Info Service on Finance and Development (Mar13/02)
11 March 2013
Third World Network
Illicit flows undermine human rights, says UN expert
Published in SUNS #7540 dated 7 March 2013
Geneva, 6 Mar (Kanaga Raja) -- "Illicit financial flows - generated
from crime, corruption, embezzlement and tax evasion - represent a
major drain on the resources of developing countries, reducing tax
revenues and investment inflows, hindering development, exacerbating
poverty and undermining the enjoyment of human rights," a United
Nations independent expert has said.
In an interim report presented Wednesday at the current twenty-second
session of the UN Human Rights Council, Independent Expert on foreign
debt Mr Cephas Lumina said that it is estimated that, on average,
developing countries lost between US$783 billion and US$1,138 billion
in illicit financial outflows in 2010.
The expert added that these flows have increased in real terms to
8.6 per cent over the period 2001-2010, suggesting that existing measures
to tackle the problem have not had a significant impact.
"It is notable that this rate of growth of illicit flows exceeded
the average rate of economic growth (6.3 per cent per annum) of developing
countries for the same period."
According to the Independent Expert's interim report, the magnitude
and growth of illicit funds generated by crime, corruption, embezzlement
and tax evasion, as well as their socioeconomic implications, underscore
the need for robust policy responses that will not only curtail these
flows but also ensure that countries of origin are able to use the
maximum available resources for the realisation of economic, social
and cultural rights in accordance with the obligations assumed under
the relevant international human rights instruments.
Mr Lumina explained that financial flows may be illicit for two distinct
although overlapping reasons.
First, they may relate to proceeds of crime, such as corruption, embezzlement,
drug trafficking or illegal arms trade. The proceeds are subsequently
laundered often through offshore deposits in secrecy jurisdictions
and shell companies designed to hide illicit financial flows.
Second, although most illicit financial flows derive initially from
legitimate economic activities, the transfer abroad of such funds
in contravention of relevant laws (such as non-payment of applicable
corporate taxes or breach of exchange control regulations) makes them
He noted that commonly used methods to evade taxation include trade
mis-invoicing and transfer mis-pricing.
According to the report, the Organisation for Economic Co-operation
and Development (OECD) estimates that a significant percentage of
all international trade is intergroup trade occurring between related
companies, thus providing multinational corporations with opportunities
to shift profits within companies in its own group to make sure that
the accounts show high profits in low-tax jurisdictions.
"While tax evasion, breaking national tax laws, is illegal, many
tax avoidance schemes comply with existing laws and regulations,"
says the report, adding that such tax evasion schemes are a concern
to all countries struggling with tight budgets and cuts in essential
However, owing inter alia to their resource constraints and heavy
external debt burdens, developing countries tend to be the most severely
affected by financial outflows related to such schemes.
"It is notable that most illicit financial flows are facilitated
by tax havens, secrecy jurisdiction, shell companies that cannot be
traced back to their owners, anonymous trust accounts, bogus charitable
foundations, money-laundering techniques and questionable trade practices."
While in the past persons hid their involvement with funds derived
from bribery, embezzlement of public funds, tax evasion or other forms
of corruption through anonymous bank accounts or accounts in fictitious
names, this option is becoming increasingly less available. The preferred
method is the use of a corporate vehicle - this term is used to refer
to companies or corporations, foundations and trusts.
A study by the Stolen Asset Recovery (StAR) Initiative, a joint initiative
of the World Bank and the United Nations Office on Drugs and Crime
(UNODC), showed that trust and company service providers, including
those in OECD countries, often fail to exercise sufficient due diligence
when approached to create or provide administrative services for such
corporate vehicles to comply with the recommendations by the Financial
Action Task Force (FATF).
According to the report, there is also evidence that, by failing to
exercise due diligence, banks play a key role in facilitating illicit
financial flows. A series of high profile court cases in the United
States and elsewhere have shown that international banks have frequently
been negligent or complicit in the laundering of corruption proceeds
or tax evasion.
On 11 December 2012, for example, the bank HSBC entered into a deferred
prosecution agreement in terms of which it agreed to pay penalties
of a little more than US$1.9 billion for systemic and willful violations
of United States anti-money-laundering and foreign sanctions laws.
[Specialist financial blogs, like Naked Capitalism, have repeatedly
drawn attention to the fact that such criminal activities of banks
and financial institutions have been merely slapped with such financial
penalties, in effect paid by shareholders, while perpetrators, the
corporations or its executives, have been spared criminal prosecutions.
From TBTF (‘too-big-to-fail'), banks have become ‘too-big-to-jail'
(TBTJ). - SUNS]
In the United Kingdom, the report notes, a 2011 report by the Financial
Services Authority based on a survey of the screening practices of
British banks for politically exposed persons found that three quarters
of the banks surveyed did not properly establish the legitimacy of
the funds deposited by such persons; over half failed to apply enhanced
due diligence to high-risk politically exposed persons; and over a
third "appeared willing to accept very high levels of money-laundering
risk" from such clients.
The scarcity of data combined with lack of transparency on the part
of banks and other financial intermediaries involved in illicit financial
transactions renders it difficult to calculate illicit financial flows
with a degree of certainty.
However, a number of studies have provided useful estimates. A recent
study by Global Financial Integrity (GFI) concludes that, depending
on the method employed, in 2010, developing countries lost between
US$783 billion and US$1,138 billion in illicit financial outflows.
Transfer mis-pricing and trade mis-invoicing are considered the prime
factors for illicit financial flows, followed by illicit flows related
to international drug trafficking and other criminal activities.
While flows of the proceeds of corruption out of developing countries
account for only about 5 per cent of all illicit financial flows,
they have been estimated at US$20-40 billion annually. This is still
a very significant amount, representing between 15 per cent and 30
per cent of all official development aid (ODA) currently received
by developing countries.
The Independent Expert said that he is concerned that, of the considerable
amount of illicit funds referred to above, only a small proportion
has been repatriated to the countries of origin.
According to the StAR Initiative, only US$5 billion in stolen assets
have been repatriated over the past 15 years.
A recent survey of 30 OECD member countries showed that only six of
these had frozen assets worth slightly over US$1.2 billion during
the years 2006 to 2009, and they had managed to return only assets
worth US$227 million to foreign jurisdictions during these four years.
The Office of the High Commissioner for Human Rights (OHCHR) has estimated
that only around 2 per cent of the estimated funds of illicit origin
annually leaving the developing world are repatriated to their countries
Similarly, a study analysing the fate of assets stolen, embezzled
or otherwise unlawfully obtained by 25 prominent political leaders
after they were forced from office shows that the overall sum of stolen
assets by these rulers and their family members was approximately
US$140 billion. However, only a small fraction (5 per cent) of these
assets have ever been traced and frozen abroad, and even a smaller
fraction (2.4 per cent) had been returned to new, legitimate successor
According to the report, studies indicate that most illicit financial
outflows are from developing countries.
According to GFI estimates, 61.2 per cent of all illicit financial
flows from developing countries come from Asia, mostly due to massive
outflows from China and India, the largest developing economies in
Illicit financial flows related to commercial transfer mis-pricing
and trade mis-invoicing are estimated to account for over 90 per cent
of illicit financial flows from this region.
Latin America and the Caribbean follow at 15.6 per cent, with the
Middle East and North Africa at 9.9 per cent. Developing Europe follows
with 7 per cent of illicit flows, while Africa accounts for 6.3 per
cent of all illicit outflows.
Mr Lumina said that while at first glance illicit financial outflows
from least developed countries (LDCs) may account only for a small
portion of all illicit financial outflows worldwide, they have a particularly
negative impact on social development and the realisation of social,
economic and cultural rights in these countries.
Given that LDCs account for less than 2 per cent of world gross domestic
product (GDP) and only about 1 per cent of global trade in goods,
illicit financial flows from these countries are in relative terms,
compared to their small economies, very large.
The United Nations Development Programme has estimated that illicit
flows from LDCs amounted, on average, to 4.8 per cent of their GDP
over the period 1990-2008. This means, that for every dollar received
in ODA, on average, 60 cents exit these countries in illicit flows.
The total amount of estimated illicit financial flows for 39 LDCs
for which sufficient data was available, amounted to US$246 billion,
surpassing debt service payments of US$164 billion and thus constituting
the principal contributing factor to the net resource transfer from
these countries to the rest of the world, estimated at US$197 billion
(all data for the period 1990-2008).
"There is a lack of comprehensive information pertaining to where
illicit funds are held. While in some cases significant funds may
be returned by corrupt or criminal actors and invested in private
assets, such as land and luxury estates in the countries of origin,
most funds remain offshore," says the report.
It finds that usually illicit financial flows "are laundered
through a complex web of corporate vehicles based in secrecy jurisdictions
and tax havens and are subsequently invested in shares, real estate
or other assets, often together with wealth acquired through legitimate
Assets held offshore (that is, in jurisdictions where the investor
has no legal residence or tax domicile) were estimated to amount to
US$7.4 trillion in 2009. While European investors hold the largest
amount of assets offshore - mostly in Switzerland, the United Kingdom,
Ireland and Luxembourg - the percentage of wealth held offshore by
investors from Latin America, Africa and the Middle East is particularly
According to the Boston Consulting Group, investors from Latin America,
the Middle East and Africa hold between 23.5 and 33.3 per cent of
their wealth in offshore financial centres.
"In order to enhance efforts to tackle the problem of illicit
financial flows, it is critical that the international financial system
is made more transparent and that countries of origin and countries
of destination improve their cooperation in the fight against these
flows. Making the global financial system more transparent requires
fundamental reforms," said Mr Lumina.
The Independent Expert considered that it is desirable that all measures
to tackle illicit financial flows are designed with the need to promote
the realisation of human rights of the populations of the countries
of origin of illicit funds, particularly the poor who disproportionately
suffer the negative effects of the shortage of resources resulting
from illicit financial outflows.
Indeed, he added, such an approach would be consistent with the recognition
(explicit or implicit) in most anti-corruption conventions of the
negative impact of illicit financial flows on development, governance
and human rights.
The Independent Expert also stressed that illicit financial flows
should not be a human rights concern for States only. While States
have the primary duty to respect, protect and fulfil human rights,
the Guiding Principles on Business and Human Rights require business
enterprises to "avoid causing or contributing to adverse human
rights impacts through their own activities, and address such impacts
when they occur" (guiding principle 13).
Business enterprises that contribute through transfer mis-pricing,
tax evasion or corruption to significant illicit financial outflows
and undermine the abilities of States to progressively achieve the
full realisation of economic, social and cultural rights cause adverse
human rights impacts, Mr Lumina concluded. +