BNM On Illicit Money Flows

It’s a fairly long explanation and directly targets the Global Financial Integrity reports with respect to Malaysia (I’ve taken the liberty of copying it in full):

Update on Measures to Address Unrecorded Financial Flows

Bank Negara Malaysia would like to provide an update on measures that have been undertaken by members of a High Level Multi-Agency Special Task Force (Task Force) to reduce illicit financial flows. The Task Force comprises of the Attorney General’s Chambers of Malaysia, Royal Malaysian Customs Department, Royal Malaysia Police, Malaysian Anti-Corruption Commission, Inland Revenue Board of Malaysia, Immigration Department of Malaysia and Bank Negara Malaysia. The Task Force’s role is to spearhead more effective coordination and collaboration among key law enforcement authorities in the country as well as between local and international enforcement agencies to mitigate illicit activity and financial flows.

Unrecorded financial flows are likely overstated

A recent report by an external non-governmental organisation has raised the issue of substantial illicit financial outflows from developing economies. It is important to note that estimates highlighted in its reports are essentially ‘unrecorded financial flows’, which are not necessarily synonymous with ‘illicit financial flows’.

The report estimated that 80% of the unrecorded financial outflows in Malaysia amounting to USD227.1 billion during the period of 2001-2010 were due to trade mispricing. However, unrecorded financial flows which are derived by comparing import and export data between countries also arise due to data discrepancies and the varying conventions used to compile trade statistics among countries. This includes time lag, variations in valuation and exclusion of certain types of goods. The situation is further complicated by the treatment of goods that are exported via re-export hubs. Exports by Malaysia to a specific trading partner may for example not give rise to a similar number recorded as total imports from Malaysia by that country. This discrepancy arises as the imports are recorded based on country of origin that also includes those exports that are via other countries. After taking into account Malaysia’s trade that is exported via Singapore and Hong Kong (re-export hubs), the estimate of trade mispricing between Malaysia and its top 10 trading partners were reduced significantly by about 70%.Since the estimates in the report of trade mispricing do not take into consideration such discrepancies in trade statistics, the estimates of illicit flows are overstated.

The report also estimated that 20% of illicit outflows were accounted for by unrecorded transfer of proceeds via informal channels that is captured by the Errors and Omissions (E&O) of the Balance of Payments (BoP) of the country. It should be noted that not the entire E&O figure is attributable to illicit activities, as it also includes genuine statistical errors from the compilation of statistics of external trade and cross-border financial transactions. Since Malaysia is a very open economy with total trade in goods and services amounting to an average of 192% of GDP during this period, such discrepancies are bound to be large in absolute amount. It is recognised, however, that a portion of the E&O could arise from the transfer of funds obtained from illegal activities, organised crime and tax and custom duties evasion. Importantly, the E&O has averaged at 2% of total trade, which is well below the 5% benchmark threshold prescribed by the International Monetary Fund (IMF). These ratios have also been on a moderating trend since 2010.

Measures have been undertaken and will be further intensified

The Government has always considered any transgression of the country’s rules and regulations as a very serious matter. Indeed long before such reports on illicit outflows, efforts had already been made by the Government in combating illegal financial flows through various preventive measures. Collaboration between relevant agencies on this issue began in 2008, culminating in the establishment of the Task Force in 2010.

On mitigating trade mispricing, the Royal Malaysian Customs Department has taken actions against entities and individuals who have evaded customs duties especially in cases of under- and over-invoicing of exports and imports of goods, as well as phantom shipments and other falsification of the value or quantity of shipments. Tighter monitoring and surveillance at various entry and exit points are in place, including the installation of closed-circuit televisions and scanners. In addition, all travellers (Malaysian residents and non-residents) are required to declare to the Customs if they carry into or out of Malaysia cash in amounts exceeding USD10,000 or its equivalent in Ringgit and in foreign currency.

Effective 1 December 2011, the new Money Services Business Act 2011, under the purview of Bank Negara Malaysia, came into force to support the development of a more dynamic and competitive money services business industry (comprising the money changing, remittance and wholesale currency businesses). The relicensing exercise of all money services businesses was completed in 2012, resulting in the number of money changers being reduced from 839 to 511. This exercise has enhanced the capacity of the money services business industry to be more professional and prevent the players from becoming a conduit to illegal fund transfer activities. In addition, the exercise also resulted in the approval of qualified money changers as remittance agents. This is expected to facilitate the migration of remittances, especially by foreign workers, from informal to formal channels. The Money Services Business Act 2011 further complements the measures that have been put in place and actions taken under the Anti-Money Laundering & Anti-Terrorism Financing Act 2001 (AMLATFA 2001). The AMLATFA 2001 which came into force on 15 January 2002 criminalises money laundering of proceeds from serious crimes. Malaysia is now well supported byrobust legislation to combat illegal financial flows.

In addition, Malaysia’s efforts to strengthen the legislation and implementation of Anti Money Laundering/Counter Financing of Terrorism measures have been recognised by the IMF and the World Bank during the recent Financial Sector Assessment Programme (FSAP), where Malaysia was accorded a “Compliant” rating for the Basel Core Principles (Principle 18) and “Observed” for the Insurance Core Principles (ICP 22).

Greater collaboration among local agencies as well as with their international counterparts through the sharing of databases, information and intelligence and joint enforcement actions, with some of them facilitated by the Task Force had yielded positive results in combating illegal activities. The Inland Revenue Board of Malaysia has taken actions on entities and individuals who have evaded corporate taxes. The Board had also conducted tax audit on firms and strengthened its enforcement to minimise tax evasion. The Customs have also intensified its enforcement efforts. These efforts have produced results shown by the significant rise in tax and duties collections.

Moving forward, the trade mispricing issue will also be mitigated with the introduction of Goods and Services Tax (GST) which requires reporting of value-added at various stages of production. Recognising the importance of addressing illicit financial flows, continued concrete and coordinated efforts between various enforcement agencies including across borders will continue to be pursued to ensure the integrity and stability of the Malaysian financial system. Bank Negara Malaysia

01 March 2013

This update makes clear something which many people appear to have missed – looking out for “illicit capital flows” is not the sole responsibility of BNM. By the very nature of the majority of these flows – trade mispricing – very little would involve actual flows of money or cash. It’s more a transfer of accounting profits than anything else. So the inclusion of Customs, MACC and Inland Revenue among others is both necessary and welcome.

It’s also clear that the authorities are well aware of the various channels and methodologies through which legal and illegal money can flow into and out of the country – though to me that has never been in dispute.

I am however somewhat disappointed by the dismissal of trade mispricing as a problem that is sufficiently being handled. While they’ve cracked down on the obvious egregious abuses, blaming 70% being due to the numbers being bloated by the practice of trans-shipment and re-exporting misses the point – that’s probably where we’re losing out, if that’s where the difference in pricing between source country and end-use country originates (i.e. re-invoicing). Nor does this explain for instance, why there’s a direct discrepancy between Malaysia and Singapore trade numbers as there is no middle man here.

Criticisms aside, the real acid test is whether we see the gaps in export-import numbers actually close. If they do, then the Task Force has done its job well and we can also expect government revenue collection to increase. If they don’t, then we’re going to continue to be periodically plagued by headlines of illicit money flows.