A recent survey by the Bangladesh Institute of Bank Management (BIBM) revealed that trade-based money laundering in Bangladesh is rising quite fast. The scope for use, or rather misuse, of this channel has reached menacing proportion in recent years in the wake of phenomenal growth of Bangladesh's external trade which stood at about $90 billion (exports $36.67 billion and imports $52.94 billion) in 2017-18, thanks to the dynamic business-friendly policy of the government. The BIBM survey revealed that among the trade-based money laundering techniques, the common ones are over-invoicing and under-invoicing of exports from and imports into Bangladesh.
The most common is under-invoicing of imported goods carrying high import duty and taxes. The amount under-invoiced annually would probably be between $6.0 billion to $7.0 billion-about 10 per cent of total imports per year. With the amount of revenue lost on account of under-invoicing of imports one year alone, another dream bridge could be built on the Padma without burdening the tax payers. These imports are under-invoiced mainly in collusion with suppliers and other agencies involved in the clearing process. The BIBM survey pointed out that, at times, the commercial banks are also forced to get involved in the racket.
Import of fancy goods like televisions, computers and mobile phones from China, Hong Kong, Singapore and Thailand, are known to be the principal wares of the racketeers. On the other side of the spectrum, is the import of low or zero dutiable goods, e.g. capital machinery, that are over-invoiced by fortune hunters to build up funds abroad. Frequently, the LC-opening banks bear the brunt of these kinds of fraud because the perpetrators take away the money in collusion with the suppliers and vanish into thin air while the gullible banks are forced to clear the goods themselves and dispose those of at the fraction of their declared value. Not infrequently, the containers that are supposed to contain imported goods are found filled with rubbish. What the unwary LC-opening banks can do other than ruing the loss of the entire amount they shelled out to finance the consignments? These phenomena also explain why our port capacity is choked with unclaimed merchandise that, in a few years, turns into rotten stuff.
Exports too are both over-invoiced and under-invoiced depending on what the adventurous money launderer intends to do. If he wants to enjoy the duty drawback and subsidies generously doled out by the government for export promotion, over-invoicing would be the trick of his trade. One classic story we heard is about an enterprising fraudster who exported our low-cost mundane 'gamcha'(handloom towel) at US$4.0 US FOB (free on board per piece which cost less than Tk 100 in the local market, with arrangement with the consignee to compensate him by remittance of money through the kerb market. He eventually succeeded to amass several millions of taka in the form of subsidy and other largesse from the government. How he got away with his heinous scheme is another story.
The scenario would be reversed from over-invoicing to under-invoicing if one wishes to build up money abroad in the garb of exports, especially exports on which no subsidy is available. The technique in that case would be under-invoicing the exported consignment with arrangement to collect the money from the consignee who usually is his partner in crime.
There is yet another category of importers and exporters who never bring or ship the underlying goods to or from the country. A close scrutiny would surely reveal the instances of exports which are not shipped but bogus export documents are prepared to collect subsidies and/or duty drawbacks for the imaginary exports. The generous 25 per cent subsidy announced by the government in the early '90s for the apparel sector under the backward linkage scheme and the local LC system saw a flurry of imaginary exports to rake up billions of taka as subsidy from the official coffer by submitting spurious documents. Many of the luxury apartment buildings we see adorning the city's skyline could be the products of ill-gotten wealth.
While most of these malpractices are beyond the pale of Bangladesh Bank's jurisdiction, it needs to overhaul its own system of monitoring the physical aspects of movement of goods exported from or imported into the country. The regulations known as IMP procedure for imports and EXP procedure for exports inherited from the erstwhile State Bank of Pakistan to monitor actual shipments of export consignments and receipt of imported merchandise have become counterproductive and are not worth the tons of papers and hundreds of manpower wasted on this futile exercise.
This monitoring system was introduced by the State Bank of Pakistan in the late forties of the last century when there were only a handful of exporters and importers and the volume of Pakistan's foreign trade was very small. In 1950, for instance, exports from Pakistan was worth only Rs. 819.00 million equivalent to $ 172 million at the then exchange rate of $1=Rs. 4.76. In terms of today's dollar it is equivalent to $ 1,805 million (one dollar in 1950 is $10.49 in 2019 due to smaller purchasing power of dollar on account of inflationary impacts). The volume of import was Rs 1,114 million; in today's dollar $2,455 million.
It means that, our foreign trade in 2017-18 of about $90 billion is nearly 21 times bigger than $4.26 billion of Pakistan in 1949-50. The work now involved in monitoring the hundreds of thousands of imports has become too unwieldy and, as mentioned above, counterproductive too. As a result, the banks are unable or unwilling to monitor the physical aspects of exports and imports. The system is too complex and has many loopholes. For instance, one intending to commit fraud can do it with impunity because it is very easy to tamper or manufacture a fake bill of entry which, as experience has shown, the bank officials are unable or disinterested to detect. In fact, the innocent exporters/importers who fail to submit the document out of ignorance or loss or misplacement of the documents at the Custom House, C&F agent or the banks are harassed by the law enforcement personnel attached to Bangladesh Bank. Due to these reasons, Pakistan which initiated it eons ago, has abandoned this archaic system of monitoring; now they have switched to digital system.
To make a sense of monitoring exports and imports it is absolutely necessary to switch to the digital system under which, instead of exporters or importers, customs will directly feed the information electronically to Bangladesh Bank. These could be matched with the information collected from the banks, also electronically, regarding the remittances made or received for imports and exports to and from Bangladesh. This would need consultation and coordination with the customs authorities and the banks and other stakeholders. It would hopefully end the chaos in the foreign trade sector. On that note, however, I am tempted to quote a famous saying of President Richard Nixon, "Any change is resisted because bureaucrats have a vested interest in the chaos in which they exist".
Syed Ashraf Ali is a retired central bank official.
