Recently the International Chamber of Commerce (ICC) has released Trade Finance bulletin ‘DC-PRO’ quoting the Bangladesh Bank (BB) as saying central bankers are concerned that Letters of Credit (L/Cs) are being used to facilitate illicit fund flows (IFF) out of the country. The same bulletin, however, contained contrary views that L/Cs do not matter in anti-money laundering or counter-terrorist financing efforts to prevent trade-based financial crimes. It is further stated senior officials of the BB are specifically concerned that capital equipment imports are being used in the IFFs. In this article the writer has referred to the BB Governor who, in response to a question on capital flight at the launching of the central bank’s January monetary statement, said that capital machinery import rose significantly at the end of 2015. In this context, the Governor also raised a question whether the increase actually signalled that money is being siphoned out of the country via L/C transactions. One of the Deputy Governors, however, rejected the allegation saying that the BB has no specific data on capital flight. He assured close monitoring of capital machinery imports to determine whether the allegation is true. This view on alleged capital flight from Bangladesh through import of capital machinery came in regular trade finance bulletin ‘DC-PRO’ the ICC released as latest update. Those who work in the area of risk management and trade finance area of banks know that the ICC constantly monitors trade finance activities all over the world and any issue which may be cautionary in nature is released as an article in the bulletin. Every update or addition to their ‘DC-PRO’ release is instantly disseminated to the bankers all over the world and especially to officials and executives responsible for risk management and trade finance compliance. They closely review this release and take some precautionary measures in order to mitigate the potential risks. Therefore, any issue released by the ICC draws serious attention of all parties concerned. Although regular disclaimer is provided at the end of this article which states that it represents the views of the author and not necessarily those of the ICC or any of the other partners in ‘DC-PRO’. This is their common disclaimer always affixed at the end of any bulletin or article released in their ‘DC-PRO’ so that the organisation’s legal burden in case arisen over any publication can be avoided. With the release of this article in the ‘DC-PRO’ page of the ICC, the bankers across the world including those who are responsible for trade finance compliance and risk management have become extra careful in handling the L/Cs issued by our country’s banks. It would not be surprising if banks in the developed countries include our country in the list of passing EDD (Enhanced Due Diligence) after publishing this report. This will of course create a sort of additional hurdle in carrying out trade finance transaction in an international market, particularly where transactions are undertaken through L/Cs. In general, the L/Cs issued by our country’s banks are not widely accepted. In many situations, banks in the developed countries are reluctant to undertake negotiation / discounting of L/Cs issued by the banks of our country. A few months back, one large exporter of the USA was moving from bank to bank to receive letter of undertaking for discounting / negotiating some export L/Cs issued by one of the commercial banks of Bangladesh. Although confirmation was provided to those LCs, yet the exporter was confronting a difficult situation in receiving undertaking of negotiation / discounting from his banks because the L/Cs were issued by Bangladeshi banks. It is our general perception that when confirmation is provided to the L/C, there should not be any problem of handling it but this conception is not true specially in the North American market where the exporter likes to receive confirmation / undertaking from his bank for handling the L/C. In that situation, involving too many banks in managing one particular L/C not only increases cost but also results in cumbersome workflow which all the parties concerned intends to avoid. Under this situation, the article released by the ‘DC-PRO’ page of the ICC will make the acceptability of our L/Cs more difficult. From this report, it is assumed that sudden increase in capital machinery import is being envisaged as signalling capital flight which may not be true at all. Capital flight may not necessarily be associated with the increase of capital machinery imports as this may also happen in import of commodities / consumer items. Even the likelihood of capital flight through commodity or consumer imports is much higher than that of capital machinery. Because international trade of commodity or consumer goods is mostly undertaken by various trading houses whose genuine identity and location cannot be ascertained properly all the time. Since their investment is very small, their corporate culture as well as compliance is not up to the international standard. On the other hand, capital machinery is manufactured and exported by the world reputed large corporate houses whose compliance is very strong. Therefore, capital flight by means of importation of capital machinery is very unlikely. Nevertheless, capital flight though L/C transaction is not new at all. Rather, under-invoicing or over-invoicing is considered as a very old means of capital flight which takes place all over the world including the developed countries. Over the last few years, many stringent compliance measures have been developed and are in place so that the malpractice of capital flight using L/Cs can be arrested but unfortunately cannot be prevented. Instead it is continuing unabated threatening the norm of L/C transactions. The incidence of over-invoicing and under-invoicing is reported in many countries including developed ones but nobody directly admits it because this allegation is always subject to investigation and proof which is very difficult and time-consuming. Even, when the matter is identified, the concerned body does not directly admit this malpractice until the allegation is proved in a court of law because the country’s image and compliance weakness are associated with this offence. Therefore, our central bankers should have been more circumspect while discussing this sensitive issue. More importantly, when one of the Deputy Governors mentioned that there is no accurate data on this issue in their hand, there was no need at all to express concern over capital flight through capital machinery imports. However, they could have undertaken extensive measures to probe this allegation, if any at all. And this probe is not difficult for the central bank. So far we know, there is regulatory requirement for matching each L/C and its bill of lading with respective Bill of Entry which is the evidence of physical arrival of goods in the country. Any mismatch of Bill of Entry is reported to the BB. Besides, per unit price against each import can easily be verified with the international pricing standard which is now available in many websites. So it is not difficult to determine whether there is any alleged incidence of capital flight through not only capital machinery imports but also other regular commercial imports too. This verification is not necessarily required for each and every single L/C transaction, but can be done where bulk import is made involving substantial amount of foreign currency. After verification if any incident is detected, stringent punitive measures must have been taken against the involved bank. Before that, expressing concern from the central bank is really detrimental not only to the L/C business of commercial banks but also to the country as a whole. We have to keep in mind that any word that comes from the country’s central bank is viewed with serious attention because it represents the country’s treasury. We all remember that in late 90s, the then Governor of the Bangladesh Bank while speaking in an informal gathering, made a casual remark that, “Bangladeshi banking system is on the verge of the collapse”, which was subsequently quoted by an internationally reputed magazine in its article on ‘Banking sector in Bangladesh’. After the publication of the article, serious repercussion was created in the international banking arena, especially in the developed world’s banks, about the soundness of our country’s banking business. Many countries declined to accept the L/Cs and many correspondent banks also declined to confirm the L/Cs issued by commercial banks of our country because views expressed by the country’s central banker was considered with serious attention. Since then, 15 years have elapsed and our country has achieved praiseworthy success in almost all the economic as well as social parameters. Our banking sector has taken a leading role in the country’s economic development. The banking industry has expanded substantially in every respect including the number of banks and financial institutions and volume of deposits, loans, employment generation, compliance and information technology as well as mass people’s involvement with banking activities. Specially, Governor Dr. Atiur Rahman’s extensive efforts in modernising the country’s banking industry and in portraying our country’s achievement as well as potentiality have placed Bangladesh in a respectable position in the world market. The Governor’s dynamic role has not only rebuilt but also upheld the image of our country in the international arena. Now financial leaders of the developed world have learned much about our country and have started taking positive approach towards exploring trading opportunity in our country. In this situation, there should not be any word, statement or concern from central bankers without any accurate information so that this spectacular achievement is not again jeopardised. We believe that the Bangladesh Bank will conduct verification and investigation into the alleged capital flight report through L/C transaction and will unveil the true picture. If investigation unearths any wrong-doing, appropriate action should be taken against the persons and institutions found guilty. This action will improve the country’s image too. People meticulously monitor and review the action taken against any wrong-doing rather than the incident itself. Because malpractice happens all over the world but important issue is how this situation is handled. Hopefully, the Bangladesh Bank will be able to do that as it has previously done in many cases. At the same time, the BB should send a rejoinder to the ICC explaining the actual situation with accurate facts and figures so that they withdraw the article from their regular bulletin, ‘DC-PRO’.
