Illicit capital flows into Myanmar soar

The report, by US non-profit Global Financial Integrity (GFI), looks at illicit capital flows in Myanmar between 1960 and 2013. It finds that despite a number of political and economic changes since 2010, unlawful inflows – mostly due to misinvoicing – are growing fast.

GFI estimates that US$18.7 billion flowed illegally out of Myanmar over the 54-year period, with average outflows worth 6.5 percent of the country’s gross domestic product, or GDP over the same period.

Illicit inflows were four times higher, at $77.7 billion – equivalent to 14.4pc of GDP. Most entered the country through the technical smuggling of imports.

The numbers do not include the smuggling of drugs, timber, precious stones and other goods, which are often settled in cash and are beyond the scope of the report. There are no accurate figures on the value of smuggling, though anecdotal evidence suggests this may dwarf the official economy.

“The estimates provided by our methodology are likely to be extremely conservative as they do not include trade misinvoicing in services, same-invoice trade misinvoicing, hundi transactions, and dealings conducted in bulk cash,” said Dev Kar, the report’s primary author.

Of the capital flows tracked by GFI, over 59pc of unlawful outflows and more than 89pc of illegal inflows between 1960 and 2013 resulted from the misreporting of trade.

Nearly half of these inflows – in real terms – were during the last four years of the study, from 2010 to 2013. “It is greatly concerning that illicit inflows have grown significantly in recent years. Averaging under $400 million per annum in the 1960s, they’re averaging over $8 billion per year today,” said the report.

A major driver of technical smuggling was the government’s “export first” policy from 1997 to 2012. During this period, import licences were only awarded to exporters who could bring in enough foreign currency to cover their import costs.

This created an incentive to over-invoice exports, said Mr Kar. Economic sanctions may have also encouraged technical smuggling by creating an excess demand for certain items in the domestic market.

Illicit inflows were also driven by Myanmar’s production of opium poppies – the second-highest in the world. However, GFI said it provides no estimate of illicit flows generated through drug sales and trafficking, as this is impossible to detect via trade invoicing statistics or in the balance of payments.

Lost revenues
Trade misreporting has drained billions of dollars from government coffers, which could have been used for development, said GFI. It has also fuelled the underground economy, facilitated tax evasion and led to crime and corruption – all of which have cost the government additional revenue.

Tax collection in Myanmar equates to 7pc of GDP, among the lowest in the world, making it hard for the state to provide adequate health and education services, said the report. It added that if steps were taken to reduce illicit flows, the government’s pockets would be much deeper.

Myanmar lost between $2.9 billion and $3.6 billion over the 54-year period in potential tax revenues, said GFI, estimating that lost tax income equated to as much as 172pc of health spending and up to 73pc of education spending from 1960 to 2013.

“Even more troubling, [around] 30pc of this tax loss occurred in the last four years of the study. This means that some individuals have been taking advantage of increased economic openness for personal gain, at the expense of the rest of the country,” said Joseph Spanjers, the report’s co-author.

Between 2010 and 2013, lost income was the equivalent of 129pc of health spending and 42pc of spending on education, according to the report. Myanmar spends much less on education and health than many of its ASEAN peers. However, over the past few years, the government has kept its promise to increase spending these sectors.

Spending on education rose from 5.2pc of the total budget in fiscal year 2012 to 11.1pc in 2014. Health spending rose from 1.3pc to 6.3pc of the budget over the same period.

Graph adapted from Global Financial Integrity report.Graph adapted from Global Financial Integrity report.

Underground economy
The underground economy is also directly linked to illicit flows, and is a good proxy for the overall governance of a country, said Mr Kar. In Myanmar, the underground economy averaged 55.1pc of official GDP over the 54-year period, he said, “one of the highest in the world”.

The shadow economy averaged 49.3pc of official GDP in the 1960s, rising to 66.1pc in the 1980s. After reaching a peak of 83pc it is now falling again, “boding well for the country’s future”.

The authors claim that illicit financial flows “drive and are driven by the underground economy”. As such, reducing these flows should be a priority for the new government, following the November 8 elections.

GFI believes that reform should centre on two principles – “greater transparency in domestic and international financial transactions, and greater cooperation between governments to shut down the channels through which illicit money flows”. An official at Myanmar’s state anti-money laundering organisation, the Financial Intelligence Unit (FIU) ,said Myanmar has signed to cooperate with some countries on anti-money laundering, but is yet to sign with others such as China. However, the two countries have recently agreed to work together on cross-border crime.

One problem with shutting down payment channels is that trade payments rarely go through bank accounts and are usually settled directly between traders, said a senior Central Bank of Myanmar official. This allows people to avoid paying taxes, he said, adding that they may instead have to pay a small bribe.

State-owned Myanma Economic Bank has signed remittance agreements with a number of foreign banks in border areas, but the government needs to consider how to upgrade these services, reduce the costs of bank transactions and reconsider tax rates, he added.

U Soe Thein, former deputy director general for the Ministry of Finance, agreed that illicit capital flows hold back increases in Myanmar’s tax-to-GDP ratio. Only the development of the banking system can help increase tax revenues and reduce bribery and corruption, he said. “But this can’t happen overnight – the practice of using banks has just started in Myanmar,” he said.

The customs system needs an extensive overhaul, with a focus on honesty and capacity building, according to GFI, which recommends that Myanmar enforce the World Trade Organization’s Customs Valuation Agreement, which bans inaccurate or arbitrary customs values.

A real-time world market pricing risk analysis system could also help to narrow large discrepancies between Myanmar’s reported trade and the figures reported by neighbouring countries, said GFI. For example, Ministry of Commerce figures on official border trade with Thailand were 90pc lower than Thailand’s figures three years ago, as reported by The Myanmar Times.

Ministry of Commerce adviser U Maung Aung agreed that informal trade will remain high while the government lacks the capacity to tackle it. Three new border gates with Thailand and India were due to open this year but did not, due to a lack of security, he said, adding that Myanmar has 15 official border trade points, but the number of illegal gates is much higher.

“We have to open more official gates,” he said. “We are also preparing the ASEAN single-window system and X-rays for checking goods.” The single-window system aims to speed up and simplify information flows in cross-border trade.

However, the ministry is constrained by its budget, said U Maung Aung, adding that smuggling by ethnic armed groups hinders customs reform in some areas, while staff numbers at the border gates are insufficient, and law enforcement is very weak.

GFI also recommends more meaningful progress on anti-money laundering and combating the financing of terrorism. In February, the Financial Action Task Force (FATF), an inter-governmental body combating money laundering and terrorist financing, noted that Myanmar has not made sufficient progress in these areas, despite new anti-money laundering and anti-terrorism laws passed in 2014.

The FIU official said that every bank has a compliance officer to watch out for suspicious trade or investment transactions, and that Myanmar Securities Exchange Centre, Myanma Insurance and money changers are also tasked with reporting back to the FIU.

According to GFI, corruption and unregulated hundi, or remittance, system “together contribute to the continued problem of illicit proceeds from trafficking in drugs, humans, cash, and gems”.

Regulators are trying to formalise capital remittances by removing restrictions and simplifying procedures, said the Central Bank senior official. “We can’t say how much unregulated money is flowing in, but I’m sure that official money circulation can be increased by two or three times within a few years as mobile and internet banking takes off,” he said.

Collating high quality data and statistics would help the government monitor and tackle illicit capital flows, as would the study of physical and technical smuggling routes, said GFI.

“[This could] form the basis of a program to curb illegal transactions, and develop an internal review process that determines the highest priority areas for technical assistance.”

GFI concludes by saying it hopes the report will spur the government to consider laws and regulations that could reduce the flow of illicit money into and out of the country, “thereby maximising domestic resources for economic growth”.

Source: Myanmar Times

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