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Financial Crimes Cost Developing World At Least a Trillion Dollars

WASHINGTON, Dec 18 2012 (IPS) - The developing world lost nearly one trillion dollars in 2010 as a result of corruption, tax evasion, and other financial crimes not involving cash transactions, according to a new report released here Monday by Global Financial Integrity (GFI).

The six-year-old research and advocacy group said that global financial corruption has grown steadily over the past decade despite unprecedented efforts by governments and non-governmental organisations (NGOs) to curb it.

It found that illicit financial outflows cost developing countries a total of 859 billion dollars in 2010, the latest year for which trade and other data compiled mainly by the International Monetary Fund (IMF) and the World Bank is available.

That sum was approximately 10 times the roughly 88 billion dollars provided to developing countries in official development assistance (ODA) that same year.

“This means that for every one dollar in economic development assistance going into developing countries, ten dollars are lost via these illicit outflows,” GFI noted.

But the group’s lead economist and report co-author, Dev Kar, stressed that the latest estimate almost certainly underestimated the total amount of illicit flows, in part because it did not include cash transactions and because it was based on a new, more-conservative methodology than GFI used in the past.

The latter method estimated that developing economies lost about 1.14 trillion dollars in illicit outlows in 2010.

“The estimates provided by either methodology are still likely to be extremely conservative as they do not include trade mispricing in services, same-invoice trade mispricing, hawala transactions and dealings conducted in bulk cash,” according to Kar, who previously served as a senior IMF economist.

“This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities, which are often settled in cash, are not included in these estimates,” he added.

The 80-page report, “Illicit Financial Flows From Developing Countries: 2001-2010,” found that China suffered the greatest losses resulting from illicit outflows – a yearly average of 274 billion dollars over the century’s first decade – or 2.74 trillion dollars from 2001 through 2010, and 420.36 billion dollars in 2010 alone.

China was followed by Mexico, Malaysia, Saudi Arabia, and Russia. Mexico averaged yearly losses of 47.6 billion dollars and 51.2 billion dollars in 2010; Malaysia, an average of 28.5 billion dollars but a whopping 64.38 billion dollars in 2010; Saudi Arabia, a 21 billion dollar yearly average and 38.2 billion dollars in 2010; and Russia, a 15.2 billion dollar average and 43.6 billion dollars in 2010.

Other countries that were ranked in the top ten for 2010 losses included Iraq (22.2 billion dollars); Nigeria (19.66 billion dollars); Costa Rica (17.51 billion dollars); the Philippines (16.62 billion dollars); and Thailand (12.37 billion dollars).

While most of the hardest hit economies are middle-income countries, or even high-income nations, such as Qatar and the United Arab Emirates, some of the world’s poorest countries are also victims. In addition to Nigeria and the Philippines, Sudan (8.58 billion dollars) and Ethiopia (5.64 billion dollars) were also among the biggest losers in 2010, while India ranked eighth in average annual losses over the decade (12.3 billion dollars).

“Astronomical sums of dirty money continue to flow out of the developing world and into off-shore tax havens and developed-country banks,” said GFI’s director, Raymond Baker.

“(I)t’s clear: developing economies are haemorrhaging more and more money at a time when rich and poor countries alike are struggling to spur economic growth. This report should be a wake-up call to world leaders that more must be done to address these harmful outflows.”

The report comes amidst increased global attention to corruption as a hindrance to development. Corruption – and its threats to the long-running rule of the Communist Party – were a major theme at last month’s 18th National Congress in China that transferred power to the new president, Xi Jinping.

Grassroots anti-corruption movements in Russia have spurred a major crackdown, in contrast to India where they have gained the national spotlight. Meanwhile, both traditional aid donors are increasingly conditioning their assistance on how committed beneficiary governments are to eliminating corruption by officials.

According to the GFI report, “trade mispricing” accounted for most of the illicit outflows from developing countries over the past decade.

When, for example, an exporter in a developing country sells two million dollars worth of goods to a foreign company for 1.5 million dollars, the exporter may ask that the extra half million dollars be placed in his or her own private overseas bank account, presumably to avoid taxation.

Conversely, companies may overprice imports and likewise arrange to have the illicit proceeds deposited overseas.

Illicit transfers can also be conducted through related forms of corruption, including bribery, kickbacks, as well as outright theft, according to the report.

Over the 2001-2010 period, the report estimated that developing countries lost an annual average of about 586 billion dollars in such illicit flows – or a total of 5.86 trillion dollars over the decade.

In dollar terms, illicit flows increased in real terms by a yearly average of about 8.6 percent despite the onset of the global financial crisis at the end of 2008. The increase took place in every developing region, with the Middle East and North Africa leading the pack (26.3 percent average annual increase), followed closely by Sub-Saharan Africa (23.8 percent).

The average annual increase for Asia, which accounted about 61 percent of total illicit flows from the developing world, came to nearly eight percent, while, in Latin America and the Caribbean, the increase was lowest – at 2.65 percent.

The latest report did not address cash transactions which are far more difficult to track. In a previous report, GFI estimated that drug trafficking, which is most often conducted in cash, produces annual profits of about 320 billion dollars in both developed and developing countries.

Another illicit industry – counterfeiting of both merchandise and currency – produces another 250 billion dollars a year, although it is generally less reliant on cash, according to GFI. Proceeds from cross-border human trafficking were estimated at about 31.6 billion dollars a year.

In dealing with the problem of illicit financial outflows, the report called for, among other measures, the adoption of new conventions and laws requiring the identification of the beneficial owners of all banking and securities accounts and the “true, human owners of all corporations, trusts, and foundations” when they are formed.

It also called for reforming customs and trade protocols to better detect trade mispricing. Moreover, multinational corporations should be required on a country-by-country basis to report all sales, profits, and taxes paid.

In addition, tax information on both personal and business accounts should be automatically exchanged between countries, according to the report.

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