In a study conducted between November 2010 and February 2011 on ill-gotten money and the economy, the Financial Integrity team looked at the experiences of Malawi and Namibia. We approached the project with an open mind and without any assumptions, finding that for Malawi, corruption and tax evasion as a percentage of GDP represent a significant drag on economic development. Corruption is estimated at 5% of GDP and tax evasion, at a whopping 8-12% of GDP.  Meanwhile, we estimated that tax revenue actually collected by the Malawi Revenue Authority is only 22% of GDP. Thus, if the national tax authority had successfully collected all the taxes it was due, government revenue would increase by 50 percent. This is approximately about how much Malawi receives in foreign aid (11.7 percent of GDP). As one Malawi Revenue official stated when being interviewed during the study: “if we collected all the taxes, we will then not have to depend on foreign aid”.

The Namibian tax evasion situation is no better, as uncollected taxes are equivalent to about 9% of the GDP. This is larger than education’s share of the economy and almost as large as the mining sector—which generates most of the country’s export income. What makes things worse is that Namibia suffers from the highest income inequality in the world: The Gini co-efficient, which measures the gap between rich and poor, is estimated at 70.7. Tax evasion siphons away money that could be invested in productive resources needed to diversify the economy and address urgent social problems.

Furthermore, the revenue lost through corruption and tax evasion represents a diversion (“leakage”) of financial resources away from the national budget toward private spending. And these private expenses or expenditures have much lower “multiplier effects” than expenditures on, for example, agricultural fertilizers, education, health, and infrastructure.

There are four key things that practitioners can take away from the new World Bank study “Ill-Gotten Money and the Economy, Experiences from Malawi and Namibia”.

1. Losses caused by corruption and tax evasion are powerful examples of how criminal activities can potentially have tremendous negative effects on economic development.
2. Ill-gotten money is not spent on productive investments that can have a multiplier effect on an economy and benefit the significant majority of a population, rather than just a select few.
3. Policymakers in governments and development institutions such as the World Bank cannot afford to ignore issues that stand in the way of achieving economic progress, because it means that many people remain in poverty. So, in the case of Malawi and Namibia, addressing corruption and tax evasion should be part of a continuing dialogue with the two governments in our engagement with policymakers.

The study confirms the importance for developing countries to adopt, for their own benefit, customized legal regimes and institutions to go after dirty money. The regimes should reflect local political, economic and social contexts.

As practitioners, addressing these crucial issues head on – be it corruption, tax evasion or a bloated public sector—is our responsibility. No matter how contentious or uncomfortable it may be, we should avoid ignoring this “elephant in the room” and not look the other way when we know that any of these big issues are affecting a client country. We should explore initiatives that target the root of the problem—helping governments implement solutions to critical problems like tax evasion in the short-term, and exploring behavior-changing programs by educating youth on the perils of corruption in the longer term. We hope that policy makers will take our findings into account and do the same.

Total tax revenue as percentage of GDP, 2009
Countries have been ranked by their total tax revenue to GDP ratios

Source: Revenue Statistics,1965-2010, 2011 Edition.

Click here to access underlying data

The underlying message from these comparisons is complex, as changes in tax revenues reflect not only changes in economic activity but also policy measures.

In those European countries most affected by the financial crisis and subsequent recession there was an initial sharp fall in tax revenues, but then a small recovery in the tax to GDP ratio in 2010.

The data collected also show that in a period when all levels of government have seen pressure on expenditure and revenues, the average tax ratio for state, regional and local governments has remained steady since 2007 while that for central government has declined.

In the latest edition

• Out of 30 OECD countries for which provisional 2010 figures are available, tax-to-GDP ratios rose in 17 and fell in 13.
• Compared with 2007 pre-crisis tax to GDP ratios, the ratio in 2010 was still down more than 3 percentage points in six countries.  In Spain it declined from 37.2% to 31.7% and in Iceland from 40.6 to 36.3%.  Chile, Israel, New Zealand and the United States showed declines of 3-4 percentage points over the same period.
• Historically, tax-to-GDP ratios rose during the 1990s and the highest ratio on record was 35.3%, in 2000. They fell back slightly between 2001 and 2004, but then rose again between 2005 and 2007 before falling back following the crisis.
• The proportion of tax revenues accounted for by social security contributions rose from 25% to 27% between 2007 and 2009 whereas the shares of taxes on corporate income and capital gains fell from 11% to 8% over the same period.  The shares of the other major tax categories were largely unchanged.
• Denmark has the highest tax-to-GDP ratio among OECD countries (48.2% in 2010), followed by Sweden (45.8%).
• Mexico (18.7% in 2010) and Chile (20.9%) have the lowest tax-to-GDP ratios among OECD countries.  The United States has the third lowest ratio in the OECD region at 24.8% with Korea at 25.1% and Turkey at 26.0%.
• The tax burden increased from 31.4% to 34% between 2007 and 2010 in Estonia.  Two other countries; Luxembourg and Turkey showed increases of 1-2 percentage points over the same period.

To obtain a copy of Revenue Statistics please e-mail news.contact@oecd.org.

For further information please contact OECD’s Centre for Tax Policy, Jeffrey Owens at + 331 45 24 91 08 or Stephen Matthews at + 331 45 24 93 22.

“Countries’ ability to seize and confiscate the gains from bribery is integral to the international fight against bribery and corruption, ” said Mark Pieth, Chair of the OECD Working Group on Bribery, made up of representatives from the Parties to the Anti-Bribery Convention. “It’s a requirement of all countries that join the OECD Anti-Bribery Convention and the UN Convention against Corruption.”

When a company pays a bribe to win a contract, the proceeds can only be confiscated if they are calculated accurately.  So far, a small but growing number of courts have managed to apply methods to confiscate or recover the proceeds that companies and individuals have obtained by bribing officials.

The Identification and Quantification of the Proceeds of Bribery examines existing methods for calculating the gains made by companies that pay bribes. Drawing from cases in Indonesia, South Africa, the United States and others, it shows the most accurate methods for calculating gross and net profits, as well as what can be recovered within a particular legal regime.

“This report is important because it is the first one that categorizes the main methods used in calculating ill-gotten gains across different legal systems,” stressed Jean Pesme, StAR Coordinator. “In many countries, the idea of penalizing bribery is perceived as too complicated to be seriously pursued. This book lays out in practical terms, and for all potential scenarios, well established practices that can be followed by practitioners”. This report builds on these experiences to provide real-life examples to show how the proceeds of bribery can be calculated and recovered by governments.

The report can be accessed at: www.oecd.org/daf/nocorruption. For more information about StAR, please visit: www.worldbank.org/star.

About StAR
The Stolen Asset Recovery Initiative (StAR) is a partnership between the World Bank Group and the United Nations Office on Drugs and Crime that supports international efforts to end safe havens for corrupt funds.  StAR works with developing countries and financial centers to prevent the laundering of the proceeds of corruption and to facilitate more systematic and timely return of stolen assets.

About the World Bank Group
The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. It comprises five closely associated institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), which together form the World Bank; the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the International Centre for Settlement of Investment Disputes (ICSID). Each institution plays a distinct role in the mission to fight poverty and improve living standards for people in the developing world. For more information, please visit www.worldbank.org, www.miga.org, andwww.ifc.org.

About the OECD Anti-Bribery Convention
The OECD groups 34 member countries committed to democracy and the market economy. It provides a forum in which governments can compare and exchange policy experiences, identify good practices and promote decisions and recommendations. The Organisation’s mission is essentially to work for a stronger, cleaner, fairer world economy.

The OECD is also home to the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the first and only international instrument designed to tackle the supply side of bribery. The OECD Working Group on Bribery in International Business Transactions monitors the implementation of the OECD Anti-Bribery Convention by State Parties through a rigorous system of peer review. More information about the Anti-Bribery Convention is available online at:www.oecd.org/daf/nocorruption/convention
Contacts:

In Washington:
Beata Plonka
Phone: (202) 458-5991
E-mail: bplonka@worldbank.org

In Paris (OECD):
Mary Crane-Charef
Phone: (33)1 45 24 9704
E-mail: Mary.Crane-Charef@oecd.org

Following the restructuring of the Global Forum, a program of indepth peer reviews was launched in 2010. This 2011 Report on Progress publication describes the progress made since the Global Forum launched its peer review mechanism in 2010.

To date, 59 Phase 1 and Combined reports have been published complemented by seven supplementary reports covering more than half of the Global Forum members. All peer review reports can be accessed through the EOI Portal: www.eoi-tax.org. The EOI Portal contains all the latest information on the Global Forum member jurisdictions, including information on the peer reviews and any recommendations for improvements made, news on what actions have been taken to address deficiencies and comprehensive information on jurisdictions’ exchange of information agreements.

The Global Forum reported the findings of the peer review reports to the G20 Leaders at their Cannes Summit on 3-4 November 2011 and, in particular, the quality of cooperation with the Global Forum, the level of compliance and the unresolved deficiencies. The Progress Report
to the G20 is presented in Part II of this publication after a brief introduction of the Global Forum and its Secretariat (Part I). In addition, Part III includes the report that the G20 also asked for in the context of the G20 Multi-Year Action Plan on Development. Finally, this 2011 Report on Progress includes the statements of outcomes of the two Global Forum meetings held in 2011 (in Bermuda and France).

This is recognised in the UN Convention against Corruption in Article 13 on civil society participation and access to information and in other UNCAC provisions. Additionally, Article 19 and other provisions of the UN Covenant on Civil and Political Rights, provide for a right to freedom of expression and to access to information held by public bodies and calls on states of their own accord to put information of public interest into the public domain and to establish procedures to enable easy, prompt, effective and practical access to information.

Further, in the UNCAC review mechanism that started up in July 2010 it is of critical importance for its public credibility that these principles be applied. This means a transparent and inclusive mechanism in which civil society organisations can make inputs and all review reports are published in full. It means a mechanism where civil society participation is not simply an optional add-on. The older anti-corruption review mechanisms of the OECD, OAS and Council of Europe GRECO have recognised the importance of these principles.

Read the full report here

Corrupt money transferred out of developing and transitional economies is conservatively estimated at US$20 to US$40 billion per year. Hundreds of billions in much needed funds for development have already been taken over the last few decades. While recovery of stolen funds could greatly contribute to development in those countries, prevention of such outflows through greater financial transparency and anti-money laundering efforts would reduce the harm done by corruption in the first place. By ratifying the United Nations Convention against Corruption (UNCAC), States Parties have made commitments on both of these issues.

As the fourth Conference of State Parties (CoSP) to the UN Convention against Corruption (UNCAC) convenes in Marrakesh, Morocco, and people throughout the Arab world struggle to get back their countries’ stolen funds, the UNCAC Coalition calls on States Parties to adopt resolutions to (1) fulfil their commitment to Chapter V by removing barriers to asset recovery; (2) improve their anti-money laundering efforts in practice.

Asset Recovery

Of the hundreds of billions in ill-gotten assets misappropriated over the course of the last fifteen years, no more than US$5 billion has been recovered and even less has been returned to the countries from which these assets were taken. There is a variety of reasons for this, including the fact that asset recovery processes are complex; they require a great deal of resources and expertise and depend on effective cooperation between the jurisdictions involved.

In this regard, the UNCAC Coalition welcomes the Stolen Asset Recovery Initiative’s (StAR) report “Barriers to Asset Recovery” and applauds its key recommendations which aim to facilitate judicial cooperation in the area of asset recovery and allow for rapid tracing and temporary freezing or seizing of assets before a formal mutual legal assistance (MLA) request is received However, the Coalition is also concerned that even the introduction of these measures would not fully address the twofold problem that too few asset recovery cases are brought to justice and those which are brought do not lead to effective compensation for victims.

Read the full document here

Less than 1 per cent of global illicit financial flows is currently being seized and frozen, according to the report Estimating illicit financial flows resulting from drug trafficking and other transnational organized crime. “Tracking the flows of illicit funds generated by drug trafficking and organized crime and analysing how they are laundered through the world’s financial systems remain daunting tasks,” acknowledged Yury Fedotov, Executive Director of UNODC.

Launching the report in Marrakech, Morocco, during the fourth session of the Conference of the States Parties to the United Nations Convention on Corruption, Mr. Fedotov said that the Conference served as an apt reminder that corruption could play a major role in facilitating the entry of illicit funds into legitimate global financial flows, adding that investments of “dirty money” could distort the economy and hamper investment and economic growth. The aim of the study is to shed light on the total amounts probably laundered across the globe and to advance research on the topic. “But as with all such reports, we will continue to refine the figures to provide the truest possible estimates,” said Mr. Fedotov.

The UNODC report estimates that the total amount of criminal proceeds generated in 2009, excluding those derived from tax evasion, may have been approximately $2.1 trillion, or 3.6 per cent of GDP in that year (2.3 to 5.5 per cent). Of that total, the proceeds of transnational organized crime – such as drug trafficking, counterfeiting, human trafficking and small arms smuggling – may have amounted to 1.5 per cent of global GDP, and 70 per cent of those proceeds are likely to have been laundered through the financial system.

The illicit drug trade – accounting for half of all proceeds of transnational organized crime and a fifth of all crime proceeds – is the most profitable sector. The study paid particular attention to the market for cocaine, probably the most lucrative illicit drug trafficked across borders. Traffickers’ gross profits from the cocaine trade stood at around $84 billion in 2009. While Andean coca bush farmers earned about $1 billion, the bulk of the income generated from cocaine was concentrated in North America ($35 billion), followed by West and Central Europe ($26 billion). Approximately two-thirds of that total may have been laundered in 2009. The findings suggest that most profits from the cocaine trade are laundered in North America and in Europe, whereas illicit income from other subregions is probably laundered in the Caribbean.

Once illegal money has entered the global and financial markets, it becomes much harder to trace its origins, and the laundering of ill-gotten gains may perpetuate a cycle of crime and drug trafficking. “UNODC’s challenge is to work within the United Nations system and with Member States to help to build the capacity to track and prevent money-laundering, strengthen the rule of law and prevent these funds from creating further suffering,” said Mr. Fedotov.

“We need to put corporate transparency back on the national and international agenda,”said Emile van der Does de Willebois, World Bank Senior Financial Sector Specialist who led the StAR research team. “It is important for governments to increase the transparency of their legal entities and arrangements and at the same time improve the capacity of law enforcement.” 

The report, The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, examines how bribes, embezzled state assets and other criminal proceeds are being hidden via legal structures – shell companies, foundations, trusts and others. The study also provides policy makers with practical recommendations on how to step up ongoing international efforts to uncover flows of criminal funds and prevent criminals from misusing shell companies and other legal entities.

The study explains how corrupt public officials and their associates conceal their connection to ill-gotten funds by exploiting legal and institutional loopholes that allow opacity in companies, foundations and trust-like structures. It also lists obstacles to investigating and establishing the origin and ownership of stolen assets: the difficulty of identifying where legal entities operate and have business relationships, lack of access to information on beneficial ownership and the use of complex and multi-jurisdictional corporate structures.

Drawing on evidence from relevant stakeholders, the report advises policymakers on how to effectively address the problem of corrupt payments made through opaque companies. In particular, the study recommends that more detailed information be collected in corporate registries, and that providers of legal, financial and administrative (incorporation and management) services to legal entities more effectively conduct due diligence on those controlling corporate entities.

The study is based on research including an analysis of 150 grand corruption cases and an examination of the practices of 40 jurisdictions and their company registries in collecting, updating and providing access to beneficial ownership information of legal entities. The report also draws on the experiences of more than 77 experts from 33 jurisdictions in investigating the misuse of transnational legal structures.

To access the report, please visit www.worldbank.org/star

Contacts:
In Washington DC: Xenia Zia Morales, +1 202 473 9027, xmorales@worldbank.org

For Broadcast Requests: Natalia Cieslik, (202) 458-9369, ncieslik@worldbank.org

The report commends Kazakh leaders for declaring that the fight against corruption is a top priority and for ratifying the UN Convention Against Corruption (UNCAC). Kazakhstan has also adopted an anti-corruption strategy for 2011-2015 and tasked the country’s Agency for Combating Economic and Corruption Crimes to co-ordinate its implementation. It has also taken important steps to improve business regulations in order to reduce opportunities for corruption.

However, the level of corruption remains very high, especially in the spending of public funds. To address these serious challenges, Kazakhstan should:

• Making greater use of research and analysis for monitoring the implementation its anti-corruption strategy;
• Ensure genuine involvement of civil society in anti-corruption policies and actions;
• Strengthen public sector integrity by, among other measures, preventing the politicisation  of the civil service and ensuring the independence of the judiciary and the supreme audit institution;
• Adopt an access to information law and remove criminal liability for libel;
• Eliminate loopholes in the public procurement legislation; and
• Bring Kazakhstan’s criminal legislation in line with the UNCAC, including the adoption of the law on responsibility of legal persons.

The full report and recommendations on Kazakhstan is available here.

The IAP is an initiative launched in 2003 to support anti-corruption reform efforts in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Ukraine and Uzbekistan, as part of the OECD Working Group on Bribery outreach work in Eastern Europe and Central Asia under its regional initiative Anti-Corruption Network for Eastern Europe and Central Asia.

For further information, you can contact Ms. Inese Gaika at the OECD’s Anti-Corruption Division at (33) 1 45 24 13 19 or anti-corruption.contact@oecd.org.

For more information on OECD’s work to fight corruption, visit www.oecd.org/daf/nocorruption.

Armenia’s leaders have recently taken steps to improve their country’s anti-corruption policies, legislation and institutions. However citizens and business still consider corruption a major problem and public awareness of the damages it causes is rising.

A key challenge to Armenia’s anti-corruption efforts is that political declarations and laws are not properly implemented. The results in investigations and prosecutions of corruption crimes are very limited, says the report. Stronger political leadership would help and the government should give law enforcement agencies access to bank information and other financial data so they can detect and investigate corruption-related offences more effectively.

The report also recommends that Armenia:

• Ensure vigorous implementation of anti-corruption strategies through stronger leadership and necessary resources;
• Involve civil society in anti-corruption policies and actions;
• Continue strengthening the investigation and prosecution of corruption, in particular among high-ranking officials; and
• Ensure a transparent and effective public procurement system.

This report commends Armenia on progress made in the following areas:

• Adopting a well-elaborated anti-corruption strategy and establishing a mechanism for its coordination;
• Creating in 2008 a specialised body to investigate crimes committed by senior public officials;
• Adopting a new public sector ethics law, which includes measures for preventing corruption among high-ranking officials, protecting whistleblowers and requiring high-ranking officials to declare property and income.

The full report and recommendations on Armenia are available here.

The IAP is an initiative launched in 2003 to support anti-corruption reform efforts in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Ukraine and Uzbekistan, as part of the OECD Working Group on Bribery outreach work in Eastern Europe and Central Asia under its regional initiative Anti-Corruption Network for Eastern Europe and Central Asia.

For further information, you can contact Ms. Inese Gaika at the OECD’s Anti-Corruption Division at (33) 1 45 24 13 19 or anti-corruption.contact@oecd.org.

For more information on OECD’s work to fight corruption, visit www.oecd.org/daf/nocorruption.