By Jaya Ramachandran

Crime, corruption, and tax evasion recorded near-historic highs in 2010, with illicit financial outflows costing the developing world $859 billion in 2010, just below the all-time high of $871.3 billion in 2008, the year preceding the global financial crisis. Besides, nearly $6 trillion (6000 000 000 000 000 000 U.S. dollars) were stolen from poor countries in the decade between 2001 and 2010, says a new report and urges world leaders to increase transparency in the international financial system.

“Astronomical sums of dirty money continue to flow out of the developing world and into offshore tax havens and developed country banks,” said Raymond Baker, Director of the Washington-based advocacy organization, Global Financial Integrity (GFI).

“Regardless of the methodology, it’s clear: developing economies are hemorrhaging more and more money at a time when rich and poor nations 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 outflow,” he adds.

Co-authored by GFI’s lead economist Dr Dev Kar and economist Sarah Freitas, the study, Illicit Financial Flows from Developing Countries: 2001-2010 points out that as developing countries begin to relax capital controls, the possibility exists that the methodology utilized in previous GFI reports – known as the World Bank Residual Plus Trade Mispricing method – could increasingly pick-up some licit capital flows.

“Estimates Provided  Are Still Likely to Be Extremely Conservative”

The methodology introduced in this report – the Hot Money Narrow Plus Trade Mispricing method – ensures that all flow estimates are strictly illicit moving forward, but may omit some illicit financial flows detected in the previous methodology, the study’s authors say.

“The estimates provided . . . 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,” explained Dr Kar, who previously served as a senior economist at the International Monetary Fund.

“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.

“Very Big Consequences for Developing Economies”

The study, released on December 17, 2012, finds that the $858.8 billion of illicit outflows lost in 2010 is “a significant uptick” from 2009, which saw developing countries lose $776.0 billion under the new methodology. It estimates the developing world lost a total of $5.86 trillion over the decade spanning 2001 through 2010.

“This has very big consequences for developing economies,” explained the report’s co-author Freitas. “Poor countries lost nearly a trillion dollars that could have been used to invest in healthcare, education, and infrastructure. It’s nearly a trillion dollars that could have been used to pull people out of poverty and save lives.”

 Magnitude of Illicit Outflows by Country

The authors’ research tracks the amount of illegal capital flowing out of 150 different developing countries from 2001 through 2010, and it ranks the countries by magnitude of illicit outflows. According to the report, among the 20 biggest exporters of illicit financial flows over the decade are:

China recording unlawful outflows of $274 billion average ($2.74 trillion cumulative); Mexico ($47.6 billion average and $476 billion cumulative); Malaysia ($28.5 billion average and $285 billion cumulative); Saudi Arabia ($21.0 billion avg. and $210 billion cum.); Russia ($15.2 billion avg. and $152 billion cum.); Philippines ($13.8 billion avg. and $138 billion cum.); Nigeria ($12.9 billion avg. and $129 billion cum.); India ($12.3 billion avg. and $123 billion cum.); Indonesia ($10.9 billion avg. and $109 billion cum.); and United Arab Emirates ($10.7 billion avg. and $107 billion cum.)

Others include: Iraq ($10.6 billion avg. and $63.6 billion cum.); South Africa ($8.39 billion avg. and $83.9 billion cum.); Thailand ($6.43 billion avg. and $64.3 billion cum.); Costa Rica ($6.37 billion avg. $63.7 billion cum.); Qatar ($5.61 billion avg. and $56.1 billion cum.); Serbia ($5.14 billion avg. and $51.4 billion cum.); Poland ($4.08 billion avg. and $40.8 billion cum.); Panama ($3.99 billion avg. and $39.9 billion cum.); Venezuela ($3.79 billion avg. and $37.9 billion cum.); and Brunei ($3.70 billion avg. $37.0 billion cum.).

Top Exporters of Illegal Capital

The report, funded by the Ford Foundation, also reveals the top exporters of illegal capital in 2010: China ($420.36 billion); Malaysia ($64.38 billion); Mexico .($51.17 billion); Russia ($43.64 billion); Saudi Arabia ($38.30 billion); Iraq ($22.21 billion); Nigeria ($19.66 billion); Costa Rica ($17.51 billion); Philippines ($16.62 billion); Thailand ($12.37 billion); Qatar ($12.36 billion); Poland ($10.46 billion); Sudan ($8.58 billion); United Arab Emirates ($7.60 billion); Ethiopia ($5.64 billion); Panama ($5.34 billion); Indonesia ($5.21 billion); Dominican Republic ($5.03 billion); Trinidad and Tobago ($4.33 billion); and Brazil ($4.29 billion).

Connections to Previous Reports

China, the largest cumulative exporter of illegal capital flight, as well as the largest victim in 2010, was the topic of an October 2012 country-specific report by Dr Kar and Freitas.  Using the older methodology, ‘Illicit Financial Flows from China and the Role of Trade Misinvoicing,’ found that the Chinese economy suffered $3.79 trillion in illicit financial outflows between 2000 and 2011.

“Our reports continue to demonstrate that the Chinese economy is a ticking time bomb,” said Dr Kar. “The social, political, and economic order in that country is not sustainable in the long-run given such massive illicit outflows.”

Mexico, the second-largest cumulative exporter of illicit capital over the decade, was also the topic of a January 2011 GFI report by Dr. Kar.  The study, ‘Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy‘, found that the country lost a total of $872 billion in illicit financial flows over the 41-year period from 1970 to 2010.  Furthermore, illicit outflows were found to drive Mexico’s domestic underground economy, which includes – among other things – drug smuggling, arms trafficking and human trafficking.

Possible Solutions

Global Financial Integrity report urges world leaders to increase the transparency in the international financial system as a means to curtail the illicit flow of money highlighted by the organization’s research.

In particular it stresses the need for addressing the problems posed by anonymous shell companies, foundations, and trusts by requiring confirmation of beneficial ownership in all banking and securities accounts, and demanding that information on the true, human owner of all corporations, trusts, and foundations be disclosed upon formation and be available to law enforcement.

The report also calls for reforming customs and trade protocols to detect and curtail trade mispricing; requiring the country-by-country reporting of sales, profits and taxes paid by multinational corporations; requiring the automatic cross-border exchange of tax information on personal and business accounts; harmonizing predicate offenses under anti-money laundering laws across all Financial Action Task Force cooperating countries; and ensuring that the anti-money laundering regulations already on the books are strongly enforced.