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Stealing money from the needy

by Sheila Mysorekar

In brief

Money laundering is a challenge for regulators all over the world, including Germany: fog over Frankfurt, the financial centre.

Money laundering is a challenge for regulators all over the world, including Germany: fog over Frankfurt, the financial centre.

Illicit financial flows drain much-needed funds from poor nations. Over the last decade, trillions of dollars were siphoned off.

Nobody likes to pay taxes. In developed countries, people try to dodge the tax office, but doing so is a crime. In many developing countries, however, public authorities struggle to enforce tax payments. The reasons are faulty information, poor statistical capacities, inadequate tax legislation and a lack of officers.

Like corruption, large-scale tax evasion damages economies. Global Financial Integrity (GFI), an independent research organisation, recently published a report for the years 2002 to 2011. It shows that the amounts of illicit financial outflows from developing countries are huge. According to GFI president Raymond Baker, various strategies are used. He mentions “anonymous shell companies, tax haven secrecy and trade-based money laundering.” Misinvoicing as well as plain old bribery and corruption are relevant too.

Huge damage

The figures are staggering. All in all, illicit financial outflows from developing countries and emerging markets amounted to $ 5.9 trillion in the decade concerned. This sum, however, only includes financial transactions which can be traced, whereas cash made with crimes like drug trade or human trafficking is not included (please note interview with Erik Solheim on page 84 f.).

It is difficult to get reliable data on illicit financial flows. One of the methods which the authors Dev Kar and Brian LeBlanc used for their study, was to compare official export and import records of various countries. If China, for instance, claimed a certain figure for exports to the US, but the US stated a higher import figure from China, then China was under-invoicing its exports. The countries with highest measured cumulative illicit financial outflow in the years considered were China ($ 1.08 trillion), Russia ($ 881 billion) and Mexico ($ 462 billion).

With 39.6 %, Asia’s is the highest share of all illicit financial flows worldwide. Nonetheless, sub-Saharan Africa is damaged most. The average amount of money lost every year equals 5.7 % of this world region’s GDP. No other continent has a share that large. Africa loses about ten times more money due to illicit financial flows than it gets in net development aid, the report states.

This is not a thing of the past. The authors reckon that global illicit financial flows haven risen by 13.7 % since 2010, with the highest increase observed in the Middle East and North Africa, with an annual rise of 31.5 % over the decade. Indeed, illicit financial flows are said to have swelled faster than most economies have grown.

Room for improvement

There are, however, a number of things which can be done about this. GFI makes several recommendations:

  • Anonymous shell companies, foundations and trusts pose problems because it is hard to determine who exactly benefits from their activities. Accordingly, GFI wants the human owners to be disclosed.
  • Customs and trade protocols should be reformed with the objective of detecting and curtailing trade misinvoicing.
  • Multinational corporations should be forced to account for sales, profits and taxes country by country.
  • Governments should exchange tax information automatically.
  • Laws against money laundering should be harmonised internationally.
  • All relevant regulations should be enforced stringently.

“This study should serve as a wake-up call to world leaders”, says Baker. “The time to act is now.” Sheila Mysorekar