No Need to Disclose Investment Source Raises Money Laundering Risk

Even though intent of not seeking source of investment may be good, it can have consequences, officials say

A new provision in the Financial Act for this fiscal year that it would not seek source of income from investors if they are investing in infrastructure projects and businesses has raised a question of policy reversal and concerns have also grown if it could aid money laundering.

“The government will not seek sources for investments made in the areas of nationally important hydropower projects, international airports, infrastructure projects like underground highways, cement factories, steel factories, agriculture-based businesses, tourism, businesses that create employment for more than 300 Nepalis and production-based businesses that use more than 50 percent of domestic raw materials until April 12, 2024,” according to the new provision in the Financial Act 2021-22.

It was one of the bills presented by Finance Minister Janardan Sharma on September 10 in the House of Representatives for replacing the budget that the erstwhile KP Sharma Oli government had introduced in May through an ordinance.

The Financial Act with the new provisions has come at a time when the Asia Pacific Group on Money Laundering (APG), a regional anti-money laundering body of which Nepal is also a member, is conducting a mutual evaluation of the country.

During the mutual evaluation, member countries observe whether any country has introduced anti-money laundering legislation and developed institutional mechanisms and taken action accordingly. The evaluation was supposed to be done in 2020, but it got delayed due to the Covid-19 pandemic.

The evaluation is now set to start and is expected to be completed by the middle of 2023.

Officials familiar with the matter say even though the intention behind not seeking the source of investment is good, it can have consequences.

“The government’s move appears to be well-intentioned, as it is aimed at attracting more investment in important sectors, but this may have a detrimental effect on the result of the [APG] mutual evaluation,” said an official at the Ministry of Finance who spoke on condition of anonymity.

The issue has drawn criticism from some ruling party leaders as well.

A group of Nepali Congress leaders, including its Vice-president Bimalendra Nidhi, General Secretary Shashank Koirala, and Central Working Committee member Prakash Man Singh, recently urged Prime Minister Sher Bahadur Deuba to amend the measure.

“We called upon the prime minister to immediately hold talks with Finance Minister Sharma to withdraw the provision,” Nidhi told the Post. “On the same day, Koirala, Singh and I held a meeting and reached an understanding that the provision must be scrapped.”

He said that the provision of not requiring disclosure of the source would pave the way for the entry of black money into the economy and it also invites the risk of the country being blacklisted (by FATF).

“We have strongly raised this issue with the prime minister. I hope he will take this issue seriously,” said Nidhi.

After criticism, the Ministry of Finance on September 20 put out a statement, saying that the government will not grant impunity to anyone involved in money laundering, terrorist financing, and corruption as per the existing laws and there will be no relaxation on investments of earnings made through such activities.

The ministry has refused to roll back the new provision.

The official who spoke on condition of anonymity said that despite the “good intention” behind the move—which is attracting more investment—foreign evaluators may interpret it differently while looking into Nepal’s compliance with anti-money laundering measures, especially in the wake of Nepal’s recent measures against money laundering and terrorist financing.

“There is an obvious risk to Nepal,” the official, who has a deep insight in the matter, told the Post.

The APG had first evaluated Nepal regarding the risks of money laundering and terrorist financing in 2005 based on various recommendations of the Financial Action Task Force (FATF), the global anti-money laundering body.

After it showed Nepal was deficient on multiple indices, the government had rushed to introduce anti-money laundering laws and established the Department of Money Laundering Investigation in 2008 by introducing a law.

In 2008, Nepal was put on the Grey List marking it as a territory that was deemed a “safe haven” for money launderers, and only narrowly avoided moving to the FATF’s Blacklist (of countries identified as uncooperative in the international fight against money laundering) in 2012.

In 2010, Nepal made a political commitment at the finance minister’s level to address the deficiencies identified by the FATF, including in the areas of legislation and anti-money laundering institutional infrastructure.

In 2013, Nepal amended the Anti-money Laundering Act-2008 but the country took time to introduce other laws to control money laundering despite repeated warnings from the FATF. In 2014, several laws such as Mutual Legal Assistance Act, Extradition Act, Organised Crimes Prevention Act, and Confiscation of Criminal Proceeds Act were introduced.

The government also initiated automation works in institutions like the Department of Money Laundering Investigation and the Financial Information Unit as per the country’s commitment to FATF.

As a result, Nepal was removed from the “Grey List” in June 2014.

Since 2010, Nepal has also been taking steps to plug the loopholes in laws, even though questions have been raised about the implementation of the laws, as some cases have failed to go through legal scrutiny.

In an October 2019 report, the FATF said that Nepal has historically been seen as an easy target for money laundering and financial crimes, mainly due to its long, porous border with India and cash-dominant economy.

“Additionally, relatively weak financial controls and a destabilised economic system—a legacy of the decade of civil unrest that began in 1996—added to Nepal’s vulnerability,” said the global anti-money laundering body. “The international financial community has long recognised Nepal’s deficiencies in anti-money laundering (AML) and counter terrorism financing (CFT) measures.”

Government officials say that ongoing evaluation is more about the implementation of Nepal’s laws and its commitment, rather than the introduction of laws or institutional mechanisms. The National Risk Assessment Report on Money Laundering and Terrorist Financing 2020 has pointed out comprehensive legislation as one of the key strengths of Nepal while pointing to the lack of effective supervision of reporting entities, national and international trade discrepancies including hundi, an illegal way of money transferring, and tax dodging.

But the new provision raises questions about Nepal’s legislation as well.

The government’s sudden announcement that it would no longer seek the source of income for investment in certain sectors comes at a time when Nepal’s commitment to anti-money laundering and terrorist financing continues to remain dubious.

“The provision in the Financial Act gives an impression to the international community that Nepal has reversed its anti-money laundering policy, which is not good,” said Ram Sharan Mahat, a former finance minister and leader of the Nepali Congress, which is leading the current coalition government. “We can’t ignore the possibility of being greylisted again by the FATF if we fail to abide by our international commitments.”

Nepal falling on the “Grey List” could affect the country’s international financial transactions and it may also affect foreign aid to be received by the country, according to experts.

Mahat said that seeking the source of income has been an international norm in recent years amid the growing risk of money laundering and terrorist financing.

In Nepal, for every transaction worth over Rs1 million, the source of income must be stated. Any suspicious transactions must be reported by banks and financial institutions as well as insurance companies and others to the Financial Information Unit.

The Financial Information Unit is responsible for receiving, processing, analysing, and disseminating financial information and intelligence on suspected money laundering and terrorist financing activities to the relevant law enforcement/investigative agencies.

Chiranjeevi Nepal, a former central bank governor, also warned of Nepal being put on the “Grey List” by the FATF because of such policy reversal by the government on sources of investment.

“What would be our response to the international community on relaxation on income source provision at a time when the country is under the scanner?” said Nepal. “Can we remain detached from the international community?”

This, however, is not the first time efforts to relax provisions regarding income source have been made.

Yubaraj Khatiwada, who was finance minister in the erstwhile KP Sharma Oli Cabinet and introduced strict measures against money laundering during his tenure as the central bank governor, had also sought to relax the provision regarding income source when he presented his first budget in the fiscal year 2018-19.

As per the Financial Act 2018-19, the government “will not seek the source for investments made in the areas of nationally important hydropower projects, international airports, infrastructure projects like underground highways and railway, a business that creates employment for more than 300 Nepalis and production-based businesses that use more than 50 percent of domestic raw materials, until mid-April 2019.”

A Finance Ministry official said the provision met with criticism then also and after widespread criticism, it was never implemented and later removed.

Nepal, the former central bank governor, said such provisions, in the garb of good-looking intentions, are usually introduced to serve certain interest groups.
He also questioned the central bank’s policy of relaxing the requirement of its approval for foreign investment.

By introducing Bylaws on Foreign Investment and Foreign Debt Management in June, the Nepal Rastra Bank introduced a provision that the bank’s approval will not be required to bring in foreign investment after the relevant government agencies give their approval for such investment. The only thing the central bank needed was a notification.

“These measures, even though they appear to be aimed at attracting foreign investment, could be counterproductive,” said Nepal, “as they give rise to suspicions about the country’s commitment to anti-money laundering.”

Right after such a provision was made in the Financial Act, representative bodies of the private sector welcomed the government’s move, but experts say that implementing the new policy would be risky for Nepal.

“This will pave the way for production growth in the economy and employment creation, by bringing the capital of the informal sector into the formal sector,” the Federation of Nepalese Chambers of Commerce and Industry, the apex private sector body, said in a statement.

Chintamani Siwakoti, former deputy governor of the central bank, however, said that the new provision could enable money launderers to turn their black money white by investing in the designated sectors until mid-April 2024.

“How can you defend such a move before the international community?” said Siwakoti. “Scrutiny on income sources has been a common norm internationally. Such a move could put us on the international radar.”

Article credit: https://kathmandupost.com/money/2021/09/27/no-need-to-disclose-investment-source-raises-money-laundering-risk