20 May, 2022

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With So Much Debate On Twin Deficits, Forex & External Debt Crisis: Why No Focus On The Impact Of & Control Over Illicit Financial Flows?

By Chandra Jayaratne

Chandra Jayaratne

In recent days, the leaders in governance, the executive, legislators, intellectuals and the media have engaged in many analyses, debates and strategic way forward suggestions to get Sri Lanka and its people out of a critical socio-economic morass, due to years of mismanaged twin deficits, external accounts and asset liability management; which as a consequence can drag the nation down to a level that it joins the group tagged as ‘failed states’.

The suggested strategic corrective action options were varied; with most professionals and business persons recommending a float of the exchange rate, adjusting interest rates to market, cutout wasteful spends, defer all capital projects, with an external debt restructure alongside an IMF bailout assistance, whilst supporting the targeted poor and the vulnerable with cash transfers; the home grown solution of the Ministry of Finance and the Central Bank Road Map were dependent on attracting non debt creating inflows, forced conversion of export earnings, seeking short term bail out swaps, import restrictions, seeking longer term tenor loans from friendly nations, selling strategic assets, granting long term supply contracts and concessions mainly in the energy and port sectors in return for long term credit and upfront fees, placing reliance on the revival of the economy via normalization of tourism flows and potential investments/value creation via the Port City, possibly topped up with the sale proceeds of world’s largest single natural blue sapphire, whilst holding down exchange rate and settling maturing debt commitments; the socialist academics called for moratoriums on repatriation of dividends/ royalties/ technical services fees along with freight/airline ticket sales, postponing debt resettlements for up to five years, totally defaulting on all external debt obligations, become self reliant without imports, beginning with restricting imports only to essential food, medicines, petroleum products and raw materials for exports.

It is very strange and puzzling as to why the key stakeholders engaged in the above analysis and debates failed to pursue the critical option of minimizing illicit financial flows (IFFs), especially cross border IFFs!

“One of many lessons that the Millennium Development Decade taught all stakeholders is that sustainable development requires looking at entire systems of economic and governance related enablers and disablers of growth and domestic resource mobilization: in other words to consider those factors which enable and disenable sustainable outcomes in economic growth, governance and security, politically commit to pursuing the enablers and preventing the disablers, and implementing a policy framework which will increase the effectiveness of implementation. Illicit financial flows (IFFs) constitute a major disabler to sustainable development. They can have a direct impact on a country’s ability to raise, retain and mobilize its own resources to finance sustainable development. International commitments to urgently address IFFs have accelerated in recent years: the Addis Ababa Action Agenda urge all countries to ratify and accede to the United Nations Convention against Corruption; to support the Stolen Asset Recovery Initiative; to combat money laundering and terrorism financing; and to ensure effective implementation of the United Nations Convention against Transnational Organized Crime. Similarly, the 2030 Agenda for Sustainable Development and the Sustainable Development Goals call on countries to significantly reduce illicit financial and arms flows by 2030 (SDG target 16.4); to substantially reduce corruption and bribery in all their forms (16.5); to develop effective, accountable and transparent institutions (16.6); to strengthen domestic resource mobilization, including through international support to developing countries (17.1); and to enhance global macroeconomic stability (17.13).

The term “illicit financial flows” (IFFs) is not defined in the international normative framework. IFFs are defined broadly as all cross-border financial transfers, which contravene national or international laws. This wide category encompasses several different types of financial transfers, made for different reasons, including: funds with criminal origin, such as the proceeds of crime (for example tax evasion, money laundering, fraud and corruption); funds with a criminal destination, such as bribery, terrorist financing or conflict financing; transfers to, by, or for, entities subject to financial sanctions under UN Security Council Resolutions such as 1267 (1999) and its successor resolutions; and transfers that seek to evade anti-money laundering/counter-terrorist financing measures or other legal requirements (such as transparency or capital controls). [i]

Illicit financial flows in its broader definition cover illegal movements of money or capital from one country to another. Global Financial Integrity classifies this movement as an illicit flow when funds are illegally earned, transferred, and/or utilized across an international border.

“The challenge in global and national efforts to stem capital flight is to explain its drivers and dynamics. In other words, how is capital ‘leaking out’ of the economy and what are the main causes of these leakages? The main conduits of capital flight are: (1) Balance of Payments leakages; (2) export mis-invoicing; (3) import mis-invoicing; (4) unreported remittances[ii].

IFFs in Sri Lanka can be traced to arise from the following:

Trade Based
Imports – Capital Goods, Intermediate Goods, Commodities including essential food and petroleum, other goods where over invoicing, transfer mispricing, commissions/discounts/credit note values and incentives retained and invested overseas
Services- over invoicing, false invoices, transfer mispricing,
 
Exports- Goods-where under invoicing, transfer mispricing,
Exports –Services- where under invoicing, transfer mispricing
 
Non Trade Based Other Remittances
Expatriate Worker Remittances-when banked overseas, illicit transfers via Undial, Hawala and other informal exchanges overseas for home based settlements
Other Inward Remittances – Grants, Donations and Project costs reimbursements transferred net of amounts retained overseas
Other Outward Remittances- Unauthorized Portfolio and Real Estate Investments, Spurious Investments, Crypto Currency Investments, Use of Corporate Credit Cards for imports, Illicit capital transfers to Trusts including beneficial/orphan and in orbit trusts
Illicit Trades Not in Formal Accounts
Sale or Disposal of Investments and Real Estate and other assets in Sri Lanka with part of funds received overseas
Sale or Disposal of Investments and Real Estate and other assets overseas not repatriated to Sri Lanka
Unauthorized cross border Currency Transfers/smuggling
Smuggling Gold/Gems/Jewelry
Smuggling Others- Liquor /Cigarettes
Narcotics Trade
Kerb Transactions based Transfers
 
Fiscal Deficit Enhancing Illicit Drains Funded by Formal External Debt
Bribery, Corruption, Money Laundering
Customs, Excise and Tax Leakages
Untaxed Informal Economy
Stolen State Assets
Revenue and Capital Spends of the State incurred with knowledge and intent to cause any wrongful or unlawful loss to the Government, or for any wrongful or unlawful benefit or favour or advantage being conferred on any person.

An amateur approach to assessing the probable extent of annual Illicit Financial Flows of Sri Lanka, using the 2021 trade and balance sheet numbers and the then prevailing exchange rate, developed by applying to each of the above noted categories of financial flows and estimating the probable tainted share and extents of illicit flows, and thereafter identifying low and high ranges, bring out estimates between 3- 4 billion US dollars per annum, with an average of USD 3 billion as the value of IFFs.

As there is potential to minimize illicit flows via effective leadership, application of the rule of law, effective law enforcement and penal sanctions, should not such options be pursued before or alongside the suggested strategies listed earlier to alleviate the impending economic crisis?

A well coordinated, coherent and focused, professionally driven collective actions with accountability and commitment do not appear to be in place binding the relevant key actors[iii] responsible for combating IFFs in Sri Lanka.

The above position and ineffectiveness of Sri Lanka’s control over IFFs are reflected in many international researches. The Tax Justice Network’s Illicit Financial Flows Vulnerability Tracker[iv] which measures and visualizes each country’s vulnerability to various forms of illicit financial flows over different periods of time, ranks Sri Lanka mid-high at the financial secrecy index, being number 39 out of 133 countries globally, and with a score of 72 (where 100 is the worst) on financial secrecy haven. They in their 2021 report on Sri Lanka notes that $77.9 million (equivalent to 0.85% of tax revenue (Tax Revenue: $9 billion) and equivalent to $4 per member of population, was lost in tax every year to global tax abuse. The social impact of tax lost was equivalent to vaccinating 4.53 million persons and represents 5.98 % of the health budget. Further, $69 million tax loss was inflicted on other countries by facilitating global tax abuse with trading partners; most responsible for such vulnerability were UAE, Singapore and Switzerland, where inward trade (stone) with a vulnerability score for the channel of 68 ( worst 100).

Primary destination countries for illicit money originating in Sri Lanka [v] are identified by Transparency International stating “Although difficult to trace by their very nature, illicit financial flows (IFFs) coming out from Sri Lanka have benefitted from secrecy and tax havens in various jurisdictions and finds some of the characteristics that make Seychelles, Thailand, Singapore, Bangladesh, Mauritius, India, the Maldives, Malaysia, Hong Kong and the British Virgin Islands as attractive destinations, with a particular focus on how they rank in tax haven and secrecy scores, and how they have been misused in the past” ( strangely does not refer to Australia and USA amongst misused destinations).

The shadow economy of Sri Lanka as a percent of GDP, during 1991 – 2015, was assessed at an average value of 45.58 percent with a minimum of 35.49 percent in 2015 and a maximum of 52.94 percent in 1991[vi]

Sri Lanka was in the in the grey list countries with heightened risks of money laundering and terrorism financing along with Bahamas, Botswana, Cambodia, Ethiopia, Ghana, Pakistan, Panama, Syria, Trinidad and Tobago, Tunisia and Yemen prior to 2019 before upward rerating in October 2019 .  The October 2021 report concluded that “Sri Lanka will remain in enhanced follow up, and will continue to report back to the APG on progress to strengthen its implementation of anti money laundering/combating the financing of terrorism measures”.

Focusing on international research, ‘Causes and Consequences of Money Laundering in Russia”[vii] notes that “Money laundering has led to the flow out post-Soviet Russia of funds amounting to billions of dollars. The racket has flourished because of a nexus between political groups and business ones, mafia operations, the scope for malpractices created by privatization and deregulation of foreign trade, and corruption in banking system. It bodes ill for Russia, particularly because some IMF money, too, has allegedly been gobbled up. Capital flight during Yeltsin years has been estimated at about $150 billion, which is almost equal to Russia’s foreign debt[viii].During this period the capital flight was around $200 billion, which is more than the total volume of foreign investment in Russia[ix]

A Global Financial Integrity report 2019 assesses that illicit capital outflows of $5.9 billion was siphoned off from Bangladesh in 2015 and a total of $81.7 billion during 2006 to 2016.

A UNDP report[x] identifies capital flight (“hot money’) of 8 developing countries to be mostly due to high political or economic instability in the originating country; and these flows are facilitated by a shadow international financial system, especially offshore financial centres, tax secrecy jurisdictions enabling individuals and corporations to hold their wealth abroad capitalizing on banking secrecy and loose financial regulations. With the exception of Guinea, all other counties are ‘net creditors’ to the rest of the world as measured by external debt in 2010.Trade mis-invoicing appears a major conduit of capital flight along with leakages through the Balance of Payments Leakage of financial resources out of Lesser Developed Countries carries severe development impacts and deserves serious attention.

The revelations made by the International Consortium of Investigative Journalists in Panama Papers, Mauritius Papers and Pandora Papers are supportive of the presumption of high level capital flights to tax havens and trusts offshore by Sri Lankans and corporate entities, funded out of illicit financial flows.

Mr. President, Finance Minister, Governor of the Central Bank, Director FIU and the IGP, it is now over to your accountability arena to get Sri Lanka’s IFFs subjected to a professional independent research and to develop and implement with commitment strategic options for combating.

[i] Coherent policies for combating Illicit Financial Flows United Nations Office on Drugs and Crime (UNODC)/ Organization for Economic Co-operation and Development (OECD)

[ii] UNDP-A SNAPSHOT OF ILLICIT FINANCIAL FLOWS FROM EIGHTDEVELOPING COUNTRIES: RESULTS AND ISSUES FOR INVESTIGATION”

[iii] Refer Page 23 of Policy Coherence in Combating Illicit Financial Flows – www.oecd.org

[iv] Illicit Financial Flows Vulnerability Tracker https://iff.taxjustice.net/#/profile/LKA

[v] Transparency International Anti-Corruption Helpdesk Answer

[vi] https://www.theglobaleconomy.com › Sri-Lanka › 

[vii] https://www.jstor.org/stable/4408663

[viii] American publication’ Nation’

[ix] Ariel Cohen, an American Expert on Russia

[x] A Snapshot of Illicit Financial Flows from 8 Developing Countries- Cote d’lvoire, Guinea, Sierra Leon, Tanzania, Zambia, Bangladesh, Bolivia, Nepal

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Latest comments

  • 13
    0

    Illicit money flow in and out of the country has been going on for a long time. The Present Central Bank Governor has been involved actively in politics since 2005 in various positions. He is today the Governor. If he wanted he could have stopped the in and outflow of the illicit money, but he did not. More than anyone else Cabraal as a politician and as the Governor of the Central Bank – a civil servant had the responsibility to stop this illicit money movement, but he did not do it as he personally benefitted from it and ensured his other family members too benefitted out of this. He was involved in paying the CIA agent illegally from Central Bank millions of dollars and the CIA agent is today in a US prison, but Cabraal is out. So Cabraal more than anyone else should be responsible for this and he should be kicked out and taken to court for his hand in the movement of illicit money.

    • 11
      0

      They might have thought, IFFs could save the people from the crisis. However, it has been unable to let those IFFs get into the country yet today. Not long ago, I guess nearly 3 months ago, Rajapakshe s bum gun (Ajith Cabral) was very confident about settling all the debts and usher a new dawn. The very same man behaves today, as if he said nothing like that. Dollar payments gaping up the loans was the mistake. Had the funds kept for fuel and other essentials goods, things would have improved as of today. Miserable man’s donkey decisions paved the way innocent masses to que up almost every day alone looking at all these past few weeks. Whoever it will be the next govt, they should first behead ” Rajapkshes and their Wandibattayas ” comforting the people’s unbearable angers. That could then do lo tmore to the psychology of the people.

  • 18
    0

    It appears that like the proverbial monkey getting hold of a barber’s shaving knife (razor) the author has found a compendium on fraud and illicit financing, material that is probably as foreign to him as to most readers here, and has pasted them incoherently, expecting perhaps some plaudits. On the contrary, information overload kills the message and turns off all but the most dogged reader. My advise would be to try and understand the material he has before him, and write to make sense of it simple terms. That way it will hopefully be a useful source of public information.

    • 5
      0

      LP,
      I am reminded of Sajit and his thesaurus.

    • 2
      2

      LP,

      Really? He gave a complete analysis of everything. There isn’t any other way to write it…..Lankan corruption being too complex.

    • 1
      3

      LP
      Perhaps I am repeating a definition of noise:
      Noise is an excess of information.

  • 6
    0

    Why No Focus On The Impact Of & Control Over Illicit Financial Flows?
    ———–
    Because so many Lankans are thieves and fraudsters themselves.
    It would be the pot calling the kettle black.
    What the leaders do on a big scale, stealing billions, the common people do on a smaller scale, by borrowing money from family and friends and not returning it, creating forged documents, bank managers stealing their customers money, rickshaw drivers tampering with the meters, fuel station workers hiding the meters on the fuel pumps from drivers etc etc.
    Lankans migrate abroad and make a name for themselves as fraudsters.
    I can write a whole novel on what Lankans get up to world wide, scamming others for a living and in many instances getting very rich doing it!

  • 7
    2

    OC ,yes Sajith seems to be referring to a thesaurus , like Ranil using the word Blackguard a lot, a familiar word in our elite circles .

    I am confused by the fancy dress party, in the morning wear Western attire to talk of a solution, IMF reports, King Vijaya etc and evening wear a while shirt and perform satyagrah against the very thing you are helping to find a solution to !

  • 3
    1

    LP you are spot on. One needs a confused mind to understand a confused article. Maybe I hit the brown bottle before the next reading. Hopefully something sinks in before I pass out.

  • 3
    1

    This is just brilliant Chandra Jayasinghe! We never knew before, how to read in professional terms the obvious plundering going on right under our very noses. We were starkly aware, however, that so many Lankans shamefully indulged in it (the very ones who heap deceit on others to cover their illicit deeds).

    Thank you for writing it all out for us, the Lankans and global suffering Masses, so we can finally structure out and rationalize these concepts, and take firm action against those who are robbing us of our God-given rights and inheritances for ourselves and our progeny.

    • 1
      1

      Chandra Jayaratne*

  • 6
    0

    CJ , when was last time a Lankan politician was found guilty and punished for corruption??? MR who swindled Tsunami fund is still our PM. How fortunate are we ??

    • 7
      0

      And the guy who is affectionately known as Mr. 10 % ( didn’t even bother to disguise corruption) is now rewarded with Finace Ministry post. Do I have to say more ??

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