Dirty money, clean homes: The dark side of real estate
Money whitening schemes disrupt the real estate market and create inequality. The government should scrap the scheme entirely to reap long-term benefits of reduced tax evasion, inequality and inflation
Money whitening is a form of money laundering which is used to hide the origin of illicit funds and transform it into 'legitimate' money. As a result, the government loses a significant amount of expected tax revenue. In order to get a hold of the lost revenue through illegal activities, the previous government used to grant tax amnesty to these black money holders.
Because of the continuous practice of money laundering, the real estate sector in Bangladesh has become a strong target for illegal activities. Even though the money whitening scheme has worked as an incentive for the black money holders to bring illicit funds into the country to some extent, it also creates inequality.
The regular tax payers face discrimination since fraudulent individuals pay a part of their wealth at a reduced tax rate. This undermines fairness and equity while providing an incentive to engage in more illicit activities to pay a reduced tax rate to avoid legal consequences, increasing tax evasion.
During Sheikh Hasina's regime, a tax of 15% was imposed on undeclared assets. After the July uprising, the interim government decided to abolish the money whitening scheme. However, the National Board of Revenue (NBR) stated that a few aspects of the scheme, such as the legalisation of real estate properties, will not be abolished.
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Scrapping the policy on financial instruments such as cash and bank deposits will influence the national budget and volatility of stock prices in the market. However, since the legalisation of properties is still allowed, undeclared wealth continues to flow into the real estate market, especially in the urban areas such as Dhaka and Chattogram, with the illicit fund holders facing little scrutiny. According to reports, money whitening is one of the prime reasons for real estate price hikes.
Due to allowing money whitening, a significant amount of black money is being invested into real estate. This investment causes distortion of the price in the market. As a result of these price hikes, middle-income earners are often engaged in saving up for property purchase or for affording apartments, creating speculative demand in urban areas.
Another reason for this price distortion can be seen as the dual valuation of land. For instance, lands are usually purchased based on the market rates. However, the specific amount of tax imposed on land in order to whiten money is Tk15,000 per square metres in areas of Dhaka such as Gulshan, Banani, Motijheel, Dhanmondi and Shahbag. As a result, official rates and registration rates become different. The money whitening scheme ends up exacerbating urban inequality.
Since Bangladesh is a densely populated country, lower income earners are affected by this, as they are unable to afford the high price, pushing them back to rural areas. As wealthy individuals pour their undeclared money into the real estate market, the prices surge, eventually fueling the gap between the rich and the poor.
This causes the lower-income class to remain in rural areas unless they are employed in Dhaka, while the middle-income earners are forced into cheaper areas with very substantial living conditions.
However, the concept of money laundering is not only limited to Bangladesh. Nations with better financial sectors such as Canada, which has a strong democracy and highly accessible banking systems, also tend to face similar challenges. Experts say that every penny of the real estate transaction needs to be monitored, both from the realtors' side and the lawyers' side.
According to CBC news, real estate prices were pushed up by 5% due to money laundering in Canada. Criminals who have invested in real estate through illicit funds have no use of the premises they purchase. So, people who are in actual need of houses are unable to afford them while the premises purchased remain unused.
At the same time, the Financial Track has recently taken steps such as imposing fines on banks who have violated the anti-money laundering laws. Moreover, mortgage brokers also have to face the same rules as banks, indicating that compared to before, they now have to deal with more scrutiny and paperwork.
Even Australia has become a hotspot for the investment of illegal funds through real estate. For example, AUSTRAC estimated that a billion dollars of suspicious money from China was invested in Australian real estate in a single year. Furthermore, in Sydney, the Australian Federal Police (AFP) eliminated a $10 billion Chinese money laundering scheme. The ring included land close to the second airport location, office buildings and residences.
Therefore, real estate of different countries, regardless of their being developing or developed, are largely associated with money laundering. The impact of such a phenomenon depends on the quality of institutions. Thus, instead of partially scrapping the scheme, the Bangladesh government should abolish it entirely in order to reap the correct benefits of this reform. If the entire scheme is abolished, the interim government will then be able to investigate the sources of the illicit funds.
In terms of long-term benefits, the economy will experience a lower rate of tax evasion and there will be a downward pressure on its inflationary prices. As a new emerging economy, Bangladesh is in dire need to strengthen its institutions and rule of law in order to put a stop to such illegal activities being conducted in the economy.
Yeashfa Haque is an undergraduate student at the Department of Economics and Social Science, BRAC University. She can be reached at: haqueyeashfa@gmail.com
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.
