Money that does not circulate in the open is suspect—either it is outright black money or an accumulation of undisclosed income. The two are very different.

Black money is collected by syndicates, cartels and middlemen who are seeking to embezzle public and private funds; taking bribes and other forms of gratification in exchange for illegitimate patronage; or over-billing and under-invoicing exports revenue, over-invoicing imports expenditures, wilfully defaulting on bank loans and laundering money abroad. Cheating on tax, non-deposition of VAT collection, non-registration of urban houses/apartments in the guises of "cooperatives" etc; fraud by under-recording the space and paying a lower holding tax rate on urban property; and possible additional remittance of laundered foreign exchange—for example, with a USD 10 billion abnormal hike in remittance, the handler can pocket Tk 1,700 crore as a two percent incentive—all of this also contributes to the creation of black money.

There are a number of examples of when these illegal activities have dominated headlines in Bangladesh. For example, the negligence in bringing to book the perpetrators of major banking scams was widely discussed—such as the snatching of Tk 574 crore from Oriental Bank in 2005; the Tk 3,700 crore Hallmark scam; the illegal banking by Destiny Group, where they took "deposits" at 30 percent interest rate, and transferred crores to personal accounts from the master account; and the AnonTex Group and Bismillah Group scandals. Recently, the alleged billion-taka scams at Evaly have been brought to the fore, sparking debate on cash-on-delivery payments.

A strange Bangladesh Securities and Exchange Commission (BSEC) rule preventing minority shareholders from seeking directorship unless they have two percent equity; the concentration of economic power (and possible money laundering) that militates against the equity objectives in a welfare state; and diverting industrial credits to secondary share purchases in 2010-11 and using the stimulus package money for share trading in 2021 are all things that have contributed to the vast amounts of black money that are prevalent in the Bangladesh economy.

However, it must be reiterated that black money is very different from undisclosed money, which accumulates due to middle class laxity and/or ignorance of tax laws. Some laws, rules and practices force the selling of land and real estate to register at lower than the market price.

In 1985-86, Dr SA Latifur Reza, the then director-general of the Bangladesh Institute of Development Studies (BIDS), made an important estimate of the black economy, finding it to be as high as a third of gross domestic product (GDP). Another estimate made by Dr Asaduzzaman of BIDS put the size of the underground economy to be 40 percent of GDP. Professor Abul Barkat estimates that black money is in the range of 33 percent of GDP at market price.

The then Finance Minister AMA Muhith announced during the 2013 post-budget press conference that 41-82 percent of GDP might be outside the mainstream economy. Thus, it is reasonable to assume that the current black money to GDP ratio is around 40 percent. This means that in an economy with a GDP of Tk 2.93 million crore, the size of the shadow economy is Tk 1.17 million crore. During the 2020-21 financial year, Tk 20,600 crore or 1.75 percent of the black money was whitened.

The black economy involves economic activities that do not enter into GDP estimates, which are therefore lower than the actual GDP. In any economy, lower than optimal mobility of goods and services and imperfect information shows an artificially low standard of living. The disparities in income, wealth and opportunities are made worse by the concentration of economic power emanating from black money.

An amount of Tk 78 crore was whitened in the 1977-78 budget, Tk 850 crore during 1987-90, Tk 1,000 crore during 2000-01, Tk 4,403 crore during 2005-06, Tk 9,683 crore during 2007-08, Tk 1,213 crore during 2009-10, and Tk 20,600 crore in 2020-21.

The terms under which black money was mainstreamed as above were more or less similar—a flat tax rate of 10 percent without any penalty for investment in specific sectors such as real estate or the capital market. However, in the 2005-06 budget, the flat tax rate was lower at 7.5 percent. It is to the credit of former Finance Ministers Tajuddin Ahmed, Major General MA Mumin, M Sydeduzzaman and Dr Wahidul Haque that no whitening of black money was permitted during their time.

A solution to the unearned income issue lies in a transparent registration process of all real estate, land and apartments at prices reflecting the market. In order not to increase the cost burden of registration, income tax, capital gains tax and municipal tax rates should be significantly adjusted downwards. Corruption minimisation monitoring will have to be put in place. As a warning to manipulating sellers, the government may exercise a right of preemption to purchase such properties at the (vastly reduced) registration price. This was practiced in Bolivia in the 1980s.

To the extent that tax cheating, loan defaults, money laundering and possibly manipulated remittance inflow might be interlinked, a strong break at tax fraud, money laundering or both would be an effective starting point. Completion of automation of the tax administration, coupled with an incentive of commission (for identification of hitherto hidden income), as well as sharing of income tax, value added tax and customs duty realised from new sources, may be tried. A target of a million new taxpayers every year apportioned to tax officials, with appropriate penalty for failure and rewards for success, may be in order. Priority completion of residential flats and fully equipped modern digital offices should also help.

Under-invoicing of exports and over-invoicing of imports and misdeclaration, if monitored, identified and penalised heavily, will have a salutary impact in reaching a tax-GDP ratio of 15 percent by 2025 and 20 percent by 2030.

Effective and just disposal of all cases relating to frauds, scams, financial corruption, trade-related money crimes, money laundering and e-commerce, if done properly, will help minimise the accumulation of black money.

Multiple exchange rates for imports (official), exports (plus one percent) and remittances (plus two percent) hurt the long-term health of the economy. If expert opinion so recommends, an appropriately depreciated exchange rate should replace the multiple exchange rates.

June 30, 2022 should be declared to be the last date for mainstreaming unaccounted-for money—unearned or black. After that date, all amounts outside the open economy will have to be confiscated. Income tax on unearned income may be fixed at 10 percent of the amount. In the case of black money, it will be the standard rate for the taxable income slab concerned. We must consider these ways forward if we are ever to deal with the issue of black money in the Bangladesh economy.

Dr Mohammed Farashuddin is a former governor of Bangladesh Bank.