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Tuesday, April 5, 2016

Combatting money laundering and terrorist financing

Ali Reza Iftekhar

Bangladesh's story is one of miraculous success, especially in terms of macro and micro indicators of economic and social development. Beginning with a mere $100 per capita income in the early 1970s, today Bangladesh can boast about crossing the World Bank-defined low-income economy threshold by achieving $1,200-plus per capita income.
The growth performance of Bangladesh has also been spectacular, with average annual growth of 6.14 percent over the past 12 years, and what is more remarkable is that the standard deviation of the growth rate in that time was as low as a quarter of a percent. This is lowest not only in South Asia but also in the global context.
Bangladesh also experienced strong external sector gains with positive balance of payments (BOP) current account balance and a record foreign exchange reserve of more than $26 billion.
Poverty has declined from around the 80 percent range in the early 1970s to 25 percent, and extreme poverty is estimated to have fallen below 13 percent in 2015. Life expectancy rose by 10 years, from 59 to 69; girls' education increased significantly and performance in reducing infant mortality rate and post-natal deaths has become a global role model.
As far as the demographic dividend is concerned, Bangladesh is at a vantage point as majority of the population is young. The economy is transforming in a big way wherein agriculture is no longer the dominant source of employment and income.
Bangladesh for its sustained growth has achieved Ba3 (Moody's) and BB- (Standard and Poor's) with a stable outlook for the sixth consecutive year. Stable real GDP growth and strong external balances have helped Bangladesh achieve BB- rating with stable outlook from Fitch Ratings for the second time this year.
While there is no doubt about the growth potential of Bangladesh, the question is how to capitalise all these positive features to a higher growth trajectory and sustain the momentum to consolidate Bangladesh's position as a solid middle-income country in the next 15 years.
The major challenges Bangladesh faces today are climate change and sustainable development. But there are other issues such as macroeconomic stability, public and private investment, domestic   resource mobilisation, infrastructure   development, and poverty reduction.
There two other issues that pose serious challenge to growth -- money laundering and terrorist financing. These issues are major threats to the integrity of our financial system, and they are not just issues of concern locally.
In fact, over the past twenty years crimes related to money laundering and terrorist financing have emerged as potential threats to global economy. As we are living in a globalised world, every concern that affects others has a deep impact on us as well.

The first convention titled Vienna Convention to combat money laundering was signed in 1998 and became effective in 1990 with signatories including the EU and G7 countries. In relation to that an international body -- Financial Action Task Force (FATF) -- was established to oversee the implementation of the principles of the convention. The issue of combating terrorist financing was taken into serious consideration immediately after the 9/11 incident on the World Trade Centre in 2001.
The FATF is responsible for developing an international standard for anti-money laundering and combating financing of terrorism issues and works closely with other global organisations such as the International Monetary Fund, World Bank, and United Nations. The FATF has also regional bodies for effective coordination globally. In 1997 the Asia-Pacific Group (APG) on money laundering was established.
In line with international efforts, Bangladesh has taken a number of initiatives to prevent money laundering and combat terrorist financing and proliferation of weapons of mass destruction. 
Bangladesh is a founding member of APG and first in the South Asian region to promulgate Money Laundering Prevention Act in line with recommendations from FATF in 2002. Since 1997, Bangladesh has been regularly participating annual plenary meetings of APG. The Money Laundering Prevention Act was replaced by the Money Laundering Prevention Ordinance in 2008, and the Anti-Terrorism Ordinance was also enacted the same year. These two were later passed by the parliament as Money Laundering Prevention Act and Anti-Terrorism Act in 2009, after which Bangladesh issued Money Laundering Prevention Rules and formulated Anti-Terrorism Rules in 2013. 
The Bangladesh Financial Intelligence Unit was established in 2012 to receive, analyse and disseminate suspicious transaction reports, cash transaction reports and complaints. Bangladesh Financial Intelligence Unit is responsible for exchanging information related to money laundering and terrorist financing with its foreign counterparts. The intelligence unit has also achieved membership of Egmont Group in 2013. The purpose of the group is to provide a forum for financial intelligent units of government organisations of different countries to improve support for each other. 
Bangladesh had its first mutual evaluation by a joint team from World Bank and IMF in 2002, and adoption by Asia-Pacific Group in 2003 followed by a second mutual evaluation in 2008.
Bangladesh's banking sector has come of age and when it comes to adopting international best practices this sector has always been pioneer. What is important now is to identify and assess the existing, emerging and also future risks and look closely into vulnerabilities within the current banking practices and procedures. 
In the wake of recent incidents, we have to be extra cautious about money laundering and financing of terrorist. It is high time for banks to prioritise unity against money laundering and terrorist financing activities to protect the integrity and stability of Bangladesh's financial system.
Money launderers and terrorist financiers exploit loopholes and move their funds to or through jurisdictions with weak or ineffective legal and institutional frameworks.
Money laundering has potentially devastating economic, security, and social consequences. It allows drug dealers, smugglers, terrorists, illegal arms dealers, and corrupt officials to operate and expand their networks.
Money laundering diminishes government tax revenue and thereby indirectly harms honest taxpayers. This also makes government tax collection much more difficult because the loss of revenue means higher tax rates, and corruption-inflated higher costs of public works. 
Money laundering distorts assets and commodity prices and leads to misallocation of resources. This creates an unstable liability base and unsound asset structures for financial institutions, creating risks of monetary instability and even systemic crisis. This crisis further leads to loss of credibility and investors' confidence and the potential of destabilising financial systems, particularly in emerging economies. 
The social and political cost of money laundering is serious as this money may be used to corrupt national institutions. Laundered money is also spent as kickbacks to government officials, which undermines the moral fabric in society. 
The banking sector is now in the process of implementing Basel III. Automation is one key tool for combating money laundering and terrorist financing and recent progress in the banking sector is noteworthy.
The major achievements in automations include an automated Credit Information Bureau, introduction of LC monitoring system, and modernisation of payment systems. 
A delegation of Asia-Pacific Group on Money Laundering is visiting Bangladesh now to review the preventive steps taken by the Bangladesh government against militancy and terrorism finance and the effectiveness of the banking sector in implementing legal, regulatory and operational measures for the same.
As a nation we cannot afford to have our country's image tarnished because of money laundering and terrorist financing issues, especially in today's global economy. We have to be vigilant and guard the integrity of our financial system for financial and social stability. Failure to effectively combat these dark forces will have adverse impact on us, like our international ratings will go down, and we will lose competitive advantages: cost of foreign trade will be higher, foreign loans will fall, and most importantly, the country's image will suffer. And we cannot afford to have that when we are moving forward to achieve the middle-income country status by 2021.
 The author is the managing director and CEO of Eastern Bank. He is also the chairman of Association of Bankers, Bangladesh.  

Source:  The Daily Star, 18 October 2015

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