Malaysia needs to urgently address illicit capital outflow

(The Star) – The Malaysian Government needs to address the factors underlying illicit capital outflows urgently to improve both public and investor perception of the country’s economic management, economists said.

“It is a serious development, which may indicate an adverse trend,” Asian Strategy and Leadership Institute chairman for public policy studies Tan Sri Ramon Navaratnam said of the recent findings by Global Financial Integrity (GFI), which placed Malaysia among the top-10 developing countries with the highest amount of illicit financial flows over the period of 2002 to 2011.

“The most prudential way to address the large illicit capital outflows, which is undeniably a complex issue, is to find out the causes of the problem and then address it at the root in order to curb and arrest the situation,” Navaratnam toldStarBiz.

Bank Negara had refuted GFI’s recent findings, which ranked Malaysia fourth after China, Russia and Mexico.

 

The central bank said the amount of cumulative illicit financial flows at US$370.38bil (RM1.22 trillion) during that period as claimed by the Washington-based non-governmental organisation had been “grossly overstated” due to flaws in the latter’s methodology.

GFI’s methodology in deriving illicit outflows is based on the aggregate of two methods – trade mispricing, which captures the under-invoicing of exports and over-invoicing of imports, and hot money narrow, which captures unrecorded transfer of proceeds via informal channels.

According to GFI’s data, trade mispricing accounted for 82.5%, or US$305.63bil, of Malaysia’s total illicit financial flows between 2002 and 2011, while hot money narrow accounted for the remainder 17.5%, or RM64.75bil.

Bank Negara’s own estimate would put total unrecorded financial outflows from Malaysia between 2002 and 2011 at US$161.4bil.

But the central bank was quick to stress that unrecorded financial flows were not necessarily “illicit financial flows”.

Bank Negara had explained that GFI’s estimation of Malaysia’s trade mispricing, for one, was flawed due to the country’s re-export activity via Singapore.

Estimation of trade mispricing is also vulnerable to discrepancies in trade statistics arising from various factors such as the difference in timing of the recording of exports and imports between partner countries; the difference in actual cost, insurance and freight of imports; and the different trade systems practised by the partner countries.

Bank Negara said while GFI’s report acknowledged the use of re-export hubs would overstate the measure of trade mispricing, the removal of re-exports via Hong Kong was not significant for Malaysia, as Malaysia’s trade with Singapore for re-export was more than thrice the size of Malaysia’s trade with Hong Kong.

It explained that if re-exports via Singapore to Malaysia’s top-10 trading partners were included, then Malaysia’s trade mispricing would be reduced by about 70%.

Bank Negara also questioned GFI’s estimates of hot money narrow, whereby 20% of illicit outflows from the country were due to unrecorded transfer of proceeds via informal channels. It said that for a highly open economy such as Malaysia, with total trade of goods and services amounting to 162% of gross domestic product, statistical compilation errors and omissions (E&O) in the balance of payments were bound to arise.

“Importantly, not the entire E&O figure is attributable to illicit activities, and Malaysia’s cross-border statistics have consistently met all the international standards set by  The International Monetary Fund (IMF) and the World Bank,” Bank Negara said.

“In particular, the E&O of the balance of payments has averaged at 2% of total trade, well below the 5% benchmark threshold prescribed by the IMF,” it added.

Notwithstanding the central bank’s explanation, an economist with a local bank said that GFI findings on illicit financial flows from Malaysia would worsen the public’s perception of corruption in the country.

“Data by GFI may be ‘grossly overstated’ as Bank Negara stressed … but sometimes, perception is everything, and in this case, it could undermine public confidence,” he said.

Navaratnam concurred, saying that the GFI’s findings “could have an implication on the degree of confidence in the long-term prospects of the country’s economy”.

Acknowledging the challenge, Bank Negara stressed that the Government had a multi-agency approach to address the root cause of the problem.

A high-level multi-agency special task force – comprising the Attorney-General’s Chambers of Malaysia, the Royal Malaysian Customs Department, Royal Malaysia Police, Malaysian Anti-Corruption Commission, Inland Revenue Board of Malaysia,Immigration Department of Malaysia and Bank Negara – has been set up since 2010 for the purpose, and wide-ranging measures have been used to combat illegal activities to reduce such financial flows.

These include strengthening the regulatory framework, intensifying enforcement efforts, enhancing the surveillance mechanism and improving the quality of statistics.

According to Bank Negara, the measures have yielded some positive results in recent years. For instance, 104 cases have been investigated under joint operations by the Inland Revenue Board and the Royal Malaysian Customs Department since 2011, with the joint operations contributing to increased collection of taxes and duties by both agencies.