New law aims to prevent illegal capital flight in guise of foreign trade

The government has drafted a new law to stop illicit outflow of money in the name of exports and imports.

The draft law states that if imported goods as ordered in terms of quality and quantity do not arrive in the country after payments are made, the importer has to bring back the price paid for the goods and the central bank will be able to ban its import by issuing a notification.

Also, if a company does not receive the price of exported items on time, the Bangladesh Bank can impose a ban on its direct and indirect export in the same way.

With such a provision, the Ministry of Finance drafted the "Foreign Currency and Exchange Management Act 2020" and uploaded it on the Financial Institutions Division's website on June 9 seeking public opinion.

Officials of the division said after finalisation and vetting by the law ministry, the draft will be placed in parliament in the form of a bill. 

Ibrahim Khaled, former deputy governor of the Bangladesh Bank, said on Sunday the political will of the government is the most important thing to prevent capital flight through over-invoicing and under-invoicing.

It will not be possible to prevent capital outflow and identify money launders by law alone, he said.

At present, Bangladesh transacts foreign currencies under the Foreign Exchange Regulation Act 1947. Though there are various provisions in it for payment of export prices, there is nothing to prevent capital flight under the guise of import. 

An official of the Bangladesh Bank told The Business Standard that they have drafted the act to prevent money laundering through foreign trade, and have submitted it to the Financial Institutions Division to make it a bill.

Finance Minister AHM Mustafa Kamal has proposed a 50 percent tax on detected money smuggled by over-invoicing or under-invoicing during import and export. 

Speaking at a post-budget press conference on Friday, he said there were no laws or regulations to prevent money laundering and take action against launderers.

"No case has been filed against many of the launderers due to lack of law. There have been one or two cases, and they are not being handled properly in this regard. We have to have a new law for that," he added.  

Officials of the central bank said there is no provision to prevent capital flight in the name of trade in the existing act. The Bangladesh Bank has issued circulars on various occasions to address the weakness, but the court did not show interest in receiving cases against money launderers, saying there was no legal basis for those circulars.

So, the new law has called for increasing the capacity of the central bank to prevent outflow of money through foreign trade, they added.

The law says the Bangladesh Bank can ban a company's import operations if imported products do not arrive in the country on time after payments are made. In case of late payment, the central bank will be able to order the payment of the quantity of goods that will arrive in the country.

The central bank will also be able to instruct the importer to submit documents as proof that the items have arrived or will arrive. 

If the price of a product mentioned in the invoice seems to be less than its actual value to the Bangladesh Bank, and as long as the fair price of the exported product is not sent back by the exporter, the central bank will be able to order the preservation of the shipping documents until then.

If the product mentioned in the invoice has already been exported, the Bangladesh Bank will be able to order a show of proof that its full price has been paid or will be paid within the stipulated time, or contracts signed with the foreign buyer.

The draft act states that any citizen of Bangladesh or any person residing in Bangladesh and any government employee residing anywhere holding foreign currency, foreign securities and any immovable property or industry or company located abroad and information related to its control or interest including houses, cars, and buildings, the Bangladesh Bank will be able to direct the submission of information on all liquid and immovable assets.

The US-based Global Financial Integrity said in a report released last March that the gap between the foreign trade of Bangladesh in 2015 and the real price of those commodities in the world market was 19.44 percent. The average for 10 years is 17.95 percent.

In the 2018-19 financial year, Bangladesh exported products worth $40.53 billion and imported goods worth $44.02 billion. If 17.95 percent of the price was laundered, that would have amounted to $15.18 billion or Tk129,000 crore.