Bangladesh needs tougher disclosure rules to curb trade-based money laundering

Overpricing and underpricing of goods are common in the business world, particularly in transactions between related parties with mutual self-interests. Importers and exporters who exercise control, influence, or ownership over one another are considered related parties.

By contrast, a fair price — known as the arm's length price (ALP) — is the price agreed upon in an open market between independent, unaffiliated parties.

Arm's length price: A difficult concept

Many governments have policies regarding ALP, such as the comparable uncontrolled price method, which refers to the price that would be charged in an open and independent market. In theory, ALP information is accessible online, but in practice it is a difficult concept to apply.

There are several reasons for this:

Product variations – The wide variety in product quality makes it hard to maintain accurate price comparisons.

Policy influenced by multinational companies – Large corporations can influence government policies in developing and least-developed countries.

Political control over business – In countries where businesses are owned or controlled by members of parliament, ministers, or political leaders, governance and law enforcement are often compromised, and agencies such as the National Board of Revenue (NBR) cannot operate independently.
 

Over-invoicing at import

Businesses may deliberately over-invoice imports to inflate their cost of goods sold and reduce reported profits.

For example, if an importer records raw material purchases at Tk80 million when the market price at the exporter's location is Tk60 million, the excess Tk20 million represents money laundered in foreign currency. This also results in corporate tax evasion: Tk 20 million × 25% corporate tax rate = Tk5 million in lost revenue.

Under-invoicing at export

Similarly, exporters may under-invoice to reduce reported revenue.

For instance, if a Bangladeshi company declares exports worth Tk50 million when the market price in Bangladesh is Tk55 million, the Tk5 million undervaluation represents both money laundering (foreign currency not remitted) and corporate tax evasion: Tk5 million × 25% = Tk1.25 million in lost revenue.

Growth in international transactions and transfer pricing regulations

Between 1980 and 2010, Bangladesh's export-to-GDP ratio rose from 4.1% to 16.2%, while imports increased from 13.1% to 23.7%. Alongside this growth, evidence of over- and underpricing of inventories and other assets has multiplied worldwide.

For example, the World Integrated Trade Solution (WITS) reported that in 2015, goods worth $3,545 million from China were either smuggled or never imported despite letters of credit being opened. NBR lost tax revenue equivalent to 2.05% of GDP — significant compared to the country's total tax revenue of around 10% of GDP at that time.

Disclosure regulations under ITA 2023

Section 236 of the Income Tax Act (ITA) 2023 requires related parties to submit detailed statements of international transactions to the NBR's transfer pricing officer. These must include per-unit prices, total quantities, and total values.

The transfer pricing officer compares these figures with ALP data (as per Section 235) to determine the correct tax liabilities. However, researchers and the general public do not have access to these NBR datasets.

Financial reporting disclosure requirements

IAS 24 (International Accounting Standard for related party disclosures) requires companies to report related party transactions in their annual reports. IAS 2 (Inventories) specifies whether FIFO or average pricing is used, but neither standard requires disclosure of per-unit prices or quantities — only aggregate values.

This means shareholders, researchers, and the public cannot determine whether related parties used arm's length pricing by comparing with a comparable uncontrolled price.

Unit price data: Internal vs external reporting

While IAS 2 requires detailed cost information (unit costs, quantities, import duties, handling charges) for internal management purposes, external financial statements require only aggregate values. IAS 24 mandates disclosure of related party transactions, but without unit-level detail. IFRS 13 (Fair Value Measurement) requires disclosure of fair value at initial recognition but focuses mainly on the amount paid to acquire an asset or transfer a liability — not on detailed per-unit breakdowns.

As a result, only internal management and auditors have access to these details.

Developed vs less-developed countries: Data access for researchers

In countries such as the US and UK, commercial databases offer access to large pools of comparable public and private company data, including reliable ALP benchmarks, which researchers can purchase.

In contrast, in many developing countries where governance is weak, researchers are denied access to such data despite legislation like the Right to Information Act.

Evidence from annual reports

Since IAS and IFRS do not mandate disclosure of unit prices, listed companies — both domestic and international — disclose only aggregate import and export values in their annual reports.

This prevents shareholders, lenders, and researchers from comparing actual transfer prices to ALP benchmarks, making it impossible to detect money laundering through over- or under-invoicing. Only the NBR can access such detailed datasets.

Auditors, during transfer pricing audits, do have access to these details and submit separate reports to client management as required under ITA 2023, but these reports are not publicly disclosed.

Recommendation: Revise IAS 2, IAS 24, and IFRS 13

Financial statements are intended for external stakeholders — shareholders, lenders, and researchers — who lack access to internal company data.

Given the prevalence of money laundering, over- and under-invoicing, and corporate tax evasion, especially in developing countries, disclosure of per-unit invoice prices for at least major inventories and assets should be mandated in the Notes section of financial statements.

The Notes section can show the breakdown of account balances, which could exert additional pressure on management to comply with ALP rules, thereby reducing illicit financial practices.

Dr Dhiman Chowdhury is a Professor of Accounting and Information Systems at the University of Dhaka. 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.