Money laundering, tax evasion and governance of ports

Dhiman Chowdhury   | Published: November 19, 2018 20:51:26 | Updated: November 23, 2018 21:24:50

The Bangladesh Financial Intelligence Unit of Bangladesh Bank estimates around 7.0 per cent of L/Cs (letters of credit)  have no bill of entry, meaning that a significant amount of imports remain out of records either by the customs and/or the ports. This unrecorded imports means either imports without due tariffs (smuggling) or the goods have not been imported at all but the foreign currency has been transferred (money laundering). World Integrated Trade Solution (WITS) records show Bangladesh's total imports of $48 billion in 2015 but Bangladesh Bureau of Statistics (BBS) data shows $40 billion - a difference of $8.0 billion. In addition to money laundering there is evasion of tax. If average total tariff index (TTI) of 50 per cent (VAT 15 per cent, tariff 12 per cent and supplementary duty 23 per cent) is considered, then duties evaded will be $4.0 billion ($8 billion x0.5). This is 2.05 per cent of gross domestic product or GDP ($4.0 billion/$195 billion) and is significant if compared to total tax to GDP ratio of around 10 per cent.

EVIDENCE OF OVERPRICING:  In 2015, Bangladesh's imports from India were $5582 million but India's exports to Bangladesh were $5521 million, an over-invoicing of $361 million (1.01 times). Similarly, from Germany it is 1.21 times ($862m/$709m). In case of over-invoicing there are two losses for Bangladesh: money laundering and corporate tax avoidance. If the importer over-invoices, then he gets corporate tax savings but loses import duty and supplementary duties (VAT is excluded because it is customers'). Tax losses of the government, however, will depend upon whether tariff and supplementary duties are lower than the relevant corporate tax rate. But if the motive is money transfer offshore, then over-pricing can be independent of the above taxes and duties.

EVIDENCE OF UNDER-PRICING: According to one study, British American Tobacco (Bangladesh) has a record of over-pricing back in 1987, but recently of under-pricing of its exports (Chowdhury 2018). It exported a kg of leaf at TK245 which appears to be low and also lower than Indian export price of TK302 (quality, however, was not considered). By under-pricing, BAT (BD) can reduce export duty, currently at 10 per cent and also corporate tax at 45 per cent.

WORLD DATA: In 2015, Bangladesh's recorded imports from China ($10394m) to China's recorded exports to Bangladesh ($13894m) were 0.72 times. This compares to 0.98 in UK from Germany (UK imports of $88077m from Germany and Germany's exports to UK $90075m), 1.04 from France ($35949m/$34445m) and 1.03 from US ($57103/$55280m). Thus Bangladesh's unrecorded imports are much higher than UK.

BOARD OF GOVERNORS OF PORTS: Chittagong Port Authority (CPA) Ordinance 1976 prescribes a 5-member board: 3 (three) commodores and 2 (two) joint secretaries. All are full-time executives. There are no nonexecutive members in the board. Even there is none from the customs wing of the National Board of Revenue (NBR). Although there is a provision for an advisory committee, no information is available about this in the annual report. Inland Port Authority has a seven-member board including only one non-executive from the corporate sector (by the 2001 Act). But actual board membership is not disclosed either in the annual report or elsewhere. Mumbai Port Trust has 16 members including one commissioner of customs, 4 (four) members outside the government (non-executives) and 2 (two) labour union members. Singapore port, one of the largest 10 ports in the world, has a supervisory committee of 7 (seven) non-executive members and an executive committee of 10 members. The board of Dover port, UK has 7 (seven) non-executives including the chairman but only two executive directors. It should be mentioned here that organisations around the world, both corporate and government, are now-a-days governed by majority non-executives who are external to the organisations, independent of their management and owners, have expertise and who brought name and fame for their countries.

ANNUAL REPORTS: CPA annual reports disclose revenue (fees and charges), expenditures, assets and liabilities in the financial statements. In addition to these, it discloses imports and exports in quantities (tons, MT, TEU) only but no value of these in monetary terms. Kolkata Port Trust also discloses traffic of import and export in quantity, classified by major products but no data on value (CIF price) is available. The Chairman's report of Dover Port of UK in the beginning mentions annual trade of BPS122 billion but except that no more data on the value of imports and exports is available in the annual report. Dover discloses three vital standing committees such as audit, remuneration and nomination committees. There are also disclosures of executive and nonexecutives' salaries and benefits.  But our ports do not disclose these statistics which are considered vital for good governance.

CHAIRMAN'S REPORT: Chairman's report is very important because he is considered to be a celebrated citizen of the country and he has inside information of his organisation and he is supposed to disclose it in his report for the stakeholders. CPA Chairman's report is of one page and  that of Inland Port Authority' chairman is just of  half-a-page report. Dover Chairman's one is 18 pages long, describing past, present and future threats and opportunities. Mumbai  Chairman's report runs 11 pages, describing salient features of achievements and development projects.

NEED FOR VALUE DATA: Most of the ports around the world do not disclose import and export in monetary terms. Mumbai Port Trust has been found to be an exception which reported Rs 557 billion worth of imports and Rs180 billion worth of exports, classified by products, during 2016-17. This data is necessary for a cross-check with the customs data. The port and the customs or revenue offices are two independent authorities. Separate customs data and port data are necessary for controlling money laundering, smuggling and evasion of tax. This widening and broadening of information will help control of over-pricing and under-pricing of import and export. Average tariff rate multiplied by value of import and export gives total tariff value which should be similar in the records of ports and the revenue office. Annual reports contain 80 to 200 pages. One or two pages on this vital information can be easily accommodated in the annual reports. Importers' shipping companies submit import general manifest (IGM) both to the customs and to the ports. This document includes quantity and value of goods imported. Although the ports may not need the value information (because they charge fees based mostly on weight), they should cooperate with the revenue office (NBR) for control on money laundering, smuggling and evasion of tax which are evident from the above data and also from the fact that tax revenue of around 10 per cent of GDP is one of the lowest in the world.  

Dr. Dhiman Chowdhury is Professor of Accounting at the University of Dhaka.


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