On December 9, the International Anti-Corruption Day, concerns were expressed on the rampant corruption in Nepal. Prime Minister Baburam Bhattarai reportedly acknowledged the prevalence of corruption at high bureaucratic and political levels. Meanwhile, Transparency International, a global anti-corruption watchdog, has placed Nepal among the most corrupt countries in the world in its 2012 Corruption Perception Index (CPI). The CPI has ranked Nepal at 139th position out of 176 countries.
Irrespective of whether it is public or private sector corruption, or grand or petty corruption, corruption generates proceeds for those involved. Although no formal estimate has been made as to how much proceeds corruption generates in Nepal, Nepal’s 2010 assessment of its compliance of international anti-money laundering (AML) standards by the Asia Pacific Group on Money Laundering stated that corruption is one of the primary sources of illicit proceeds in Nepal. The acknowledged level of corruption presumably generated substantial amounts of proceeds for high level bureaucrats and politicians. The higher the proceeds of the corruption, the more severe are its socio-economic impacts.
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Furthermore, corruption raises serious concerns because of its links with other criminal activities. As noted by the 2011 research report on illicit financial flows published by United Nations Office on Drug and Crime, corruption level tends to be higher in poor countries with high levels of organized crime. Studies have also suggested that criminal organizations use the proceeds of their illegal activities to corrupt officials so that they can operate without interference. Higher level of corruption in a society is, thus, indicative of existence of other criminal activities as well, eventually resulting in an increased flow of illicit proceeds in the economy.
How do we track these proceeds? The proceeds are either placed within the financial system, or are invested in valuables, real estate, and so forth. A vigilant financial system can detect such illicit proceeds by applying AML measures including customer due diligence, identifying and verifying beneficial owner, verifying the customer’s source of fund, continuous monitoring and scrutiny of customer’s transaction, and record keeping and reporting of suspicious transactions to the Financial Intelligence Unit (FIU).
Similar measures are to be applied by businesses and professions dealing in valuables. International AML measures put in place certain arrangements where financial transactions of individuals are constantly monitored and suspicious transactions reported to the FIU for analysis and dissemination to law enforcement agencies. AML measures prevent any criminal use of financial system or designated businesses like trade of precious metals and stones and real estate, for the purpose of concealing illicit source.
Taking into consideration the intrinsic link between corruption and money laundering, United Nations Convention against Corruption suggests anti-money laundering measures as one of the measures to prevent corruption. In addition to requiring financial institutions to establish the FIU, it requires them to conduct enhanced scrutiny of accounts maintained by or on behalf of individuals who are (or had been in the past) entrusted with prominent public functions, their family members, and close associates.
Responding to the call of G-20, Financial Action Task Force—an international inter-governmental body mandated to develop international AML standards—has strengthened international AML standards to help detect and deter proceeds of corruption. The Financial Action Task Force (FATF) standards enable authorities to follow the money trail so that underlying criminal activities can be detected and the proceeds successfully confiscated before the criminals get to conceal the true illicit source of proceeds. If properly implemented, the international AML standard can facilitate detection, investigation and prosecution of corruption in addition to ensuring transparency of financial system. Similarly, the 2011 plenary of Egmont Group of FIUs, an informal international group of the FIUs around the world, has also given priority to the FIU’s role as part of each government’s anti-corruption work, especially in tracing and identifying illicit proceeds, and in facilitating international exchange of information.
Of the many preventive measures, AML measures undoubtedly serve an important role for prevention of corruption. Tracking proceeds of corruption have not yet been a part of anti- corruption initiatives in Nepal. Existing anti-corruption law does not provide for AML measures as anti-corruption measures, nor does AML law provide for a formal relationship between Commission for the Investigation of Abuse of Authority (CIAA), Department of Money Laundering Investigation, and FIU.
Proceeds of corruption need to be targeted, and measures adopted accordingly. Regulation of the financial institutions alone does not suffice. Businesses dealing in precious metals, real estate, and other similar trades that may facilitate laundering of illicit proceeds need to be properly regulated. Lack of proper arrangements to track the movement of proceeds of crime has contributed to encouraging corruption in Nepal as much as government’s failure to appoint commissioners at the CIAA. Preventive measures must go together with punitive measures.
Author is a lawyer associated with Nepal Rastra Bank. Views are personal.
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