Kathmandu, December 10

Nepal is the fourth largest country in South Asia to witness illegal movements of money or capital, says a latest global report.

Nepal recorded illicit financial outflows of $5.67 billion in between 2004 and 2013, or average of $567 million per year, shows the latest report, ‘Illicit Financial Flows from Developing Countries: 2004-2013’, released by Global Financial Integrity (GFI), a Washington, DC-based non- profit research and advisory organisation.

India ranked top in the South Asian Illicit Financial Flows Index, reporting illegal outflows of $510.29 billion in between 2004 and 2013, followed by Bangladesh, which recorded illicit outflows of $55.88 billion in the same period.

Globally, $7.85 trillion worth of illicit financial flows were reported in between 2004 and 2013, the report says.

The GFI measures illicit financial outflows using two sources: deliberate trade misinvoicing — import or export under-invoicing or over-invoicing — and leakages in the balance of payments.

These estimates, according to the GFI, are likely to be under- rather than over-stated because the study only covers misinvoicing of goods trade, and does not incorporate services trade. Also, illicit flows via cash transactions, same-invoice faking and hawala transactions are not taken into account while conducting the study.

The continued growth of unrecorded, illicit outflows has a pernicious impact on development aspirations in many countries, affecting economic progress and poverty alleviation efforts, says the report. It also undermines efforts made by the government to attract foreign direct investment.

Because of these ‘corrosive impacts’ of illicit financial flows the Action Agenda of the Third International Conference on Financing for Development held in Addis Ababa sought commitment from all the nations to ‘redouble efforts to substantially reduce illicit financial flows by 2030, with a view to eventually eliminating them’.

The United Nations’ Sustainable Development Goals, which will soon replace the Millennium Development Goals, have also set a target of ‘significantly reducing illicit financial and arms flows by 2030’.

In Nepal, of the total money that flowed out in between 2004 and 2013, $5.39 billion, or 95 per cent, was related to import under-invoicing, says the report.

This means many importers are deluding banks to issue payment instruments, such as letters of credit, of bigger amount, but are not making all the payment to parties overseas.

A previous report of the GFI had said: “This is possible due to the fact that trading partners write their own trade documents. This way corrupt government officials, criminals, and commercial tax evaders are able to easily move assets out of countries and into tax havens, anonymous companies, and secret bank accounts.”

To control this practice, the latest report says, governments should significantly boost customs enforcement by providing appropriate training and equipment to better detect the intentional misinvoicing of trade transactions.

“One particularly important tool for stopping trade misinvoicing as it happens is access to real time, commodity-level world market pricing information. This would allow customs officials to tell whether a good is significantly under- or over-priced in comparison to its prevailing world market norm price,” adds the report.

Also, the country should control leakages in balance of payments. Around $282 million flew from the country illegally in the 10-year period because of leakages in the balance of payments, says the report. This is a conservative measure derived from the Net Errors and Omissions line in the International Monetary Fund’s Balance of Payments Statistics database, adds the report.