefully and bring all of them under tax bracket so that the earners impel to abide by law. Good governance in the tax administration is also a prime factor to stop money laundering.
Specifically, some measures should be applied to control this crime. The government should make a strong string of financial intelligence wing in the financial sectors. The policing to unearth the crime should be intensified so that the origin of crime is contained. The government, therefore, should give some exemplary punishments to those once identified with money laundering and scrutinise the life style of suspected people. In different wings of National Board of Revenue — income tax, customs etc — experts having specialised knowledge of business, criminology and law should be appointed. In Criminal Investigation Department, Anti-Corruption Commission and Comptroller and Auditor General office, the personnel appointed should have specialised knowledge in forensic accounting, at least they should have business educational background. Furthermore, the customs authority need to be vigilant and monitor that both import and export shipments are sticking to the quantities mentioned in their Letter of Credits and both parties concerned paying the right amount of duties and taxes to the government. In addition, the banks need to check that the prices quoted by importers for their goods in their LCs are in line with the international prices.
Bangladesh government should be wary of the unusual amount of money transactions in the banking system. Furthermore, government should motivate such money to be invested into infrastructural projects or to any project which will focus on rural development. This will help to utilise such money for reinvesting into the economy and therefore benefiting mass people. For instance, tax waiver advantage can be offered if anyone buys the share of any rural development project.
However, no matter what strategies are being formulated and action plans are devised, the only key to curb money laundering throughout the world is ensuring transparency and accountability leading to uprooting corruption, which also includes misuse or abuse of power by people having authority — both in public and private domain.
Ikhtiar Mohammad is a development researcher at BRAC Research and Evaluation Division.
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