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Duty-dodging In Bangladesh

Counterfeit counterfoils

The Economist
In the five years to 2005 Bangladesh had the unfortunate distinction of languishing at the very bottom of Transparency International's corruption perceptions index. It has fared little better since. When Jim Yong Kim, the World Bank's president, forcefully stated his commitment to curb crony capitalism under his watch earlier this year, he used Bangladesh as an example of how the bank would punish "insufficient response by the authorities to the evidence of corruption". The bank had just cancelled funding for South Asia's largest donor-funded infrastructure project, a $3 billion bridge across the Padma river, citing alleged corruption by Bangladeshi officials.
Yet it is surprising how little attention donors pay to the biggest form of graft in Bangladesh, which, if fixed, would leave the government with enough cash to double health spending and to pay for an infrastructure project as large as the Padma bridge every two years.
The corruption in question is fraudulent trade invoicing. Take exports of spectacles from China to Bangladesh, for example. The Bangladeshi importer asks the Chinese exporter to invoice for $1 per pair of spectacles, though the price agreed is $10. That allows him to pay only a fraction of the import taxes he owes the state. The Chinese exporter agrees to under- invoice because it makes his product hyper-competitive in Bangladesh (by undercutting those who are not prepared to falsify their invoices); and to avoid foreign exchange regulations, which require him to turn over his proceeds on the spectacles to China's central bank.
In practical terms, the importer pays $1 through official channels (using a letter of credit) and settles the remaining $9 by using the hundi system, an informal money transfer set-up. He hands that sum to a hundi dealer in Bangladesh. Another dealer in Dubai, say, uses a money transfer agent to balance accounts. He sends $9 in hard currency to the importer's offshore account, out of which he then pays the Chinese exporter. No money crosses Bangladesh's borders and the currency movements recorded show no link to the original trade transaction.
The sums of money involved are big. Forrest Cookson, an American economist and expert on Bangladesh's economy, reckons that under-invoicing of imports alone results in lost revenue of at least 1 percent of GDP annually. If the practice were stamped out, he says, the country would gain 1.5 percentage points in its tax to GDP ratio (which remains one of the lowest in the world, despite a fourfold explosion in trade in the last decade). Bangladesh also ends up paying a lot more for its imports, because importers who save on duty can afford to trade with more expensive suppliers (thus squander-
ing an estimated $3 billion in foreign exchange annually). The problem has worsened following a surge in trade with China, which has risen sevenfold between 2002 and 2012, to $8.5 billion. Under-invoicing on Chinese imports alone could be as high as $3 billion.
Part of the reason for the fraud is Bangladesh's protectionist trading regime, which is among the toughest in Asia. Customs officials report the worst cases of under-invoicing on goods with high duties—for example, costume jewellery (often invoiced at just 5 percent of its real value). But tax evasion is made easy by lax and outdated custom controls. This fraud would be cheaper to fix than reforming the institutions that Bangladeshis commonly perceive to be the most cormpt: the police, the judiciary and political parties. Some efforts are already being made. This summer the government launched a new software system in three of its ports (Benapole, Chittagong and Dhaka), which allows customs officials to check dodgy-sounding values by looking up current market prices.
But full automation is still a long way off. And on June 30 Bangladesh's mandatory Preshipment Inspection Programme, under which the quality, quantity and price of exports were verified by an independent firm before entering Bangladesh, was scrapped. The system had helped contain the worst excesses of fraudulent trade invoicing. Losses to the exchequer are likely to keep rising.