The Market Monitor Minding the Nation's Business
Luis Leoncio
How does one measure the success of the concepts “tuwid na daan” (straight path), no “wang wang” (equal treatment to all), and good government is good economics that are the lynchpins of the social and economic policies of the Aquino administration?
Financial integrity is encapsulated in the Aquino administration-coined “good governance.”
“Good governance” to its coiners, is supposed to mean good economics and personifies the current administration’s policy of promoting reforms both in the government and the private sector toward ethical standards.
But the pursuit has been largely a failure, based on data recently released by the Washington-based Global Financial Integrity (GFI) group, which ranked the Philippines as the 15th biggest exporter of illicit money out of 151 countries on the list, with the economy missing out on P420 billion in potential gains from irregular transactions every year up to 2012.
The amount is about one fourth of the yearly government budget that the Aquino administration touted as a People’s Budget, with stress on social welfare services such as the conditional cash-transfer (CCT) program, which amounts to some P80 billion this year.The focus on social welfare was meant to give substance to President Aquino’s aim to improve the plight of poor Filipinos with a pledge that “nobody should be left behind” in the country’s economic development.
The GFI study showed that more than P4 trillion of the country’s potential financial resources were foregone during the 10-year study from 2003 to 2012, the last two years being under the Aquino administration.
The GFI data also showed that the flow of dirty money from the country did not slow down during Mr. Aquino’s term as more than $20 billion or P900 billion was spirited out of the country in 2011 and 2012—the first two years of Mr. Aquino’s term.The group estimated that more than $410 billion or P18.4 trillion flowed illegally into or out of the country between 1960 and 2011, which it said reduced domestic savings, made the underground economy prosper and facilitated crime and corruption. During the study period, the Philippines suffered $132.9 billion or P6 trillion in illicit financial outflows from crime, corruption, and tax evasion, while $277.6 billion or P12.5 trillion was illegally transferred into the country, predominantly through the misinvoicing of trade transactions.The report also found that tax revenues lost reached $19.3 billion or P868.5 billion since 1990 due to evasion of customs duties through import under-invoicing alone. Combined with an additional $3.7 billion or P166.5 billion in income, profits, and capital-gains tax revenue lost through export under-invoicing, the government has lost out on at least $23 billion or P1 trillion in revenues due to trade misinvoicing since 1990.
The GFI study is some years behind due to difficulties in collecting accurate trade and fiscal duty from governments.According to the study, governance issues—corruption, in particular—tend to be a major driver of illicit fund flows.
The GFI said in its case studies on the Philippines, Brazil and Russia, the link between purely illicit flows and governance tends to be even stronger than the link between capital flight and governance.The extensive study also showed under-invocing of exports as a major source of the flow of illegal funds for the Philippines, with the country being ranked seventh in the world, with P72.2 billion in undervaluation in the 10 years that the study covered.Under-invoicing is resorted to evade tax payments.Conversely, imports are over-invoiced as a way of reducing income-tax payments, according to the study.“While importers may initially pay more by over-invoicing imports, they will continue to do so as long as the reduction of corporate profits (due to larger imports costs) outweighs the increased import duties payable,” the GFI said.It noted import over-invoicing also allows big importers to exploit foreign-exchange regulations that allow preferential rates for the importation of essential commodities like oil.The importers “then turn around and sell the excess currency in the black market for a profit.”“Similarly there is an incentive to over-invoice exports of goods that receive government subsidies. If certain imports enter the production process as intermediate inputs to other goods, which are then subsequently exported, this may drive the producer to over-invoice the export of final goods to claim a refund on the value-added tax (VAT) paid on the original imports.The study showed the Philippines had an average of $9.35 billion or P420.75 billion yearly in dirty money exports or a total of $93.49 billion or P4.2 trillion in 10 years.The amount is almost equivalent to the government’s total domestic and foreign debts.The Philippines was ranked one notch below Costa Rica and above Belarus. It was the fourth biggest exporter of dirty money in Asean—after Malaysia, Indonesia and Thailand.The report said illicit money flows from developing and emerging countries were growing at 9.4 per year, which would be faster than the economic growth of most countries on the list.The $6.6 trillion stolen from the developing world during the study period of 2003 to 2012 is mostly the result of trade misinvoicing which was responsible for 77.8 percent of illicit outflows.
The study identified China, Russia, Mexico, India and Malaysia as the biggest exporters of illicit capital over the decade with Sub-Saharan Africa suffering the biggest illicit outflows as a percentage of gross domestic product (GDP).
A record $991.2 billion in illicit capital flowed out of developing and emerging economies in 2012, facilitating crime, corruption, and tax evasion, according to the GFI study. The study is the first GFI analysis to include estimates of illicit financial flows for 2012.
The report’s 2014 annual global update on illicit financial flows pegged cumulative illicit outflows from developing economies at $6.6 trillion between 2003 and 2012, the latest year for which data are available.
“As this report demonstrates, illicit financial flows are the most damaging economic problem plaguing the world’s developing and emerging economies,” GFI President Raymond Baker, a longtime authority on financial crime, said.
“These outflows, which are greater than the combined sum of all foreign direct investments (FDI) and official development assistance (ODA) flowing into these countries, are sapping roughly a trillion dollars per year from the world’s poor and middle-income economies,” Baker added.
He said what was most troubling, however, was the fact that these outflows are growing at an alarming rate of 9.4 percent per year, which was twice as fast as the global GDP growth.
“It is simply impossible to achieve sustainable global development unless world leaders agree to address this issue head-on. That’s why it is essential for the United Nations to include a specific target next year to halve all trade-related illicit flows by 2030 as part of post-2015 Sustainable Development Agenda,” the report added.
Authored by GFI Chief Economist Dev Kar and GFI Junior Economist Joseph Spanjers, the study revealed that illicit financial flows hit a historic high of $991.2 billion in 2012, marking a dramatic increase from 2003, when illicit outflows totaled a mere $297.4 billion.
Over the span of the decade, the report found that illicit financial flows were growing at an inflation-adjusted average rate of 9.4 percent per year.
Still, in many parts of the world, GFI noted that illicit flows are growing much faster, particularly in the Middle East and North Africa (Mena) and in Sub-Saharan Africa, where illicit flows are growing at an average annual inflation-adjusted rate of 24.2 and 13.2 percent, respectively.
Illicit financial flows averaged a staggering 3.9 percent of the developing world’s GDP, it added.
As a share of its economy, Sub-Saharan Africa suffered the largest illicit financial outflows, averaging 5.5 percent of its GDP, followed by developing Europe (4.4 percent), Asia (3.7 percent), Mena (3.7 percent), and the Western Hemisphere (3.3 percent).
“It’s extremely troubling to note just how fast illicit flows are growing,” Kar, the principal author of the study, said.
He noted that over the past decade, illicit outflows from developing countries increased by 9.4 percent each year in real terms, significantly outpacing economic growth.
Moreover, these outflows are growing fastest in and taking the largest toll, as a share of GDP, on some of the poorest regions of the world. These findings underscore the urgency with which policymakers should address illicit financial flows.
The fraudulent misinvoicing of trade transactions was revealed to be the largest component of illicit financial flows from developing countries, accounting for 77.8 percent of all illicit flows and highlighting that any effort to significantly curtail illicit financial flows must address trade misinvoicing.
Illicit outflows were roughly 1.3 times the $789.4 billion in total foreign direct investments (FDI), and 11.1 times the $89.7 billion in official development assistance (ODA) that developing economies received in 2012.
“Illicit financial flows have major consequences for developing economies,” explained Spanjers, the report’s co-author.
The study showed emerging and developing countries hemorrhaged a trillion dollars from their economies in 2012 that could have been invested in local businesses, healthcare, education, or infrastructure.
“This is a trillion dollars that could have contributed to inclusive economic growth, legitimate private-sector job creation, and sound public budgets. Without concrete action addressing illicit outflows, the drain on the developing world is only going to grow larger,” Spanjers said.
The study tracked the amount of illegal capital flowing out of 151 different developing and emerging countries over the 10-year period from 2003 through 2012, and it ranked the countries by the volume of illicit outflows.
The report recommends that world leaders focus on curbing the opacity in the global financial system, which facilitates these outflows.
Specifically, GFI recommended that: Governments should establish public registries of meaningful beneficial ownership information on all legal entities; financial regulators should require that all banks in their country know the true beneficial owner(s) of any account opened in their financial institution; government authorities should adopt and fully implement all of the Financial Action Task Force’s (FATF) anti-money laundering recommendations; regulators and law enforcement authorities should ensure that all of the anti-money laundering regulations, which are already on the books, are strongly enforced; policymakers should require multinational companies to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis; all countries should actively participate in the worldwide movement toward the automatic exchange of tax information as endorsed by the OECD and the G20; trade transactions involving tax-haven jurisdictions should be treated with the highest level of scrutiny by customs, tax, and law-enforcement officials; governments should significantly boost their customs enforcement by equipping and training officers to better detect intentional misinvoicing of trade transactions; and the United Nations should adopt a clear and concise Sustainable Development Goal (SDG) to halve trade-related illicit financial flows by 2030.