New Study: Illicit Financial Flows Hit US$1.1 Trillion in 2013


US$7.8 Trillion drains from Developing World from 2004-2013

Trade Fraud Responsible for Illicit Outflows of US$6.5 Trillion

China, Russia, Mexico, India, Malaysia are Biggest Exporters of Illicit Capital over Decade

Sub-Saharan Africa Still Suffers Largest Illicit Outflows as % of GDP

WASHINGTON, DC – Illicit financial flows from developing and emerging economies surged to US$1.1 trillion in 2013, according to a study released Wednesday by Global Financial Integrity (GFI), a Washington, DC-based research and advisory organization. Authored by GFI Chief Economist Dev Kar and GFI Junior Economist Joseph Spanjers, the report pegs cumulative illicit outflows from developing economies at US$7.8 trillion between 2004 and 2013, the last year for which data are available.

Titled “Illicit Financial Flows from Developing Countries: 2004-2013″ the study reveals that illicit financial flows first surpassed US$1 trillion in 2011, and have grown to US$1.1 trillion in 2013—marking a dramatic increase from 2004, when illicit outflows totaled just US$465.3 billion. “This study clearly demonstrates that illicit financial flows are the most damaging economic problem faced by the world’s developing and emerging economies,” said GFI President Raymond Baker, a longtime authority on financial crime. “This year at the U.N. the mantra of ‘trillions not billions’ was continuously used to indicate the amount of funds needed to reach the Sustainable Development Goals. Significantly curtailing illicit flows is central to that effort.”

Additional Findings

– Illicit financial flows averaged a staggering 4.0 percent of the developing world’s GDP.

– Sub-Saharan Africa suffered the largest illicit financial outflows—averaging 6.1 percent of GDP—followed by Developing Europe (5.9 percent), Asia (3.8 percent), the Western Hemisphere (3.6 percent), and the Middle East, North Africa, Afghanistan, and Pakistan (MENA+AP, 2.3 percent).

– In seven of the ten years studied global IFFs outpaced the total value of all foreign aid and foreign direct investment flowing into poor nations.

– The IFF growth rate from 2004-2013 was 8.6 percent in Asia and 7 percent in Developing Europe as well as in the MENA and Asia-Pacific regions.

Major Implications for Domestic Resource Mobilization and Sustainable Development

Goal 16.4 of the Sustainable Development Goals (SDGs) calls on countries to significantly reduce illicit financial flows by 2030. However, the international community has not yet agreed on goal indicators, the technical measurements to provide baselines and track progress made on underlying targets and, subsequently, the overall SDGs. These indicators will not be finalized until March 2016. The report calls on the IMF to conduct this annual assessment.

Country Rankings

The study ranks the countries by the volume of illicit outflows. According to the report, the 20 biggest exporters of illicit flows over the decade are:

  1. China …………………………………. US$139.23bn avg. (US$1.39tn cumulative)
  2. Russia …………………………………US$104.98bn avg. (US$1.05tn cumulative)
  3. Mexico ………………………………..US$52.84bn avg. (US$528.44bn cumulative)
  4. India …………………………………..US$51.03bn avg. (US$510.29bn cumulative)
  5. Malaysia………………………………US$41.85bn avg. (US$418.54bn cumulative)
  6. Brazil ………………………………….US$22.67bn avg. (US$226.67bn cumulative)
  7. South Africa …………………………US$20.92bn avg. (US$209.22bn cumulative)
  8. Thailand …………………………….. US$19.18bn avg. (US$191.77bn cumulative)
  9. Indonesia ……………………………US$18.07bn avg. (US$180.71bn cumulative)
  10. Nigeria ………………………………. US$17.80bn avg. (US$178.04bn cumulative)
  11. Kazakhstan …………………………US$16.74bn avg. (US$167.40bn cumulative)
  12. Turkey ………………………………. US$15.45bn avg. (US$154.50bn cumulative)
  13. Venezuela ………………………….. US$12.39bn avg. (US$123.94bn cumulative)
  14. Ukraine …………………………….. US$11.68bn avg. (US$116.76bn cumulative)
  15. Costa Rica …………………………. US$11.35bn avg. (US$113.46bn cumulative)
  16. Iraq ………………………………….. US$10.50bn avg. (US$105.01bn cumulative)
  17. Azerbaijan …………………………. US$9.50bn avg. (US$95.00bn cumulative)
  18. Vietnam…………………………….. US$9.29bn avg. (US$92.94bn cumulative)
  19. Philippines ………………………… US$9.03bn avg. (US$90.25bn cumulative)
  20. Poland……………………………….. US$9.00bn avg. (US$90.02bn cumulative)

Policy Recommendations

This report recommends that world leaders focus on curbing opacity in the global financial system, which facilitates these outflows. Specifically, GFI maintains that:

Governments should establish public registries of verified beneficial ownership information on all legal entities, and all banks should know the true beneficial owner(s) of any account opened in their financial institution.

Government authorities should adopt and fully implement all of the Financial Action Task Force’s (FATF) anti-money laundering recommendations; laws already in place should be strongly enforced.

Policymakers should require multinational companies to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis.

All countries should actively participate in the worldwide movement towards the automatic exchange of tax information as endorsed by the OECD and the G20.

Customs agencies should treat trade transactions involving a tax haven with the highest level of scrutiny.

Governments should significantly boost their customs enforcement by equipping and training officers to better detect intentional misinvoicing of trade transactions, particularly through access to real-time world market pricing information at a detailed commodity level.

Governments should sign on to the Addis Tax Initiative to further support efforts to curb IFFs as a key component of the development agenda.

Methodology

To conduct the study, Dr. Kar and Mr. Spanjers analyzed discrepancies in balance of payments data and direction of trade statistics (DOTS), as reported to the IMF, in order to detect flows of capital that are illegally earned, transferred, and/or utilized. Since GFI’s 2014 annual update, the existing methodology has been refined to provide a more precise trade misinvoicing calculation for a greater number of countries, leading to a significant upward revision in illicit flow estimates for many of these economies as compared to previous GFI reports.

Source: Global Financial Integrity


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