The Global Financial Integrity (GFI), a Washington DC-based Research and Advocacy organization established to curb illicit financial flows out of developing countries has presented its report for the year and its analysis of illicit financial flows from developing countries for ten year period 2002-2011 has an overwhelming estimate of $946.7 billion in 2011 and cumulative illicit financial outflows over the decade between 2002 and 2011 of US$5.9 trillion.

Illicit financial flows are cross-border transfers of funds that are illegally earned, transferred, or utilized. These kinds of illegal transactions range from corrupt public officials transferring kickbacks offshore, to tax evasion by commercial entities, to the laundered proceeds of transnational crime.

“Illicit financial flows are growing fast and when adjusted for inflation, the illicit financial flows out of developing countries increased by an average of more than 10 percent per year over the decade”.

The GFI report is a sober reminder that the creation and outflow of illicit wealth has grown despite all the indignation, cry of the poor and criticism. The report established three key drivers propelling this incessant drain of resources: they are Export Proceeds Surrender Requirements (EPSR) and Capital Account Openness (CAO) and Corruption – while the first two are regulatory factors that drive up the trade mispricing, Corruption is a governance related factor as measured by the World Bank's Control of Corruption index. The more corrupt a country is, the greater the flow of illicit funds.

The report identified crime, corruption, and tax evasion as wholly responsible for illicit financial outflows with Asia accounting for 39.6 percent of total illicit outflows from developing countries compared to 61.2 percent of such outflows in the 2012 IFF Update, Developing Europe (21.5 percent) and the Western Hemisphere (19.6 percent) contribute almost equally to total illicit outflows. The Middle East and North Africa (MENA) region accounts for 11.2 percent of total outflows on average and Africa had an average of 7.7 percent over the decade. Despite having the smallest nominal share of regional illicit outflows, Africa had the highest average illicit outflows to GDP ratio of 5.7 per cent, implying that the lost capital has an outsized impact on the continent.

With a cumulative illicit financial flow of $142.27bn, Nigeria is amongst the top 15 exporters of illicit capital flows over the decade.

China, Russia and Mexico ranked 1st, 2nd and 3rd with cumulative illegal capital flight and outflows totaling $1.08trn, $880.96bn and $461.86bn respectively. Malaysia ranked fourth with $370.38bn with India and Saudi Arabia having $343.93bn and $266.43bn in 5th and 6th position respectively. Other countries are Brazil, with $192.69bn; Indonesia , $181.83bn; Iraq, $78.79bn; Thailand, $140.88bn; United Arab Emirates, $114.64bn; South Africa,$100.73bn; Philippines, $88.87bn; Costa Rica, $80.65bn cum; Belarus, $75.09bn cum; Qatar, $62.82bn; Poland, $49.39b; Serbia ,$49.37bn; Chile, $45.20bn; Paraguay, $40.12bn; Venezuela, $38.97bn; Brunei, $38.37bn; Panama, $38.09bn, and Turkey,$37.28bn.

We may want to note that with economic crisis trailing countries across the globe, the underworld market is booming and thriving in the face of these apparent challenges.
The GFI President, Raymond Baker mentioned that anonymous shell companies, tax haven secrecy, and trade-based money laundering techniques had drained nearly a trillion dollars from the world’s poorest in 2011, at a time when rich and poor nations alike are struggling to spur economic growth. He said that there has been continual increase in illicit activities over the years and now is the time for an intervention to stem the flow and rechannel funds towards concrete economic developments in sectors such as infrastructure, education, health, agriculture and local businesses to name a few.
The report revealed that MENA region grew the fastest with a 31.5 per cent trend rate per annum and that the $946.7bn which flowed illicitly out of developing countries in 2011 was approximately 10 times the US$93.8bn net official development assistance (ODA) that went into these specific 150 developing countries that year. This simply means that for every $1 in economic development assistance going into a developing country, roughly $10 of capital is lost through two identified channels of flow; the leakages from balance of payments and deliberate misinvoicing of external trade.

While the GFI proud itself on the accuracy of adopted methodology, it faces the challenges of estimating Abusive Transfer Pricing. Abusive transfer pricing involves placing false values on single invoices. This is a serious problem for developing countries, but it is not detected by GFI’s trade misinvoicing methodology. As abusive transfer pricing tends to occur with one single invoice on both sides of the border, there is no discrepancy between what is reported in the exporting country and what is reported in the importing country. Without the discrepancy, GFI cannot detect it and so the use of strict estimations based on researches to arrive at largely accurate percentage.

The report said that the motivations and driving factors behind abusive transfer pricing and trade misinvoicing may also differ, requiring potentially different policy solutions. Abusive transfer pricing is driven mainly by a motivation to reduce corporate taxes for an entity, while trade misinvoicing is often used to move or launder money for tax evasion as well as many other crimes.

Summarily, illicit financial flows have destabilizing effects on government. Curbing the menace can bridge the gap between official development assistance (ODA) and the level of resources needed to achieve the Millennium Development Goals. If not, this will drain foreign exchange, reduce tax collection/revenue, restrict foreign investments and worsen poverty in poorest developing countries. Like ringworm, if not controlled, it would spread and eat deep into developing economies where these criminals will become sophisticated and become bigger than the law.

The organization is hopeful that the report would serve as a wakeup call.

Nigeria’s cashless policy will go a long way to reducing the insistent flows as transactions can be monitored and aid Commissions with jurisdiction to investigate and prosecute criminals.

Article: Unen Ameji, Writer.

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