Illicit financial flows from developing countries

Illicit financial flows from developing countries

This article will present the key findings of 2015 report about “Illicit financial integrity” prepared by Global Financial Integrity (GFI) -a non-profit, Washington, DC-based research and advisory organization, which produces high-caliber analyses of illicit financial flows, advises developing country governments on effective policy solutions, and promotes pragmatic transparency measures in the international financial system as a means to global development and security-.

While discussing the development equation especially for the developing countries, we should take into consideration the massive outflows of money that are likely to adversely impact the domestic resources and illicit leakages of capital from the balance of payments and trade misinvoicing.

Illicit financial flows can be defined as illegal movements of money from one country to another, the illegal attribution can be due to the illegal sources used to earn the money, transfer or utilize it. By their nature, illicit funds are difficult to estimate with precision taking into consideration the lack of economic data and methods that can help in framing and forming the scale of the problem.

Among the top ten countries with the highest average illicit financial outflows, which stand for 62.3% of cumulative amount of illicit capital outflows from the entire developing world, the Asian presence is further emphasized as the top exporter of illicit capital with a representation of 5 countries out of the sample (10 countries) and a percentage of 38.8%. The Western Hemisphere represented by Mexico(3rd) and Brazil (6th) in the top ten countries accounted for 20% while Sub-Saharan Africa regions represented as well by two countries: South Africa(7th) and Nigeria (10th) accounted for 8.6%off cumulative illicit financial , Russia (2nd) alone appear in the global top ten representing Developing Europe with 25.5%.

The main components of this illicit capital can be represented by trade misinvoicing which means export under invoicing (undervalues export sales) and import over-invoicing (raises import costs).According to statistics found on the “OECD, IMF, UNTCAD Statistics…and other databases” it has been proved that the amount of illicit financial outflows exceeded both official development assistance (ODA) and inward foreign direct investment (FDI) in all developing countries which shows the seriousness and gravity of the issue since the unrecorded illicit outflows are significantly much higher than the resources these countries might accumulate through ODA and FDI.

US$1.1 trillion was recorded as the amount of illicit flows in 2013 from developing world, which represent 10 times the amount of official development aid received by these countries in the same year and the annual percentage of growth of these outflows is approximatively 6.5%

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Money laundering through trade transactions which can be done via various techniques including trade misinvoicing was defined by the financial action task force (FATF) as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.”. also an important link had been tied between illicit outflows and countries that are major drug producers and/or represent a transit point for drug trafficking since an appealing ratio of misinvoicing to total trade drug transiting countries and the other developing countries was identified (For 68% of the sample trade misivoicing outflows to total trade are significantly above the 6.7% which is the developing countries average.

The opacity of global financial system that can be represented in the following issues-tax havens, secrecy jurisdictions, bribery and corruption- which make up the bulk of illicit financial flows from developing countries, even though there are some best practices that should be adopted and promoted at international and institutional level by all these countries such as:

  • Anti-money laundering: by enforcing all anti-money laundering laws and regulations and penalizing employees of financial intuitions who are facilitating the money laundering operations.
  • Beneficial Ownership: Government authorities should coordinate with banks in order to create public registries in order to maintain a database of the true owners of any account opened all over the financial institutions.
  • Country-by-Country Reporting: Multinational companies should have the obligation to disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis.
  • Tax Information Exchange: Encouraging the participation of all countries to contribute in the worldwide exchange of tax information.
  • Trade misinvoicing: Preparation of well trained and equipped officers to enhance the ability to detect intentional misinvoicing of trade transactions through the ability to access real-time world market pricing information.

The issue of illict finiancial flows is at the forefront international forums and agendas, national and international mobilization is required to tackle the issue and take serious actions on the fight against the phenomenon

Fatima-Zahra Boukhari, Analyst at Infomineo

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Sources :
• Financial Action Task Force, “Trade Based Money Laundering” (Paris, France: Financial Action Task Force (FATF), June 23, 2006), 3, http://www.fatf-gafi.org/media/fatf/documents/reports/Trade%20Based%20Money%20Laundering.pdf.

• “Illicit Financial Flows from Developing Countries 2004-2013” report issued by Global Financial Integrity in December 2015 : http://www.gfintegrity.org/wp-content/uploads/2015/12/IFF-Update_2015-Final.pdf