Interviews
There’s a dirty nexus between businessmen and politicians
The Panama Papers, an unprecedented leak of 11.5 million files from the database of Panama-based Mossack Fonseca, one of the world’s biggest offshore law firms, have revealed the myriad ways in which the rich were exploiting secretive offshore tax regimes.The Panama Papers, an unprecedented leak of 11.5 million files from the database of Panama-based Mossack Fonseca, one of the world’s biggest offshore law firms, have revealed the myriad ways in which the rich were exploiting secretive offshore tax regimes. Though no names of Nepali individuals or companies have come out in the open so far, questions are being raised in Nepal about the rise in capital flight and the possibility of Nepalis having offshore accounts. Mukul Humagain and Bibek Subedi talked with Maha Prasad Adhikari, former deputy governor of Nepal Rastra Bank, about a legal regime on anti-money laundering and how capital flowing in and out of the country should be governed. Adhikari led Nepali delegations numerous times in the meeting of the Financial Action Task Force (FATF), a global anti-money laundering body.
The Panama Papers have shown that the world’s rich and powerful have extensively used offshore companies to avoid taxation. Though no Nepali companies or individuals have been named so far, how likely do you think some names will be disclosed once all the documents are uncovered?
As of now, details of the Panama Papers have not been disclosed. Moreover, they are leaked documents and full investigation on them need to be carried out. For countries that have capital account convertibility, having offshore entities and investment through offshore companies is not illegal. However, Nepal has the Restricting Investment Abroad Act in place, which makes it illegal for its citizens to invest abroad or have bank accounts in foreign banks. Despite this, earlier leaks by the International Consortium of Investigative Journalists have revealed that Nepalis have made investments abroad through offshore entities.
As far as the Panama Papers’ connections with Nepal are concerned, the leaked documents might contain some offshore companies with Nepali investments. But we may not find the big names that we are expecting. Instead of real names, it might have dummy names and companies making it difficult to find the ultimate beneficiaries.
It was due to the FATF that Nepal introduced a legal regime to tackle money laundering in the country. How effectively has the state dealt with money laundering?
The FATF in its initial days had made effective interventions to combat money laundering and deal with money earned through illegal means. It has worked with many countries across the globe to create a legal regime. Since last year, the FATF has entered a new phase of effectiveness and proper implementation of the regime. However, due to resource constraints, it cannot review many countries at the same time.
Nepal has enacted numerous Acts on anti-money laundering. Five vital legislations—Anti-Money Laundering Act, Mutual Legal Assistance Act, Proceed of Crimes Act, Extradition Act, and Organised Crime Control Act—have been endorsed by Parliament. We have institutional infrastructure in place with the Department of Money Laundering Investigation (DMLI) and the Financial Intelligence Unit (FIU) as well as joint investigation mechanisms. The FIU under the central bank has sufficient autonomy. But the issue in Nepal is not about a legal regime but its enforcement. What is needed is to effectively implement anti-money laundering Acts.
There are talks of elevating the status of the DMLI to a commission, given its weak performance. Will that make it more effective?
I believe it will because then it will not have to follow instructions from any ministry. But people have their own perspectives. I have even heard some government agencies complaining that the DMLI has too much authority. But you need authority to work effectively. As far as I know, the department has not abused its authority. It has filed cases at the Special Court after detailed analyses. However, with frequent transfers of the director general of the DMLI, it has not been as effective as intended.
Despite a strong legal regime, capital flight from Nepal has not stopped. Many argue that the situation will improve if the government endorses a legal framework that would make investing abroad legal. Do you agree?
It would be wrong to argue that we should make investing abroad legal because capital flight is taking place despite the ban. But I agree that sooner or later, we should establish a legal framework to allow Nepalis to invest abroad. Nepal Rastra Bank—the central bank—has been working on it. But we should move ahead gradually. If we allow Nepalis to invest abroad, we need to consider various factors including the status of foreign reserves in our banks and the political situation. We should not forget that we are still undergoing a political transition and that capital moves fast during such times. We need to go for a cautious opening of our regime rather than doing it in a haste. But the foremost prerequisite is political stability.
When Nepal was under the monitoring of the FATF, Nepal Rastra Bank implemented several reforms on corporate governance. What was the impact of those initiatives on our banking system?
Isee many positives effects. Once we enacted legislation on anti-money laundering, banks and financial institutions (BFIs) started conducting risk assessments while choosing their customers. They seemed to have internalised the fact that while building relationships with customers is important, at times the clients themselves pose risks. The BFIs have a huge role in conducting due diligence to know their customers.
How, in your view, does capital flight take place from Nepal?
Capital flight takes place neither through wire transfers nor through physical movements. Nepalis’ illegal wealth stashed abroad is money made through trade-based money laundering or hundi. Over-invoicing is one of the means that can be used for trade-based money laundering. Research shows that 40 percent of Nepal’s total remittance does not enter the country through legal channels. Thus, a huge amount of money is flowing through the hundi system. Whenever people are caught in connection with foreign investments, the most common justification is that a Non-Resident Nepali relative invested earnings from abroad.
Why is it that our enforcement agencies, including the DMLI, have not been very successful in tracing illegal money?
People need to know that just on the basis of a leak, foreign agencies do not provide blanket information to us. There is a proper system for this. If our agencies are suspicious of certain Nepali citizens and conduct an investigation, they can contact foreign agencies once the investigation reaches a certain stage. The FIU can ask its counterparts in other countries for assistance and the police can take help from the Interpol if it is a criminal case. But first the case needs to be built properly in Nepal.
In Nepal, the nexus between businessmen and the political class is a known fact. Is such a nexus contributing to capital flight from the country?
There is a tendency to link any event in the country to its political transition whereby government agencies are unable to act to the extent possible. There is always a fear that if the government authorities take actions unilaterally—even against financial crimes—it could break the political understandings. In that sense, the nexus between businessmen and politicians in Nepal has definitely posed a challenge to anti corruption movements as well as to governance in general. In a country like ours with weak enforcement of laws, such a nexus increases the likelihood of capital flight and other illegal activities.
Twenty percent of the total FDI committed to Nepal has come from countries that are considered tax havens. Investment from such countries has increased substantially of late. What does this indicate?
It is true that in recent years we are witnessing an increased flow of illegally-earned money into Nepal under various pretexts. While we should welcome foreign investments, we should also govern the flow of capital properly. Such capital should not invite crimes. It should bring good governance, foster innovation and promote technology and skill transfers. There should be investment in infrastructure. But we do not want black money entering Nepal only to leave the country after being laundered.