Kazakhs had registered shady money and undocumented property amounting to some KZT5.7tn (€16.9bn) by the end of last year under the government’s capital amnesty programme, but this merely scratches the surface of the country’s true shadow economy.
The Kazakh government first approved a capital amnesty law in 2014, enabling Kazakh citizens, ethnic Kazakhs moving home from abroad and those holding residence permits to register property and money taken out of legal circulation as cash or cash-equivalents. The law was introduced in an effort to bring greater transparency to the country’s capital flows by clamping down on money laundering. More specifically, Astana hoped to achieve two goals: reduce the size of the shadow economy and legalise $50bn worth of money and property.
However, this effort flopped, with the Central Asian country persuading residents to register just KZT84bn ($25.4mn) by November 2015. Even after the government amended the law at that time to significantly simplify the legalisation process, assets totalling a little over a third of the $50bn were registered by the deadline of the end of December 2016.
The authorities had estimated they would gain annual tax revenues worth KZT200bn from the newly registered property and capital. Legalised commercial real estate alone would result in an annual KZT800mn in property tax income. The return of KZT4.1tn of cash and cash equivalents back into legal circulation is expected to annually generate KZT150bn in taxes.
Yet official figures indicate the programme registered the equivalent of 10% of Kazakhstan’s GDP, whereas the post-Soviet nation’s shadow economy is estimated at 30-40% of GDP, based on estimates by independent analysts.
Legal money laundering
Some analysts have hinted that the programme was in fact designed with an entirely different purpose – to clean dirty capital and property belonging to Kazakh elites. “In my opinion, the elites are trying to guarantee the safety of their wealth,” human rights defender Yevgeny Zhovtis said when the amnesty law was originally passed. Senior officials and investors acquired assets during privatisations in the 1990s in very untransparent processes that were entangled in corruption.
Under the official rules of the capital amnesty programme, property acquired via crime and corruption could not be amnestied, but there were few safeguards put in place to stop this. Bribery and corruption are rampant in Kazakhstan, and the government is ineffective in curbing it.
In 2015, Kazakh economist Magbat Spanov projected in an interview with Expert.ru that only the 3-5% of the population who own 90% of the property in the country would take part in the programme. The prediction was based on the uneven wealth distribution in the country of 18mn, where the richest 50 people are worth a combined $24bn, according to Forbes Kazakhstan.
The number of applicants under the scheme turned out to be even narrower than forecast by Spanov, as only around 0.8% or 140,000 people took advantage of the capital amnesty programme by the end of 2016.
Most of the 140,000 people are thought to have applied for property legalisation, amounting to KZT1.6tn or 151,000 real estate units and 213 stakes in legal entities. Most of this undocumented real estate was a byproduct of the “samostroy” phenomenon, or construction of buildings without approval from the authorities. Kazakhs often find it easier to build or expand real estate, typically housing, without construction permits, since paying a fine is significantly simpler in Kazakhstan than the process of permit acquisition. As such, the amnesty programme provided an opportunity for Kazakh citizens to bypass the legal fines.
It is the remaining shadow capital worth KZT4.1tn that is ”a more complex question”, Spanov says, “but this would be a question for the tax authorities”. A better way to combat Kazakhstan’s shadow economy would be via “[reforming] the tax code and the judicial system”, Spanov believes. He also argues that, when it comes to circulation of capital, the authorities’ concern should be directed at the country’s “offshore economy”.
“The offshore economy remains ignored – in fact, it is the legal capital outflow channel of Kazakhstan’s economy,” Spanov notes. “Most of the world understands the disadvantages [an offshore economy] can carry to the national economy and, thus, implements de-offshorisation measures – but, not us.”
“The main reasons [behind] the outflow of capital [from the country] have been and still remain the weak definition and enforcement of property rights, high risk of expropriation and other manifestations of the weak institutional environment,” Halyk Finance analyst Nurfatima Dzhandarova told Tengrinews.kz back in 2014, as she warned that the amnesty law “will not fix the issues of capital outflow”.
However, the government claims to have already embarked on measures to “withdraw out of the shadows” capital located in 19 offshore territories under the Strasbourg anti-money laundering convention. Astana ratified the convention in 2016, close to a decade after it first applied.
“We cannot speak now about [the amounts] withdrawn out of the shadows, from these countries. Because even in the case of legalisation of these funds… from offshore jurisdictions, we do not keep track of such statistics. Because [the information] still remains under [state] secrecy," deputy head of risk management, analysis and statistics of the State Revenue Committee Yerlan Sagnayev said last September.