Bank Negara disputes ‘illicit financial flows’ report

BNM says the estimated 80% of the unrecorded financial outflows in Malaysia, amounting to US$227.1 billion, were due to trade mispricing.

By Kamalavacini Ramanathan

KUALA LUMPUR: Bank Negara Malaysia (BNM) has disputed a recent report by an external non-governmental organisation on alleged substantial illicit financial outflows from developing economies saying that the figures disclosed were merely “unrecorded financial flows” which are not necessarily synonymous with “illicit financial flows”.

In a statement last Friday, the central bank said the estimates in the report of trade mispricing did not take into consideration the discrepancies in trade statistics and thus the estimates of illicit flows were overstated.

This was the central bank’s first comment following a report by Global Financial Integrity (GFI), a Washington DC-based research and advocacy organisation, which placed Malaysia third globally for exporters of illicit financial flows, behind China and Mexico, and just ahead of Saudi Arabia, Russia and the Philippines.

In the report entitled “Illicit Financial Flows from Developing Countries: 2001-2010” released in mid-December 2012, GFI claimed its study showed some US$285.24 billion (RM882.8 billion) flowed out of the Malaysian economies via crime, corruption and tax evasion in the one decade period. As for top exporters of illegal capital in 2010, Malaysia ranked second (US$64.38 billion) behind Russia (US$420.36 billion).

BNM did not respond to earlier queries from The Malaysian Reserve on this issue. In its statement, BNM said the report estimated 80% of the unrecorded financial outflows in Malaysia, amounting to US$227.1 billion, during the period of 2001-2010 were due to trade mispricing.

It said unrecorded financial flows which were derived by comparing import and export data between countries also arose 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,” it said.

It added that the 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 was 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%, it said.

The report also estimated that 20% of illicit outflows were accounted for by unrecorded transfer of proceeds via informal channels that was captured by the errors and omissions (E&O) of the balance of payments 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,” it said.

BNM said since Malaysia is a “very open economy” with total trade in goods and services amounting to an average of 192% of gross domestic product during the period, such discrepancies were “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,” it said, though the central bank did not provide any estimates for the illicit outflow.

BNM added that the E&O has averaged at 2% of total trade, which was well below the 5% benchmark threshold prescribed by the International Monetary Fund, and that it was on a moderating trend since 2010.

The central bank is part of a so-called “high-level” task force which also includes the Attorney-General’s Chambers, Customs, police, Malaysian Anti-Corruption Commission, Inland Revenue Board and the Immigration Department.

“Moving forward, the trade mispricing issue will also be mitigated with the introduction of goods and services tax which requires reporting of value-added at various stages of production,” it said.

This content is provided by FMT content partner The Malaysian Reserve.