Investment without Source of Income

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Investment without Source of Income

The new federal budget for FY2021/22 has sparked a big protest against its provision that says no question will be asked about the source of money that is invested in some specified infrastructure projects, such as hydropower, airports and tunnels. This is as per the demand of the private sector in general.

On the positive side, this provision allows a lot of money to enter the formal sector from the informal sector where it is circulating right now. Thus the jobs created by such investment will be in formal sector and the size of informal sector will be reduced. But the critics are not accepting this.

This provision is not entirely new, however. In the budget for FY2018/19, the then finance minister Dr Yubaraj Khatiwada had made similar provision. But the arrangement was not implemented as the government backtracked from its decision claiming that it was 'mistakenly provisioned' in the budget. Fearing a big backlash due to anti-money laundering (AML) issues, the government retracted from its decision.

At a time when Nepal has not been able to formulate adequate anti-money laundering legal and structural frameworks, it is likely that allowing investment in such a manner could provoke the ire of international bodies active in preventing money laundering including the Financial Action Task Force (FATF). However, it is also true that offshore financial centres, which are believed to be tax havens or centres of money laundering are the third largest source of foreign investment in Nepal and these bodies are not stopping investments coming from such areas.

There are reasons to believe that a good portion of the money coming in as FDI from such areas is actually the money earned by Nepalis illegally within Nepal or in other countries which got channeled to such offshore financial centres. The same money may have entered Nepal as a foreign investment. The present controversial provision will allow similar facility also for the money that is still within the country.

In this connection, it should be considered that some illegal earnings are not as bad as the others.  In the first group are money earned through terrorist activities, illicit arms trade, drug trafficking, corruption and black marketing. These are really dirty black money. Second type of illegal money is not that black. It is grey. Such money is earned not through such bad activities. However it has not been recorded in the tax system. These are incomes and assets that are not proven legitimate as per the strict sense of the law. In Nepal, some old business houses that were operating also before the Income Tax law was introduced say they have money earned as early as that but which is not possible to be claimed as clean money because such money is still not recorded in the tax system. If this second type of income is allowed to be invested it should be considered harmless and it may be possible to convince even the FATF.

The Ministry of Finance has tried to clarify that the provision will not be allowed to be used as a pretext to clean the black money of the first type. But it has not been able to totally convince the critics.

Yes, allowing investment of money earned from criminal activities could result in the country being blacklisted by intergovernmental bodies like FATF. Therefore, it will be appropriate to accept such investment only by formulating clear criteria and policy.

One reason for the strong protests now is the strong support voiced in favour of this provision by politicians with Maoist background. The critics say such politicians have amassed a lot of money through various dirty tricks during the insurgency and even after the peace deal was signed and they now see this budget provision as the easy way out to make such money white. This possibility must be stopped by making adequate provisions in the law so that such really dirty money is not allowed to be recycled.

Madan Lamsal
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