• The extensive use of emergency ordinances
• Low level of accountability for corruption
• Low level of trust of people in the parliament
• A major gap in implementation of laws by the government

If corruption continues to remain high, and the government fails to address it, Romania will struggle to further integrate into the European Economy.

Illicit financial outflows due to corruption, kickbacks, and trade mispricing have been increasing in Romania since 2006. A study by Global Financial Integrity has shown that in the year 2005, when Romania signed the EU adherence treaty, the country’s illicit financial flows declined to a three year low. However, as the graph below shows, illicit financial flows increased significantly at the same time as Romania was integrating into the European Union. Prior to accession, Romania was asked to enact reforms to curb organized crime, corruption, and food safety. Corruption remains one of the biggest drags on Romania’s economy.

Romania has shown that it does address corruption occasionally with the arrest of Former Prime Minister Adrian Natase, who was charged with taking part in organizing a conference to illegally collect money for his 2004 Presidential campaign. He was convicted to two years in prison.

This is a good step forward in creating accountability in the government. However, the amount of money flowing out of Romania indicates that they may be wise to follow Transparency International’s suggestions not only to combat the systemic level of corruption, but also to create a stronger, stable country that all Romanians and the rest of the European Union member-states can be proud of.

The report’s author, Dev Kar, estimates illicit financial flows as the sum of two components.[1] One of these components is a measure of trade mispricing. Using IMF statistics, Kar compares Mexico’s recorded imports to what the world says it exported to Mexico; and then he compares Mexico’s recorded exports against world imports from Mexico.

In a perfect world these numbers would line up. But they don’t for two reasons. The first is trade mispricing. Trade mispricing occurs when a company or an individual shifts wealth between countries, using either export under-invoicing or import over-invoicing. Suppose a Mexican furniture manufacturer, who wants to send money abroad illegally, is importing $100 worth of timber from the United States.  Instead of paying $100, the furniture company reports and pays $200.  The company’s U.S.trading partner takes $100 for the furniture, reports the $100 on its own invoice, and shifts the extra $100 to a secret Delaware bank account (and maybe keeps an extra few dollars as a transaction fee).  Now the furniture company has shifted the $100 to the United States without Mexico’s knowledge. But the $100 discrepancy is also reflected in the difference between what the United States says it exported to Mexico and what Mexico reports it imported from the United States.

The second reason these numbers don’t line up—and this is not to be overlooked—there statistical errors associated with compiling such large datasets. Even in the absence of any trade mispricing, it is unlikely Mexico’s recorded imports from the world would match perfectly with the world’s recorded exports toMexico, and vice versa.

Using the normalized estimates, Kar’s study finds illicit financial flows averaged $18.7 billion per year between 1970 and 2010. Of this total, $15.3 billion per year—or 82%—is attributable to trade mispricing.

Kar does not net out “reversals” or illicit inflows from his estimates. This diverges from more traditional models, where economists do subract illicit inflows from illicit outflows, resulting in a lower “net” estimate of capital flight. But this gives a skewed picture. Illicit outflows, because they are illegal by definition, are not supplementing the domestic economy in the same way an illicit outflow is detracting from it. Moreover, as Kar notes, “The traditional method of estimating illicit flows…seriously understates the adverse impact of illicit flows on poverty alleviation and economic development in developing countries.”

While the example I used above about the Mexican furniture company illustrates a way Mexicans can use trade mispricing to send money abroad, Mexicans are able to use the practice to bring money in as illicit inflows. Theoretically one could argue this offsets the outflow of funds. In reality, these inflows are often the proceeds of the drug trade or of money laundering.

As it would turn out, it recent years criminals in Mexico regularly use trade-based mechanisms, including trade mispricing, to launder money and skirt their government’s tight financial rules. This often occurs when drug trafficking organizations want to repatriate their earnings from drug sales overseas. For example, a Mexican front company can ship furniture to the United States and, by over-invoicing the goods, can include in the invoice enough for both the merchandise and laundered funds. The buyer on the other side, who’s holding the illicit cash, remits the payment for the furniture and sends the funds to the Mexican company’s account, which now enter the banking system as a formal, legal transaction.

This method skirts the warning flags provided by most laws and regulations. It would be recorded as an illicit inflow of cash (a “reversal”) and in a traditional model of illicit financial flows it “offsets” the equal amount in outflows. This, quite frankly, is completely nonsensical. Why should laundered money offset the damage of tax evasion?

With this report, GFI has put forward a number of policy recommendations for addressing trade mispricing in Mexico. The reasons the Mexican government should heed their advice are not limited to loss of funds—the implications of trade mispricing, and illicit financial flows generally, range from money laundering to the drug trade; from tax evasion to corruption. This is not just a question of loss of resources—although that would be bad enough—but rather a question that reaches into economic stability and national security.

flickr / chadedwardus

The U.S. government frequently raises the issue of smuggling of bulk shipments of currency from the U.S. to Mexico as a major economic and security issue, one that demands greater effort by Mexican authorities to detect and deter.

However, as a report released this week by Global Financial Integrity reveals, bulk cash smuggling is not the only form of illicit financial transfer taking place in staggering volumes across the U.S. – Mexico border.

The report’s findings indicate that the Mexican economy lost $872 billion to illicit financial outflows between 1970 and 2010. These non-cash outflows from Mexico serve to feed Mexico’s underground economy, enabling the spoils of illicit activity to be stashed abroad. Notably, the vast majority of capital leaving Mexico, including illicit transfers, is destined for banks in the United States, and a significant increase in illicit outflows from Mexico was observed in the wake of the coming into force of NAFTA, suggesting even more strongly that the bulk of illicit outflows from Mexico is placed in U.S. accounts.

As a result, there is a clear window of opportunity for U.S. policy initiatives to make this country less inviting to criminals and tax evaders from our Southern neighbor, which would benefit economic stability and national security in both the U.S. and Mexico.

There is one most obvious way that the U.S. could make its financial system a less attractive destination for Mexico’s illicit outflows – through the introduction of automatic tax information exchange agreement with Mexico on U.S. deposit accounts held by Mexican residents.

The Mexican government formally requested such an agreement with the Treasury Department in 2009, in order to help counter the laundering of Mexican criminal proceeds and tax evasion through U.S. banks, but it has yet to receive a reply. While Mexico and the U.S. do exchange tax information on a case-by-case basis in instances of suspected tax evasion, moving to automatic exchange would greatly simplify the exchange process, and would curtail unreported cross-border interest income by citizens of both countries.

Such a policy change would not be unprecedented. Though the U.S. does not currently collect information on interest payments made to most non-resident account holders, U.S. financial institutions are required to provide the IRS with such information regarding account holders that are residents of Canada. This information is in turn automatically supplied to the Canadian tax authority under an exchange agreement. The IRS benefits from the receipt of similar tax information in return.

In addition to the automatic exchange of tax information on non-resident account holders between Canada and the U.S., Mexico and Canada also have a similar agreement in place. This leaves the U.S. as the only NAFTA country that has not fully committed to the systematic, dynamic exchange of deposit account information with its major regional trading partners.

An agreement on automatic exchange of tax information on accounts could be readily implemented between the U.S. and Mexico, drawing on the experience in administering the existing agreements in North America, and in accordance with OECD standards. Given the likely volume of illicit funds being covertly transferred from Mexico to the U.S., such an agreement would go a long way towards interrupting the illicit outflows from Mexico, and would demonstrate the U.S. Government’s commitment to combating illicit financial activity on the Southern border in all its forms.

Image:  Some rights reserved by chadedwardus

MEXICO CITY / WASHINGTON, DC – Crime, corruption and tax evasion cost the Mexican economy US$872 billion between 1970 and 2010 according to a new report from Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. The illicit financial outflows, which averaged a massive 5.2% of GDP, grew significantly over the 41-year period studied from just US$1 billion in 1970 to US$68.5 billion in 2010.

“This is a devastatingly large amount of money for any developing country to lose,” said Raymond W. Baker, director of GFI. “$872 billion is gone, which could have been used to develop the Mexican economy, to invest in education, to build roads, or to fight the drug cartels. The negative ramifications are huge for everyday Mexicans.”

You can read more at mexico.gfintegrity.org.

Study Recommends Policies Be Implemented to Address Trade Mispricing, Money Laundering, Tax Evasion

MEXICO CITY / WASHINGTON, DC – Crime, corruption and tax evasion cost the Mexican economy US$872 billion between 1970 and 2010 according to a new report from Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. The illicit financial outflows, which averaged a massive 5.2% of GDP, grew significantly over the 41-year period studied from just US$1 billion in 1970 to US$68.5 billion in 2010.

“This is a devastatingly large amount of money for any developing country to lose,” said Raymond W. Baker, director of GFI. “$872 billion is gone, which could have been used to develop the Mexican economy, to invest in education, to build roads, or to fight the drug cartels. The negative ramifications are huge for everyday Mexicans.”

The study, which was authored by Dr. Dev Kar, GFI lead economist, saw illicit outflows explode from an annual average of US$3.0 billion in the 1970s, to US$10.4 billion in the 1980s, to US$17.4 billion in the 1990s, and US$49.6 billion in the decade ending 2009.

Underground Economy

Moreover, illicit outflows were found to drive the domestic underground economy, which includes—among other things—drug smuggling, arms trafficking and human trafficking. Thus, illegal capital flight was found to contribute to a deterioration in governance. Likewise, growth in the underground economy was also shown to drive illicit flows, creating “a snowballing effect whereby both the underground economy and illicit flows continue to grow at an increasing rate unless policy measures and institutions intervene,” according to Dr. Kar, who worked as a senior economist at the International Monetary Fund before joining GFI.

Trade Mispricing and NAFTA

The report concluded that policymakers should focus on measures to curtail trade mispricing, a form of trade based money-laundering, which skyrocketed in the years after NAFTA came into effect and which was shown to account for 73.7% of total illicit financial outflows over the 41-year time period.

The study recommends three policy measures to reduce trade mispricing:

• Require the utilization of computer software to detect export and import prices that are clearly out of line with international norms; (49)
• Require that the parties conducting a sale of goods or services in a cross-border transaction sign a statement in the commercial invoice certifying that no trade mispricing has taken place in an attempt to avoid duties or taxes and that the transaction is priced using the OECD arms-length principle; (51) and
• Undertake additional measures to curb abusive transfer pricing. (51)

Further Policy Recommendations

In addition to recommending policies to curtail trade mispricing, the report recommends four additional policy actions to reduce illegal capital flight from Mexico:

• Expand double tax avoidance agreements with other jurisdictions; (53)
• Require automatic cross-border exchange of tax information with other jurisdictions on personal and business accounts; (54)
• Maintain macroeconomic stability, which includes maintaining low budget deficits, low external debt levels, and low and stable inflation rates; (56) and
• Take steps to reign in the role of offshore financial centers (OFCs) and banks. (59)

Destination of Illicit Outflows

While the report cannot specifically breakdown into which jurisdictions illicit outflows from Mexico are deposited, the study does indicate that a majority of Mexican capital outflows, which include both licit and illicit capital, end up in U.S. banks. The large spike in illicit outflows following the implementation of NAFTA would imply that much of those outflows were indeed headed for the United States. This suggests that U.S. policymakers have a significant role to play in curtailing the flow of illicit money out of their southern neighbor.

In addition to the U.S., tax havens in the Caribbean and Europe were the second and third largest recipients of Mexican capital outflows.

Drug Cartels and National Security Risk

A large portion of drug cartel activity is conducted in cash, and none of those cash transactions are detected in GFI’s data, which is one of the reasons why the organization believes its figures to be extremely conservative. That said, drug cartels like many criminal enterprises also utilize legitimate commercial transactions to launder their profits. In fact, the Los Angeles Times reported last month that Mexican drug cartels were utilizing trade-based money laundering techniques to move their money across the U.S.-Mexico border. Those kinds of business transactions would show up in the organizations data, however it cannot be determined exactly how much of the trade mispricing in GFI’s report is attributable to the activities of drug cartels.

As such, the organization believes that this has serious implications for national security.

“The ease with which money can be laundered across the U.S.-Mexico border via trade mispricing poses a major national security risk to both the United States and Mexico,” said Mr. Baker. “Drug traffickers, like kleptocrats, terrorists and tax dodgers, all gain from anonymous shell companies, tax haven secrecy, and nefarious trade mispricing tactics. Taking steps to address these issues would curtail a number of societal ills.”

###

Notes to Editors:

• Download an embargoed full copy of the report in English here [PDF - 3.56MB] and in Spanish here [PDF - 3.52MB].
• A media tip-sheet is available to journalists for download in English here [PDF - 197KB] and in Spanish here [PDF - 122KB].
• Download this press release as a PDF in English here [PDF - 387KB] and in Spanish here [PDF - 101KB].
• Press briefings will be held in Mexico City and in Washington, DC on Monday January 30, 2012. The Mexico City press briefing will take place at the Hilton Mexico City Reforma Hotel on Monday, January 30, 2012 at 11am CST. To RSVP for the Mexico City press briefing, contact Clark Gascoigne at cgascoigne@gfintegrity.org. The Washington, DC briefing event will take place at 1319 18th Street NW, Suite 200, Washington, DC at 10am EST on Monday January 30, 2012. To RSVP for the Washington, DC launch event, contact EJ Fagan at efagan@gfintegrity.org.

Contact:

English:

Mexico City/Washington, DC:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 x222 (office)

Washington, DC:

EJ Fagan
efagan@gfintegrity.org
+1 202 293 0740 x227

En español:

Mexico City:

Emilene Martínez
emilene17@gmail.com
+52 1 55 6010 0835

_____________________________

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfintegrity.org. 

Follow us on: Twitter | Facebook | YouTube

Looking at 2012, experts from the Brookings Africa Growth Initiative (AGI) and colleagues from think tanks based in the region have come together to produce this year’s issue of Foresight Africa, where they outline the top priorities for the continent for 2012 and beyond. AGI scholars assess what they see as the major challenges for Africa in the coming year and provide policy recommendations on how to manage these challenges and leverage opportunities to catalyze and reignite growth in 2012. Similarly, AGI and its partner think tanks identify country-specific challenges in Nigeria, South Africa, Senegal and Kenya.

The report find that sudden surges and stops in cross-border financial flows, which have been increasing in frequency, risk generating new financial crises in both rich and poor countries.

A report by the Bretton Woods Project, Time for a new consensus, “explains the drawbacks, especially for development, of policies to deregulate the movement of money across borders, and makes suggestions for a new pragmatic approach to regulation of financial flows to ensure stability and development.” It argues that these flows should be managed more effectively in both source countries (like the US and UK) and recipient countries (like Brazil and Turkey).

Peter Chowla, Bretton Woods Project programme manager, said:

“The massive storm brewing in Europe makes it all the more important that countries prepare themselves for dangerous economic shocks, especially risk aversion by investors and capital flight. Developing countries need to put in place pragmatic, preventative regulations that can help prevent financial speculators wreaking havoc.”

A second report, published jointly by the Bretton Woods Project and Peru-based network Latindadd, Breaking the Mould, examines policies in Argentina, Brazil and Costa Rica to show how capital account regulations can help not only achieve financial stability, but also prevent unwarranted appreciation of the exchange rate and increase the ability to use monetary policy effectively. It finds that regulations on financial flows have a role in supporting broader development goals like employment creation and poverty reduction.

Jorge Coronado, an expert consultant for Latindadd, said: “The Latin American experience provides important lessons for Europe and the rest of the world. Development goals are best achieved by combining sensible regulation of finance with progressive economic policies. ”

Juan O’Farrell of the Bretton Woods Project said: “With Brazil joining Argentina in scepticism of too much reliance on volatile capital markets, Latin America is staking out a strong position in the G20 that excessive globalisation of finance is too dangerous.”

For information:

Peter Chowla, +44 (0) 7877 596 893 / pchowla@brettonwoodsproject.org

Juan O’Farrell, +44 (0) 203 122 0728 / jofarrell@brettonwoodsproject.org

Notes to editors

A preview of Time for a new consensus is available at
http://brettonwoodsproject.org/art.shtml?x=569411

A preview of Breaking the Mould is available at:
http://brettonwoodsproject.org/art.shtml?x=569425

Time for a new consensus explains the drawbacks, especially for development, of policies to deregulate the movement of money across borders. It also looks at the potential advantages of regulating flows, despite the assumption of international institutions such as the IMF and World Trade Organisation (WTO), as well as in the European Union and rich country governments, that this will be harmful. It argues that a new consensus around prudential and pragmatic capital account policies and their enforcement can facilitate financial stability, sustainable growth, and social development.

Breaking the Mould looks in depth at capital account regulations implemented in Argentina, Brazil and Costa Rica. While in Argentina the capital account regulations implemented since the 2001 crisis are part of a comprehensive policy ‘toolkit’ which represents a U-turn from 1990s financial liberalisation, in Brazil and Costa Rica the measures implemented come as isolated policies responding to a particular context of high capital inflows stimulated by low interest rates in rich countries. The report argues that the policy changes in these three countries are just first steps in the shift towards capital account regulations that work for the people. In order to increase the effectiveness and development impact of capital account management techniques they have to be implemented early on as part of a comprehensive policy framework and not just as last resort, as advocated by the IMF.

Some new, but limited, thinking on these risks has emerged from the Bank of England and from the IMF in recent weeks. However, the Eurozone crisis will make consideration of regulation of cross-border financial flows even more important, as any country leaving the Eurozone will have to design policies to prevent massive capital flight. These policies are currently forbidden under the EU’s Lisbon Treaty.

On Monday, 12 December, the Bank of England published two new financial stability papers:

• FS Paper No 13, Reform of the International Monetary and Financial System, by Oliver Bush, Katie Farrant and Michelle Wright.
• FS Paper No 12, The future of international capital flows, by William Speller, Gregory Thwaites and Michelle Wright.

Report Finds Developing World Lost US$8.44 Trillion over the Decade 2000-2009

Global Financial Integrity

WASHINGTON, DC – Developing countries lost US$903 billion in illicit financial outflows in 2009 despite the massive slowdown in economic activity which rocked world markets in late 2008, finds a new study by Global Financial Integrity (GFI), a Washington-based research and advocacy organization.

“Illicit Financial Flows from Developing Countries over the Decade Ending 2009,” which estimates the developing world lost US$8.44 trillion over the decade ending in 2009, is GFI’s annual update on the amount of money flowing out of developing economies via crime, corruption and tax evasion, and it is the first of GFI’s reports to include data for the year 2009.

“This is a breathtakingly large sum at a time when developing and developed countries alike are struggling to make ends meet,” said GFI Director Raymond Baker.  “This report should be a wake-up call to world leaders that more must be done to address these harmful outflows.”

While US$903 billion marks a drop from the US$1.55 trillion¹ that illicitly flowed out of the developing world in 2008, the study finds the decrease is almost entirely attributable to the global financial crisis rather than any governance improvements or economic reforms.

The study, which was co-authored by GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas, tracks the amount of illegal capital flowing out of 157 different developing countries over the 10-year period from 2000 through 2009, and it ranks the countries by magnitude of illicit outflows. According to the report, the 20 biggest victims of illicit financial flows over the decade are:

1. China ……………………………………… $2.74 trillion
2. Mexico …………………………………….. $504 billion
3. Russia …………………………………….. $501 billion
4. Saudi Arabia …………………………… $380 billion
5. Malaysia …………………………………. $350 billion
6. United Arab Emirates………………. $296 billion
7. Kuwait …………………………………….. $271 billion
8. Nigeria ……………………………………. $182 billion
9. Venezuela ………………………………. $179 billion
10. Qatar ………………………………………. $175 billion
11. Poland …………………………………….. $162 billion
12. Indonesia ………………………………… $145 billion
13. Philippines ……………………………… $142 billion
14. Kazakhstan …………………………….. $131 billion
15. India ………………………………………… $128 billion
16. Chile ………………………………………. $97.5 billion
17. Ukraine ………………………………….. $95.8 billion
18. Argentina ……………………………….. $95.8 billion
19. South Africa ……………………………. $85.5 billion
20. Turkey…………………………………….. $79.1 billion

For a complete ranking of average annual illicit financial outflows over the decade by country, please refer to Table 5 of the report’s appendix.

The report also reveals the top victims of illegal capital flight in 2009.  The top 20 countries suffering the highest illicit outflows in 2009 were:

1. China ……………………………………… $291 billion
2. Saudi Arabia …………………………… $82.3 billion
3. Poland ……………………………………. $66.3 billion
4. Malaysia ………………………………… $46.8 billion
5. Mexico …………………………………… $34.6 billion
6. Nigeria ………………………………….. $33.4 billion
7. Russia ……………………………………. $23.4 billion
8. Indonesia ……………………………….. $20.5 billion
9. United Arab Emirates ……………… $19.5 billion
10. Venezuela ………………………………. $18.8 billion
11. Iran ………………………………………. $18.1 billion
12. Azerbaijan ……………………………… $14.3 billion
13. Chile ……………………………………… $13.1 billion
14. South Africa …………………………… $12.9 billion
15. Vietnam ………………………………… $12.5 billion
16. Philippines ……………………………… $12.1 billion
17. Argentina ………………………………. $11.7 billion
18. Thailand ………………………………… $10.8 billion
19. Romania ……………………………….. $10.0 billion
20. Ukraine …………………………………. $9.8 billion

To schedule an interview with GFI spokespersons on this report, contact Clark Gascoigne at +1 202 293 0740, ext. 222 or cgascoigne@gfintegrity.org. On-camera spokespersons are available in Washington, DC.

For more information on the report, visit http://iffdec2011.gfintegrity.org.

###

Footnotes:

1. GFI’s previous annual study of illicit financial flows out of developing countries, “Illicit Financial Flows from Developing Countries: 2000-2009,” published in January 2011, found that US$1.44 trillion had flown out of developing economies in 2008.  Due to revised/improved World Bank and IMF data, GFI’s new report estimates that US$1.55 trillion is a more accurate measurement of illicit financial outflows in 2008.

Notes to Editors:

• The full embargoed report can be downloaded here [PDF 2.90 MB].
• A tip-sheet for journalists can be downloaded here [PDF 155 KB].

Contact:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740, ext. 222

__________

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfintegrity.org. 

Follow us on: Twitter | Facebook | YouTube

Manilla, Philippines - flickr / tEdits

According to an upcoming report that estimates the magnitude of illicit money leaving developing countries, the Philippines lost US$142 billion between 2000 and 2009.  The amount of illicit money that left the economy puts the Philippines in the top 15 countries in outflows during the period.  The report, titled Illicit Financial Flows from Developing Countries Over the Decade ending 2009, will be published by Washington, DC-based research group Global Financial Integrity on December 15.

The study found that the majority of the illicit outflow, US$113.7 billion, is due to the mispricing of imported and exported goods. Trade mispricing is a phenomenon where individuals and corporations use fraudulent commercial invoices to smuggle money out of the country, usually in order to facilitate tax evasion. A large corporation or very wealthy individual in the Philippines will trade with a counterpart in another country, but will manipulate the price and quantity of exported goods to send more money offshore than represented by what they report to the government. The individual or corporation then collects the extra money later, usually in a bank account in a tax haven or secrecy jurisdiction.

This means that while the Philippines has seen significant outflows from corruption, bribery, and kickbacks, their biggest priority when addressing illicit capital flight should be to tackle trade-related tax evasion. Tax revenue loss represents teachers that are not hired, hospitals that are understaffed, and additional taxes levied on those already paying their fair share. We believe that the very real cost in human suffering and loss of life from tax evasion in the Philippines, and elsewhere throughout the developing world, is massive.

The Philippines is a country with enormous economic potential. It has a high literacy rate and significant economic growth over the past decade. However, growth failed to keep pace with many of the Philippines’ neighbors. To make matters worse, much of the economic gain in the country has gone to relatively few people.  Income inequality in the Philippines, as measured by a Gini index of 45.8, ranks among the worst in the region. These same wealthy Philippine citizens are the ones who are likely using trade mispricing to move money out of the country. This helps explain why despite economic growth, tax revenue as a percentage of GDP has been declining since 1990.

Unfortunately, the Philippines cannot solve their tax evasion problem alone. The shadow financial system that facilitates tax evasion is international in nature. Corporations and individuals use a combination of tax havens and loose accounting practices to hide money abroad. The international community, namely the G20 countries, needs to support new transparency measures such as country-by-country reporting so that multinational corporations will report revenues and costs for their network of subsidiaries in each individual country. This will help Philippine authorities effectively tax multinationals.  Concrete steps must also be taken to establish a worldwide system of automatic tax information exchange so that the Philippine tax authorities can effectively track their citizens who keep their money abroad. These reforms will help the country reverse trends of declining revenue, and provide the public services necessary to fulfill its enormous potential.

Editorial Note: Thursday, December 15th, Global Financial Integrity will release its new report, “Illicit Financial Flows from Developing Countries over the Decade Ending 2009,” measuring illicit financial flows out of 160 different developing countries.  Revealing more data from the upcoming report, Ms. Freitas has written three other blog posts highlighting illicit financial outflows from Russia,EthiopiaandSyria.Sign up here to receive notices when new GFI reports are released.

Image License:  Some rights reserved by tEdits

WASHINGTON, DC – The illicit mispricing of trade cost the Philippines US$114 billion from 2000-2009 with total illicit outflows over the decade due to crime, corruption and tax evasion amounting to US$142 billion, finds a forthcoming report from Global Financial Integrity (GFI)—a Washington-based research and advocacy organization.  The study,Illicit Financial Flows from Developing Countries over the Decade Ending 2009, which is embargoed for publication until Thursday, places the Southeast Asian nation in the top fifteen victims of illegal capital flight world-wide.

Sarah Freitas, a GFI Economist who co-authored the report with GFI Lead Economist Dev Kar, leaked the news today in a blog post on the website of the Task Force on Financial Integrity & Economic Development (financialtaskforce.org).  Ms. Freitas writes:

The study found that the majority of the illicit outflow, US$113.7 billion, is due to the mispricing of imported and exported goods. Trade mispricing is a phenomenon where individuals and corporations use fraudulent commercial invoices to smuggle money out of the country, usually in order to facilitate tax evasion. A large corporation or very wealthy individual in the Philippines will trade with a counterpart in another country, but will manipulate the price and quantity of exported goods to send more money offshore than represented by what they report to the government. The individual or corporation then collects the extra money later, usually in a bank account in a tax haven or secrecy jurisdiction.

This means that while the Philippines has seen significant outflows from corruption, bribery, and kickbacks, their biggest priority when addressing illicit capital flight should be to tackle trade-related tax evasion. Tax revenue loss represents teachers that are not hired, hospitals that are understaffed, and additional taxes levied on those already paying their fair share. We believe that the very real cost in human suffering and loss of life from tax evasion in the Philippines, and elsewhere throughout the developing world, is massive.

The Philippines is a country with enormous economic potential. It has a high literacy rate and significant economic growth over the past decade. However, growth failed to keep pace with many of the Philippines’ neighbors. To make matters worse, much of the economic gain in the country has gone to relatively few people.  Income inequality in the Philippines, as measured by a Gini index of 45.8, ranks among the worst in the region. These same wealthy Philippine citizens are the ones who are likely using trade mispricing to move money out of the country. This helps explain why despite economic growth, tax revenue as a percentage of GDP has been declining since 1990.

The Philippines is only one of many nations featured in the organization’s upcoming report. Indeed, in comparable blog posts published over the past couple of weeks, Ms. Freitas revealed illicit outflow data onRussia, Syria and Ethiopia—three more of the 160 different developing nations included in the study.  The report, which is scheduled to be published Thursday, December 15, 2011, is the annual update to GFI’s previous studies measuring the illicit financial flows from the developing world.  This will be the first of GFI’s studies to include data for the year 2009.

To schedule an interview with Ms. Freitas or Dr. Kar, or to receive an embargoed copy of the report, contact Clark Gascoigne at cgascoigne@gfintegrity.org  or +1 202 293 0740 ext.222.

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

Contact:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 ext.222