Economists urge tough laws against money laundering

Economists have suggested to the government to strengthen the law to curb the illegal outflow of money from the country.
Their suggestion came a day after the Panama Papers leak that has also fingered seven Nepalis having partnership firms in several tax havens. "Though the issue will not have any impact on Nepal at present, it will definately have adverse impact on revenue mobilisation in the future," said former chief secretary Bimal Koirala, speaking at an interaction in the capital today.
Citing the recent example of how the government is unwilling to charge capital gains tax (CGT) on the sale of TeliaSonera's ownership in Ncell to Axiata, Koirala asked the government to start tracking the money. "The Panama Papers should be a lesson for the government to make its law strong enough to prevent such illegal flow of money."
The names of the seven Nepalis mentioned in the Panama Papers have yet to be disclosed.
Koirala suggested to the government to bring all manner of earning under the tax net so as to prevent money laundering. "If the government fails to bring strong legal provision to curb illicit flow of money, drug peddlers and armed smugglers could misuse the country for stashing their illegal earnings," he said, "Such earnings from corruption and tax evasion is sent to offshore firms and back channeled to the country under the pretexts of loans and investments."
The government also needs to find ways to plug the loopholes if there are any to curb the flow of dirty money.
He also cited the example of the central bank's freezing of Rs 3.5 billion that entered Nepal in the name of Mukti Shree Group, suspecting back channeling of black money, and also asked the government to prioritise the foreign investment. "The government should not accept all kinds foreign investments," Koirala said, suggesting the government to accept only those foreign investments that pay taxes and generate employment in the country.
Likewise, senior economist Prof Dr Bishwhambher Pyakuryal, on the occasion, said Nepal's mention in the Panama Papers has raised a question mark over the country's credibility. The deficiency in trust will result in low foreign borrowings and grants, which will in the longer term hit the development and social sectors, he said, adding that it will hit the social sector hard in the long run. "Tax evasion will hit revenue mobilisation resulting in low government spending in the social sectors."
Previous international reports have also mentioned about Nepalis stashing their illegal earnings in various tax havens. The report 'Illicit Financial Flows from Developing Countries' published by Global Financial Integrity (GFI) had last year revealed that $754 million on an average every year was siphoned away from Nepal between 2003-2012.
According to the report, trade misinvoicing – misreporting the value of a commercial transaction on an invoice submitted to customs – accounted for most of the capital flight.
Likewise, the prolonged political transition in Nepal has made it easier for domestic and foreign firms operating in Nepal to launder money out of the country, the economists said.
"If the current situation persists, Nepal could face blacklisting by the international community," Pyakuryal added. Blacklisting of a country means it will not be able to do international trade and will have restricted movement of its citizens across the globe.
"Nepal should thus enter into an agreement with the tax haven countries for information sharing relating to tax and banking transactions," he suggested.
Meanwhile, a day after the Panama Papers exposé, Department of Money Laundering Investigation (DMLI) today said that it would start probe to find whether Nepalis too are holding offshore accounts.
It is calling a meeting of key stakeholders –Financial Intelligence Unit (FIU) under Nepal Rastra Bank, Department of Revenue Investigation (DRI) and Nepal Police – tomorrow to discuss on whether Nepalis have offshore accounts and whether the government agencies are aware of such accounts.
In one of the biggest leaks in the history, International Consortium of Investigative Journalists (ICIJ) on Monday made public a huge cache of documents showing how the world’s rich, powerful and famous exploit the secretive offshore tax regimes and hide their money. The documents also named the top 10 destinations, known as tax havens, where the world’s rich and powerful stash their money. 

Lack of investment climate fuels capital flight

Lack of investment climate has fuelled capital flight, according to experts.

Speaking at an interaction here today, they blamed load-shedding, political uncertainty, donation terror by the ruling parties themselves, syndicate system and bandhs as reasons for potential investors being discouraged and entrepreneurship taking a back seat in the country.

"If the current transition prolongs, the situation will be more pathetic as capital flight will increase," said secretary at the Prime Minister's Office Krishna Hari Baskota. "There is a huge gap between imports and exports," he said, adding that the country has some 29 per cent more trade deficit only due to huge imports of petroleum products.

Due to the inability to manage government expenses and squeezing economic growth rate, the country has failed to attract investment, he added. "Lack of a full-fledged budget has also dogged development work and some government agencies will not be able to pay salaries to civil servants if the government fails to bring a full-fledged budget soon."

The country has been witnessing 10 per cent capital flight annually, said economist Dr Chiranjivi Nepal. "From 2002 to 2010, the country recorded capital flight of around Rs 70 billion," he said, adding that Nepal ranks eighth among the top 10 countries that have been witnessing capital flight. "China leads among the nations that have been witnessing capital flight."

According to Global Financial Integrity (GFI) — a programme of the Washington-based Centre for International Policy — Nepal had lost at least $1.88 billion (approximately Rs 161.38 billion) in illegal outflow of funds in 2010, up by 21.5 per cent as compared to 2009, largely due to export under-invoicing and import over-invoicing.

The report 'Illicit Financial Flows from Developing Countries: 2001-2010', has revealed that almost 10.35 per cent of the country's gross domestic product of last fiscal year was lost in capital flight.

Lack of investment climate in the country has fuelled capital flight, said vice president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Pradeep Jung Pandey, speaking on the occasion.

"The government must focus on production if it wants to stop capital flight," he said, adding that donation terror by sister organisations of political parties, prolonged power shortage, ambiguous government policy, lack of full-fledged budget on time, and frequent bandhs and strikes have contributed to capital flight.

Nepal lost between $5.92 billion and $6.04 billion in last one decade

Nepal lost between $5.92 billion and $6.04 billion over the last one decade due to illicit financial outflows, according to a study by Global Financial Integrity (GFI) published today.
Rather than the discrepancy in Balance of Payments (BoP) like unrecorded leakages, trade mispricing is the primary contributor to illicit financial outflows from Nepal. Between 2000 and 2009, approximately 82 per cent of the total illicit financial outflows from Nepal was only due to trade mispricing. The same figure for developing countries over the period stands at 53.9 per cent.
"Bribery, proceeds of corruption, and trade mispricing cost Nepal dearly," the GFI said, adding that of the total, only trade mispricing — export over-invoicing, import under-invoicing, fake VAT bill and misappropriation of IC — cost $4.940 billion to the nation over 2000-2009, an average of $494 million each year.
The study tracks the amount of illegal capital flowing out of 157 different developing countries over the 10-year period from 2000 through 2009, and ranks the countries by the magnitude of illicit outflows.
The report should be a wake-up call to the government that more must have to be done to address the capital outflows and will help it tighten screw on tax evaders, traders, and corrupt leaders and businessmen.
Nepal is also ranked sixth among the 48 LDCs having the largest cumulative illicit financial flows. With a total of $35 billion, Bangladesh is at the top of the list. The total illicit flow for Nepal is estimated to be $9.128 billion. Moreover, it is on rise.
The report revealed that from 2000 to 2008, estimated total illicit financial flows for Nepal between $563 million and $566 million per year. But according to UNDP estimates, between 1990 and 2008, Nepal lost $419 million to $480 million per year in illicit ouflow.
Global Financial Integrity (GFI) — a Washington, DC-based research and advocacy organisation that promotes transparency in the international financial system — said that capital outflows stem from crime, corruption, tax evasion, and other illicit activity.
The report also suggested to curtail trade mispricing, require country-by-country reporting of sales, profits and taxes paid by multinational corporations, require confirmation of beneficial ownership in all banking and securities accounts, require automatic cross-border exchange of tax information on personal and business accounts, and harmonise predicate offenses under anti-money laundering laws across all Financial Action Task Force (FATF) cooperating countries.
Developing countries lost $903 billion in illicit financial outflows in 2009 despite the massive slowdown in economic activity which rocked world markets in late 2008.
The report 'Illicit Financial Flows from Developing Countries over the Decade Ending 2009,' which estimated the developing world lost $8.44 trillion over the decade ending in 2009, is GFI’s annual update on the amount of money flowing out of developing economies via crime, corruption and tax evasion.
According to the report, the five biggest victims of illicit financial flows over the decade are China ($2.74 trillion), Mexico ($504 billion), Russia ($501 billion), Saudi Arabia ($380 billion) and Malaysia ($350 billion).
The report also revealed the top victims of illegal capital flight in 2009. The top five countries suffering the highest illicit outflows in 2009 include China ($291 billion), Saudi Arabia ($82.3 billion), Poland ($66.3 billion), Malaysia ($46.8 billion and Mexico ($34.6 billion).