$9B+ in illegal money coursed locally every year, says US study

More than 3 percent of the country’s economic output each year become illicit funds, based on a study conducted by the Washington DC-based Global Financial Integrity (GFI). 

These dirty funds are not captured by government records and, thus, evade tax payments, hurting the economy. They are mostly associated with money laundering, technical smuggling or outright smuggling of goods. GFI said these illegal funds usually end up financing criminal activities.

GFI listed the Philippines as among 20 countries that have the biggest flow of illicit funds.

In its report, GFI said the Philippines was No. 19 among the 149 countries on the list. Some $90 billion in fraudulent funds flowed through it between 2004 and 2013, or an average of $9.03 billion a year.

The average yearly illicit-funds flow in the Philippines was equivalent to 3.31 percent of the country’s estimated $272.1-billion gross domestic product (GDP) in 2013.

GFI measured illicit financial outflows using two sources: Deliberate trade misinvoicing and leakages in the balance of payments.

The report said that, over the 10-year period of the study, an average of 83.4 percent of illicit financial outflows were due to the fraudulent misinvoicing of trade.

The average amount of dirty money that circulates in the country in peso terms is P390 billion, or about 8 percent of the P3.0020-trillion budget for next year.

Based on the 10-year study, the transit of illegal funds in the country spikes immediately a year after the holding of national elections.

It reached a record $11.6 billion in 2005 under the term of former President Gloria Macapagal-Arroyo. The second-highest spike was in 2011 at $10.54 billion when President Aquino assumed power.

The GFI list is dominated by Asian countries; China has the biggest volume of illicit fund flows totaling $1.39 trillion in 10 years, or an average of $139.23 billion a year.

Also in the top 10 of the GFI list are Russia, which has an average of $104.98 billion a year in illicit funds; Mexico, $52.84 billion; India, $51.03 billion; Malaysia, $41.85 billion; Brazil, $22.67 billion; South Africa, $20.92 billion; Thailand, $19.18 billion; Indonesia, $18.07 billion; and Nigeria, $17.8 billion.

The GFI said illicit financial flows from developing and emerging economies reached a record $1.1 trillion in 2013.

The report pegged cumulative illicit outflows from developing economies at $7.8 trillion between 2004 and 2013, the last year for which data are available.

Titled “Illicit Financial Flows from Developing Countries: 2004–2013,” the study revealed that illicit financial flows first surpassed $1 trillion in 2011 and grew to $1.1 trillion in 2013—marking a dramatic increase from 2004, when illicit outflows totaled just $465.3 billion.

“This study clearly demonstrates that illicit financial flows are the most damaging economic problem faced by the world’s developing and emerging economies,” said GFI President Raymond Baker, a longtime authority on financial crime.

“This year at the United Nations, the mantra of ‘trillions not billions’ was continuously used to indicate the amount of funds needed to reach the Sustainable Development Goals. Significantly curtailing illicit flows is central to that effort,” he added.

Baker said GFI analyses showed that, of the $1 trillion in illicit flows leaving poor nations annually, over 83 percent was due to trade misinvoicing.

“Simply put, each year over $800 billion in illicit trade exits developing countries. While the total value of this trade would not be applied to development programs, the tax associated with this illicit activity could be allocated to various poverty alleviation efforts,” he added.

Given the trade volume, revenue could be in the hundreds of billions of dollars, Baker said.

“This is the low-hanging fruit governments can capture quickly with the proper technology and sufficient focus. Curtailing even a small portion of these illicit flows would have a catalytic impact on a government’s ability to address the needs of its most vulnerable people,” he added.

“It is our view that addressing the trade misinvoicing challenge should be the initial focus of all developing country governments,” he said.

The illicit financial flows, based on the GFI report, averaged a staggering 4 percent of the developing world’s GDP.

It showed that sub-Saharan Africa suffered the largest illicit financial outflows—averaging 6.1 percent of GDP—followed by developing Europe (5.9 percent), Asia (3.8 percent), the Western Hemisphere (3.6 percent), and the Middle East, North Africa, Afghanistan, and Pakistan (Mena+AP, 2.3 percent).

In seven of the 10 years studied, the flow of illicit funds globally outpaced the total value of all foreign aid and foreign direct investment flowing into poor nations, the report said.

The growth rate in the transit of illicit funds from 2004-2013 was 8.6 percent in Asia and seven percent in developing Europe as well as in the Mena and Asia-Pacific regions.

GFI measured illicit financial outflows using two sources: Deliberate trade misinvoicing and leakages in the balance of payments.

The report said that over the 10-year period of the study, an average of 83.4 percent of illicit financial outflows were due to the fraudulent misinvoicing of trade.

To control the illegal flow of money, GFI recommended that:

• Governments establish public registries of verified beneficial ownership information on all legal entities, and all banks should know the true beneficial owner 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 and laws already in place should be strongly enforced.

• Policy-makers 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.

• Customs agencies should treat trade transactions involving a tax haven with the highest level of scrutiny.

• Governments should significantly boost their customs enforcement by equipping and training officers to better detect intentional misinvoicing of trade transactions, particularly through access to real-time world-market pricing information at a detailed commodity level.

• The indicator for Sustainable Development Goal (SDG) 16.4 should be country-level estimates of illicit outflows related to misinvoiced trade and other sources based on currently available data.

• The International Monetary Fund or another qualified international institution should conduct and publish the analysis annually.

The report said that, by their nature, illicit fund flows are typically intended to be hidden.

“Given this, even those types of illicit flows that can be measured can be difficult to estimate with complete precision,” it said.

It added that there are some forms of illicit flows that cannot be picked up using available economic data and methods.