On money laundering, capital flight

On money laundering, capital flight

Perhaps no country in the world has been successful in stopping money laundering and capital flight from its territories completely. Although differently defined, money laundering and capital flight are related and done by separate people or the same people. In case of the former, the motive is to make a profit by laundering money or engaging money in illegal activities while in case of capital flight, money is taken away from  the country mostly on security ground and also with a view to making profit (to a lesser extent).

Billions of dollars are crossing the  boundaries every year in the illicit way and finding homes in the so-called foreign countries. The flow of such illicit journey of money is more or less one way: money moving from the socially-unstable countries to the countries of stability and also moving from the economies of too many restrictions on trade and investment to the economies of relatively freer ones. Whatever we say or how hard we beat our chests, money laundering and capital flight cannot be stopped unless we go to the root causes of these two illicit transfers.

No country could have stopped money moving illegally from its border by launching an enquiry or by resorting to punishment to the launderers and illicit transferors. Normally, small and unstable economies are losing money to the bigger and stable ones. Movement of money cannot be stopped by erecting wall around the economy. Money does not remain within a geographical boundary, it moves wherever its owners want. Money is the most liquid of all assets and can be sent to any part of the world in a second or minute.

No physical movement of money is required to settle a transaction - it just requires an order by a depository on behalf of its client to enact a transfer. It was reported that Bangladesh was losing yearly US$ 3-4 billion in the way of money laundered and illicit capital transfer. The amount may vary, but it is a fact that Bangladesh is losing a huge amount of money every year through illicit transfer. Money laundering mostly takes place for illegal financing. This happens when stricter restrictions are there on economic transactions. It also takes place if illegal duty or tariff rates are high on the import of certain goods.

In order to make more profit, the gold shop-owners employ middlemen or smugglers. Hence, the money that goes out of the market because of smuggling should partly be attributed to the government's inability to understand the needs for an open gold market. A captive gold market is resulting in a huge amount of Bangladeshi money going out of the country. Restriction on gold trade is one example, but there are other cases where trade-related transactions should have been allowed or at least liberalised long ago.

Did we ask ourselves why capital flight from Bangladesh has been taking place for so long? Definitely, there are reasons behind this. One reason is that we put too many restrictions on the movement of capital from Bangladesh. Hence, we suggest that capital account be liberalised, at least partly. What's more important, we must have inclusive politics internally. Political divide is creating one kind of uneasiness in society, which, in turn, is creating fear and uncertainty in the minds of the people possessing money. Another important thing is Bangladesh does not provide much avenues to its wealthy people to make investment in the country.

Until Bangladesh allows more room for its wealthy people to make investment within the country, we cannot hope for keeping money at home. The wealthy people will find hundred and one ways to send money out.

 Bangladesh should link its economy to the bigger economies in the neighbourhood or beyond. Offer of China to negotiate an FTA (free trade agreement) with it needs to be considered seriously. We should remember that isolated economies like Bangladesh suffer more money laundering and illicit capital transfer. No big economy suffers from these drainages. Bangladesh policymakers should understand the causes of these two phenomena fully before they can take appropriate steps to put an end to the drainages of wealth through these two channels.

Abu Ahmed is Professor of Economics, University of Dhaka.

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