Developing countries facing huge losses from illicit financial flows, says new report

A new report has revealed that there has been a phenomenal jump in the scale of illicit financial flows from developing and emerging economies in recent years.

Bassey Udo

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OVER $7.8 trillion was siphoned from the world’s developing and emerging economies between 2004 and 2013, and over $178 billion of that amount was from Nigeria, a new report on global illicit financial flows has said.

Nigeria is among the world’s top 20 countries with the biggest losses from skewed financial transactions, the report noted.

South Africa leads the pack in Africa with $209.22 billion lost over the period. It occupies the seventh position in the global rankings.

Globally, China leads with $1.39 trillion, followed by Russia ($1.05 trillion), Mexico ($528.44 billion), India ($510.29 billion), Malaysia ($418.54 billion), Brazil ($226.67 billion), Thailand ($191.77 billion) and Indonesia ($180.71 billion).

Others include Kazakhstan ($167.40 billion), Turkey ($154.50 billion), Venezuela ($123.94 billion), Ukraine ($116.76 billion), Costa Rica ($113.46 billion), Iraq ($105.01 billion), Azerbaijan ($95.00 billion), Vietnam ($92.94 billion), the Philippines ($90.25 billion) and Poland ($90.02 billion).

Illicit financial flows are transactions involving the transfer of the proceeds from the exploitation of the resources from a particular region to another, either through money laundering and other illegal means, or commercial activities, without the commensurate value in returns.

The report published in December by Global Financial Integrity (GFI), a Washington DC-based research and advisory group, said illicit financial flows from developing and emerging economies, which stood at just $465.3 billion in 2004, rose sharply to $1.1 trillion in 2013 alone.

Titled ‘Illicit Financial Flows from Developing Countries: 2004-2013’, the report, which described the phenomenal jump in scale, showed that illicit financial flows first exceeded the $1 trillion mark in 2011.

Authored by GFI’s chief economist, Dev Kar, in partnership with his junior counterpart, Joseph Spanjers, the report ranked Nigeria 10th among the world’s top 20 countries devastated by illicit financial flows.

The study involved the analysis of discrepancies in balance-of-payments data and direction of trade statistics (DOTS), as reported to the International Monetary Fund (IMF) to detect flows of capital illegally earned, transferred and/or utilised.

Detailed findings from the report showed that the growth rate of illicit financial flows for the 2004-13 period averaged 8.6% in Asia and 7% in developing Europe as well as in the Middle East and North Africa (MENA) and Asia-Pacific regions.

The report identified Sub-Saharan Africa as the region suffering the biggest blow from the negative impact from illicit financial outflows, with an average of 6.1% of its gross domestic product (GDP) finding their way out to other regions without returning.

About 5.9% of the GDP of developing economies in Europe was affected, according to the report, while the impact averaged a staggering 4% of GDP for the developing countries and 3.8% of GDP for Asia.

The report also said about 3.6% of the entire value of the economic activities of countries in the Western Hemisphere was lost through illicit financial transactions, while the figure for the Middle East, North Africa, Afghanistan and Pakistan was 2.3%.

Other findings from the report showed that trade fraud accounted for $6.5 trillion of the illicit outflows, with China, Russia, Mexico, India and Malaysia as the biggest exporters of illicit capital over the period.

Damaging problem

The report said that, in seven of the 10 years studied, global illicit financial flows outpaced the total value of all foreign aid and foreign direct investment flowing into poor nations.

‘This study clearly demonstrates that illicit financial flows are the most damaging economic problem faced by the world’s developing and emerging economies,’ GFI President Raymond Baker said.

He said the report confirmed the concerns at the 2015 United Nations General Assembly that for the international Sustainable Development Goals (SDGs) to be achieved, it would require significant curtailing of the illicit flows to meet the mantra of ‘trillions not billions’ needed to fund the SDG campaign.

This was in line with the objective of Goal 16.4 of the SDGs, which calls on countries to significantly reduce illicit financial flows by 2030.

Although the report observed that the international community is yet to agree on the goal indicators, it said that the technical measurements have been identified to provide baselines and track progress made on underlying targets and, subsequently, the overall SDGs. The indicators, the report explained, would not be finalised until March 2016. But it called on the IMF to conduct the annual assessment.

The report urged world leaders to focus on promoting openness in the global financial system, particularly by establishing public registries of verified beneficial ownership information on all legal entities, while all banks should know the true identities of owner(s) accounts opened with them.

‘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,’ the report recommended.

Besides, it asked policymakers to demand that multinational companies publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries and staff levels on a country-by-country basis.

In addition, it said all countries should actively participate in the worldwide movement towards the automatic exchange of tax information as endorsed by the Organisation for Economic Cooperation and Development (OECD) and the G20.

Other policy recommendations included the need for customs agencies to treat trade transactions involving a tax haven with the highest level of scrutiny, while 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.

The report also emphasised the need for governments to sign on to the Addis Ababa Tax Initiative to further support efforts to curb illicit financial flows as a key component of the development agenda.                       

This article was first published by Premium Times (Nigeria) (www.premiumtimesng.com).

*Third World Resurgence No. 303/304, November/December 2015, pp 10-11