This Op-ed was published in Dhaka Tribune on 16th June 2014
Looking at the history of black money whitening, it’s quite hard to feel assured that the provision for it is finally over. Irrespective of political regimes, there has been a trend of financial ministers flipping decisions regarding black money, which usually starts with a determined position on “no more money whitening.” Then some chamber or association would plead for keeping the scope and finally the finance minister will give in.
It is also evident from public debate that most analysts and stakeholders oppose any scope for whitening black money. Yet it continues. Apparently, when all sweat over the merits and morals of whitening black money, the actual negotiation takes place behind curtains.
Owing to the finance minister’s frequent change of position regarding black money, coupled with the post-budget call by Bangladesh Economic Association to allow black money whitening, we can’t be assured unless clear steps are taken.
This time, the finance minister at least admitted something that has been shouted out for years – that black money whitening provision does not have much impact on the economy. For instance, crores collected as tax from money whitening provision was only 0.03% of the total revenue (only 0.1% of total direct tax) earned by the government during FY2012-13. That is because under such a provision, only a small amount of black money gets whitened through paying a small amount of tax. Black money simply doesn’t want to become white.
The question is – if the whitening provision is really not that popular among people with black money, and if its contribution to revenue and investment really is that miniscule, then why do some quarters always demand for its continuation in one way or another?
Is it because, under existing black money whitening provisions, one can “legalise” money that is obtained through criminal means of extortion, bribery, or smuggling?
Bangladesh’s Money Laundering Prevention Act 2012 considers any activity as “money laundering” if it’s used to hide an illegal source of money. The Income Tax Ordinance that allows black money whitening also states that this provision is not applicable for money acquired through criminal or illegal means. However, that ordinance has a loophole. It also reads, “notwithstanding anything contained in this Ordinance, source of any sum invested by any person, in the construction or purchase of any residential building apartment, shall be deemed to have been explained” if the assessee pays the required tax. If the source of money can be “deemed to have been explained” without question, how can that stop legalising money that is acquired through criminal or illegal means?
Simply put – one can get away by whitening their criminally-acquired money if they invest in real estate, under the existing provision.
Moreover, if criminals are allowed to use that money in construction or to buy apartments in residential buildings, they can legalise a large amount of money by under-invoicing the actual transaction for construction or purchase. That way, properties worth billions can be legalised by paying a fraction of the original tax. This may explain the pressure to keep the provision while official record continues to show very insignificant amounts of money-whitening on paper.
Hence the argument for keeping the provisions only for legally-earned, untaxed, and undisclosed money is a complete red herring to distract people from the criminal aspects of money-laundering.
Black money whitening provisions may work when the law and order situation is strengthened to make illegal earnings difficult, and only a limited period is allowed to channel the black money to the real economy. In such cases, black money holders invest that illegally accumulated capital in industries to continue their earnings.
However, just like stealing or hijacking money can be more profitable than working for a salary, illegal or criminal sources of income will always remain more profitable than running a business. Thus, continuous black money whitening provisions only encourage illegal earnings and will never contribute to actual investment. Arguments made by the Bangladesh Economic Association to “recover” the vast sum of black money through stringent conditions also make little sense. When black money holders couldn’t be encouraged to invest on property under lenient conditions, why on earth would they be encouraged to invest in an industry with strict conditions?
The argument for black money whitening to stop capital flight is another red herring. Capital flight will only stop if returns from investment can be made more lucrative than keeping idle money in foreign banks.
Until then, strict measures need to be taken to address the channels of capital flights. Our neighbouring country India is trying to address this issue by taking a coordinated set of actions which include signing and revising money laundering treaties with other countries, and deploying the Special Investigative Team – consisting of CBI, RAW, and other partners – to unearth the black money sent abroad. Then again, we don’t need to look outside for encouragement. We have seen in the recent past that when there is political will, the government can bring back laundered money from abroad.
Stopping the source of black money will not be easy. But it can be made less difficult if we can avoid those red herrings and start focusing on the real issue at hand. Instead of applying stern rules and providing scope to legalise criminal proceeds over and over again, the government needs to ensure that people do not get the scope to earn money through criminal means to begin with. As they say, prevention is better than cure.
We thus hope that the finance minister will stand by his words, finally putting an end to this futile provision.