Print Edition - 2019-01-17 | News
How the ultra-rich use FDI to launder their illici cash
Jan 17, 2019-
At a time when the government is making a pitch for foreign direct investment—to use it as a tool to bring in the much-required fund to boost economic activities—an investigative report by the Centre for Investigative Journalism-Nepal has painted a damning picture of how some Nepali politicians and businessmen are using foreign direct investment to bring illegal funds into the country.
Around 45 percent of the money that came into Nepal in the form of FDI in the last two decades was from the British Virgin Islands, a Caribbean tax haven used by the world’s most powerful to park and transfer their illicit wealth, the report says.
The report, based on an analysis of over 3,000 financial and court documents and interviews with over 70 individuals, has listed over 50 individuals from Nepal ranging from politicians to businesspersons to doctors, and explained the myriad ways they have been using to make their illegal funds sail into the national banking system through the Caribbean waters.
In a startling revelation, the CIJ-Nepal reports two-thirds of the FDI in Nepal has been sourced from the British Virgin Islands.
A survey report by the Nepal Rastra Bank in June last year said FDI totaling Rs137.68 billion has been endowed to the industries currently operating in Nepal. More than 60 percent of the FDI share, amounting to Rs82.65 billion, comes from tax haven countries, the report says, adding that the British Virgin Islands and nearby countries alone have an investment worth Rs62.78 billion in Nepal.
The investigation also shows that statistics on FDI by different government authorities are contradictory. For example, the Department of Industries, one of the government bodies to grant FDI approval, has approved investment worth Rs282.91 billion, and Rs66.9 billion out it has been sourced from tax haven countries.
The report says investigation shows a significant difference between the amount approved by the government as FDI and the amount brought in the country. While the amount permitted by the Department of Industries was Rs66.9 billion, the central bank statistics show that Rs82.65 was received, raising questions as to how the unauthorised FDI worth Rs15.75 billion made its way to Nepal.
The FDI amount surpassing the approved amount cannot be possible without the consent from top government officials, the report said, quoting an anonymous Nepal Rastra Bank official. “Either the investment has not been approved or the profit on the initial investment has been reinvested,” the official told the CIJ. “The Department of Money Laundering Investigation has to look into the matter.”
What is more worrisome is there are no records with the government on the so-called FDI companies—whether they are functional or have ceased to exist, or they have just been registered with a view to laundering money in the name of FDI.
Financial analysts say the investigation shines a light on how Nepal has invariably failed to act against money laundering and crackdown on “illegal fund transfers in the name of FDI”, which not only has a corrosive effect on a country’s economy but also weakens governance and damages social well-being.
Such shoddy investments, a former NRB official told the Post, will defeat the real purpose of FDI, as the motive behind transfers of such funds is to launder the illegally amassed wealth rather than establish legitimate businesses that can be beneficial to the country and its people.
“Such investments will neither create employment opportunities nor aid to the technology transfer, the two main aspects of FDI,” said the former national official seeking anonymity because his current position does not authorise him to speak on the matter. “Instead, such investments will tarnish Nepal’s image in the global arena and pose a threat to the stability of the financial system in the country.”
The revelation also could lead to a situation, experts warn, where Nepal could be blacklisted by the Financial Action Task Force, an intergovernmental organisation formed to combat money laundering.
To date, Nepal has managed to avoid penalties, including getting blacklisted by the global anti-money laundering body, by endorsing a few laws and setting up the institutions like Financial Information Unit under Nepal Rastra Bank and the Department of Money Laundering Investigation (DMLI).
However, the probability of Nepal being blacklisted in the next assessment scheduled in 2020-21 cannot be ruled out, the former central bank official said, as the institutions established and laws enacted to curb flow of illicit money into the country are not effective, and a majority of foreign direct investments that Nepal receives comes from tax haven countries.
The report also presents a case where Nepal has received FDI from two other countries—Cayman Islands and Brunei, both also dubbed tax haven countries—despite the fact that investors from these countries have not obtained approval from the Nepali authorities. It has cited the NRB report that shows Nepal has received Rs160 million from Cayman Islands and Rs30 million from Brunei.
The government of Nepal has given FDI approval to 17 tax haven countries.
The investigation also shows that three companies with the largest FDI in Nepal are from the British Virgin Islands. One of them is Reven Business Limited, owned by Upendra Mahato, a non-resident Nepali which obtained the approval of Rs2 billion in February 2015. The NRB, however, imposed restrictions on the company’s investment after a conflict surfaced between Mahato and his partners in Nepal.
Similarly, the second largest company that brought significant investment in Nepal, according to CIJ-Nepal report, is associated with Saurabh Group of companies, owned by Bishnu Prasad Neupane. The company received approval to bring in FDI worth Rs1.94 billion via Global Technology and Trademark Limited to establish hotels in Bhaktapur. The 17-storey hotel building being constructed by the company in Thimi of Bhaktapur was drawn into controversy when it defied the approval to construct a five-storey building. Madhyapur Thimi Municipality has already barred the company from continuing the construction work.
The third largest FDI approval, according to the investigation, was also channelised from the BVI by Silver Heritage Group, a Hong Kong-based company. The company owned by Rajendra Bajgain, a central committee member of the Nepali Congress and a renowned tourism entrepreneur, brought in Rs1.755 billion. Likewise, Darla Holding AG, a Swiss company brought fourth largest FDI into Nepal after obtaining approval to bring in Rs1.2 billion to build a 15 megawatt hydropower plant in Rasuwa.
If the state fails to control such shoddy investments from tax havens, it will lead to weakening of the state while making the people involved in illegally amassing fortunes even stronger, the report has quoted Dharma Raj Sapkota, former head of Financial Information Unit and an expert on money laundering issues, as saying.
Looking at the ways the FDIs have been routed to Nepal, according to the source, the former NRB official, enough questions can be raised about the effective functioning of the legal frameworks and institutions that were created to curb money laundering and terrorist financing as asked by the global organisation like Financial Action Task Force.
For example a year ago, after a preliminary report prepared by the Department of Money Laundering Investigation and the Central Investigation Bureau of Nepal Police found controversial businessman Ajeya Raj Sumargi’s involvement in illegal fund transfer from abroad with a motive to launder dirty cash, the department had formed a team to probe into the property owned by Sumargi. But the department is yet to make its probe report public. “The failure to take the probe to a logical conclusion has left enough ground to question the effectiveness of the institutions like DMLI,” said the source.
The Post was unable to reach Jeevan Prakash Sitaula, the director general of the Department of Money Laundering Investigation despite repeated attempts.
Government’s own documents too agree that the frameworks and institutions in Nepal are not functioning effectively to combat money laundering.
A white paper on the country’s economy issued by Finance Minister Yubraj Khatiwada in March 2018 stated that the laws must be strongly implemented and institutions established to combat money laundering must work effectively before Nepal’s efforts are evaluated by FATF in 2020-21.
Khatiwada had warned that if the financial investment in money laundering and terrorist financing are not curbed, Nepal will have a negative image in the international arena, affecting its financial stability and expansion of global trade and the investment climate.
“The moment Nepal is blacklisted,” Sapkota, the former central bank official, told the CIJ-Nepal, “there won’t be foreign banking transaction.”
Published: 17-01-2019 07:07