KATHMANDU, AUG 18 -

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  In the largest ever case of foreign currency misuse, government agencies in the first week of February found that over US$ 100 million (around Rs. 8 billion) had been siphoned from Nepal in the name of wool import to various banks in Hong Kong.


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  After finding that huge amounts of money were going to India on the pretext of buying insurance policies from Indian insurance companies, the central bank banned the exchange of Indian currency in purchasing policies of Indian insurance companies and paying their premiums and investing in shares issued by Indian companies.

The above two instances illustrate the fact that capital flight from Nepal is on the rise. And there are also other ways that money is being siphoned from Nepal to foreign countries. Everyone in the domestic financial sector knows that each year millions of dollars go out of Nepal, but no one admits it on record.

What is the size of capital flight from Nepal? There are no authentic data. The only data that show the amount of Nepali money being deposited in foreign banks are Swiss National Bank’s annual publication Banks in Switzerland.

A country-by-country breakdown of accounts in Banks in Switzerland 2009 reveals that Nepali assets were worth 69 million Swiss francs (Rs. 4.97 billion). The Kathmandu Post on May 27, 2009 (see The Swiss Connection) had revealed that Nepali money worth Swiss francs 108 million (Rs. 7.79 billion) was deposited in various Swiss banks in 2007.

The statistics of Swiss National Bank, however, reveal some interesting facts. Nepali deposits in Swiss banks saw a huge rise after Jana Andolan II, i.e., in 2006

and 2007. In 2005, the cumulative amount was Rs. 1.70 billion which soared to Rs. 6.16 billion in 2006 and Rs. 7.79 billion in 2007.

However, in the last two years, i.e., 2008 and 2009, that amount has declined according to Swiss National Bank’s report. “The value of deposits may have gone down because of the worldwide recession,” said a CEO of a leading commercial bank.

As Nepali commercial banks don’t usually deposit their foreign currency in Swiss banks, it can be assumed that the money must have come from affluent Nepalis. Switzerland has always been a safe haven for Nepal’s formal royals whose connection dates back to the time of then King Tribhuvan. His son Mahendra and grandson Birendra kept up the Swiss connection.

However, sources say, the amount deposited in Swiss banks doesn’t show the full picture of capital flight. According to a CEO of a leading commercial bank, around US$ 300 to 400 million goes out of the country every year. And Switzerland is not the only destination; new destinations have emerged for high-net worth Nepalis to invest abroad. “Hong Kong, Singapore and Dubai have lately emerged as lucrative destinations for Nepali investors,” said a banker.

So how does Nepali money reach these banks? It is believed that the money goes through informal channels (hundi or hawala) via Hong Kong. However, when money enters these private banks, it goes through formal channels, said a banker.

The multi-million-dollar wool import scam revealed that even banking channels are being used to siphon foreign currency from Nepal. Around US$ 100 million was siphoned to Hong Kong-based banks on the pretext of conducting import transactions.

According to NRB, the trend of buying policies from Indian insurance companies, opening accounts in Indian banks, investing in shares and purchasing property in India is also the reason behind the capital flight. Last December, the central bank found that hundreds of transactions had misused legal arrangements for draft exchange of up to IRs. 100,000 to India.

Yet there are other ways to send money abroad. Commissions associated with multi-million-dollar contracts of government agencies like NEA, NAC and others are settled abroad. Commission is generally deposited in offshore accounts. Another route is over-invoicing imports.

Representatives of leading private banks like HSBC, City and Coutts visit Nepal every year to meet high net worth individuals. According to a banker, representatives of these private banks generally sell investment related products to these Nepalis.  And the minimum amount these private banks receive from an individual in Nepal is US$ 250,000.



Investment process stalls

Three years ago, the government had initiated a process for Nepali entrepreneurs to invest abroad. The Finance Ministry started work on amending the Ban on Nepali Investment in Foreign Countries Act 1964. In the budget of  2007-08, Finance Minister Ram Sharan Mahat had announced a provision for   investing abroad. “Despite restriction, Nepalis were investing abroad and these investments were not in legal purview,” said Mahat. “If we let them invest abroad, they will come under the purview of regulators.”

The Finance Ministry then was mulling three ways to allow Nepali investors to invest abroad. First, establishing a mutual fund by financially sound banks with their majority equity participation. Second, allowing investment by Nepali companies through transfer of technology. Third, permitting Nepal-based holding companies to establish their subsidiaries in foreign lands. “If we provide legal window, then whatever they earned abroad can be brought back to the country also,” said Mahat.


Posted on: 2010-08-19 08:43