The unrecognized link between the foreign exchange reserve crisis and money laundering

When Sri Lanka, our close neighbor, declared bankruptcy due to the reserves crisis, the conversation about reserves began to dominate table discussions in Bangladesh. Dwindling reserves and exacerbated economic crises continue to create a sense of unrest among Bangladeshis.

The decline in export earnings relative to import expenditure is seen as the main reason for the reserve crisis. But one of the biggest causes behind this is the money laundering that is still rampant in the country.

However, money laundering itself is not easy to understand. It takes place in two ways: in the banking channel and outside the banking channel.

Within the banking circuit, money is laundered in two ways – one of them is import. Suppose someone has imported goods worth $100 in real terms. Now it would show that the import value of the product was greater than $100 (eg $150). When he pays the price of the imported goods, he can send the additional 50 dollars through the bank channel. This is called over-billing.

Likewise, there is under-billing. This happens when someone exports goods worth $100 in real terms but tells the authority that he exported $50 worth of goods. In this way, thanks to the subvoice, the 50 dollars are not accounted for and laundered.

But in order to export, you have to import a minimum amount, which does not necessarily prevent under-invoicing, but means that more money is laundered by over-invoicing than by under-invoicing.

Outside the banking circuit, the money is laundered via Hundi. Suppose an expatriate worker wants to send money home. If he sends this money through the banking channel, it will enter the country in the form of currencies. But as his family eventually has to convert it into local currency, someone buys his foreign currency abroad and delivers the Bangladeshi currency to his family back home. This method is very easy for the sender’s family.

More importantly, they get more money this way than through the banking channel. And due to the big difference in the value of dollars in banks and in the open market, it is now more profitable to send money via Hundi. This is why remittances are down.

What happened at the start of the Covid-19 pandemic testifies to the analysis of the correlation between the Hundi and foreign exchange reserves. When foreign currency only entered the economy through the appropriate channels during the pandemic, the country’s reserves grew rapidly.

During the first months of the pandemic, many people lost their jobs and took all their money home, including their savings. Since the cessation of foreign travel, the demand for foreign currency has been reduced considerably. As a result, people working abroad had no other way to send money home than through the proper banking channels.

We understand that money sent via Hundi plays an important role in the country’s economy. But since this money does not enter the banking circuit, it does not help the country’s foreign exchange reserves.

By taking policy measures such as reducing dollar value differences in curbside market and banking, offering incentives or taking strict legal action against hundi (illegal) traders, it is possible to increase the flow of foreign currency through banking channels.

According to Global Financial Integrity (GFI), as seen till 2015, an average of Tk 70,000 crore is smuggled from Bangladesh through banking channels every year. Their figures did not include money laundered through non-banking channels like Hundi.

The GFI report also mentioned an interesting trend that money laundering increases as elections approach. For example, over Tk1 lakh crore was laundered ahead of the 2014 elections, a 50% increase from the previous year.

The most recent data from GFI also only mentions figures before 2015. Why? According to the organization, Bangladesh has stopped providing information on its imports and exports to the United Nations since 2015. Perhaps it is vital to speculate on why.

It is understood that there are certain groups of individuals, even within government, who benefit from these flawed systems in place. There are organizations like Bangladesh Bank, Bangladesh Financial Intelligence Unit which are able to quickly find out who is smuggling money through banking channels and how much money they are smuggling.

People may wonder why some people send money abroad. The answer to this question is very simple. Most of those who launder money earn it through illegal means. And they don’t think it’s safe to keep this illegal money in the country. So, at all costs and by all means, they send this money out of the country.

Also, a large percentage of Bangladeshis who move to Europe and America rarely return home. They sell their assets and resources in the country to take them with them. Even though it is legally earned money, Bangladeshis cannot withdraw money over a certain amount. This is when they sometimes have to resort to illegal means like Hundi.

Apart from this, a huge sum of money is smuggled out of the country every year under the cover of education fees for the children of the elite.

In times of economic crisis (as in the current circumstances), the government takes austerity measures in various sectors, including energy. But if money laundering is not stopped, other measures cannot in any way save the government from a major crisis.

The reality is that those who smuggle money from this country are very influential and enjoy pure impunity, which makes them almost untouchable even by governments. Now the big question is what can be done to stop money laundering. Bangladeshis have deposited a record amount of money in the Swiss bank even during the Covid-19 pandemic.

It can be deduced that there is a strong correlation between money laundering and the crisis of foreign exchange reserves. It goes without saying, of course, that it is high time to take strict measures to prevent, or at the very least control, money laundering. Otherwise, the future will remain bleak and the economy will suffer miserably.

Dr. Rakib Al Hasan is a doctor, author, activist and youth leader. He is the first Bangladeshi winner of the Outstanding Young Leader of Asia award. His Twitter:

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