BNM: Financial outflows overstated

Publication: NST

Date of publication: Mar 2, 2013

Section heading: Business Times

Page number: 001

Byline / Author: By Roziana Hamsawi

KUALA LUMPUR: THE unrecorded financial out- flows as reported by an external non-governmental organisation recently are likely to be overstated, Bank Negara Malaysia said yesterday.

In a statement, the central bank also said: "It is important to note that estimates highlighted in its (the NGO's) report are essentially unrecorded financial flows, which are not necessarily synonymous with illicit financial flows."

The NGO report had estimated that 80 per cent of the unrecorded financial outflows in Malaysia amounting to US$227.1 billion (RM703.7 billion) during the period of 2001-2010 were due to trade mispricing.

Bank Negara, however, said these unrecorded outflows could not be caused by mere trade mispricing, but also due to data discrepancies and the different conventions used to compile trade statistics among countries.

These include time lag, variations in valuation and exclusion of certain types of goods.

Bank Negara said the situation is further complicated by the treatment of goods that are exported via re-export hubs.

This means that exports by Malaysia to a specific trading partner may not give rise to similar number recorded as total imports from Malaysia by that country.

"After taking into account Malaysia's trade that is exported via Singapore and Hong Kong (re-export hubs), the estimate of trade mispricing between Malaysia and its top 10 trading partners were reduced significantly by about 70 per cent," the central bank said.

"Since the estimates in the report of trade mispricing do not take into consideration such discrepancies in trade statistics, the estimates of illicit flows are overstated."

Bank Negara also highlighted the fact the errors and omissions (E&O) of the country's balance of payments is about two per cent of total trade, well below the five per cent benchmark threshold prescribed by the International Monetary Fund.

"These ratios have also been on a moderating trend since 2010."

In its report, the NGO had estimated that 20 per cent of Malaysia's illicit outflows were accounted for by unrecorded transfers of proceeds via informal channels that are captured by the E&O of Malaysia's balance of payments.

On this, Bank Negara said it should be noted that not the entire E&O figure is attributable to illicit activities, as it also includes genuine statistical errors from the compilation of statistics of external trade and crossborder financial transactions.

"Since Malaysia is a very open economy with total trade in goods and services amounting to an average of 192 per cent of gross domestic product during this period, such discrepancies are bound to be large in absolute amount," it said.

It also said that a portion of the E&O could arise from the transfer of funds obtained from illegal activities, organised crime and tax and Custom duties evasion.

It added that the government has always considered any transgression of the country's rules and regulations a very serious matter and measures will continue to be intensified.

"On mitigating trade mispricing, the Royal Malaysian Customs Department has taken actions against entities and individuals who

Bank Negara added that moving forward, the trade mispricing issue will be mitigated with the introduction of Goods and Services Tax (GST), which requires reporting of value-added at various stages of production.

Bank Negara also said the new Money Services Business Act 2011 further complements the measures that have been put in place and actions taken under the Anti-Money Laundering & Anti-Terrorism Financing Act 2001.

Malaysia is now well supported by robust legislation to combat illegal financial flows, it said.

The country's efforts to reduce illicit financial flows are undertaken by members of a high-level multi-agency special task force, which comprises the Attorney-General's Chambers, Customs Department, police, Malaysian Anti-Corruption Commission, Inland Revenue Board, Immigration Department and Bank Negara.