Flow of Illicit Money Undermines Governments and Impedes Development

A lack of transparency in the global financial system hinders the ability of governments worldwide to stop the flow of illicit money that comes from crimes like tax evasion, money laundering, and bribery. These illegal flows rob many poor nations of their opportunity to develop and thrive.

Between 2003 and 2012, more than $6.6 trillion in illegal funds flowed out of developing nations, according to a new report by Global Financial Integrity (GFI). These illicit financial flows are growing at 9.4 percent, roughly twice as fast as global gross domestic product (GDP). The latest data reveals that illicit financial flows reached a new peak in 2012, totaling more than $991.2 billion.

Source: Global Financial Integrity

GFI’s report focused on the impacts these flows are having on developing nations and shows that the total amount of illicit money flowing out of developing nations is greater than the total amount of Foreign Direct Investment (FDI) and Official Development Assistance (ODA) combined. That means that for every dollar flowing into developing nations, countries are losing more money to illicit flows leaving the nation.

National governments, including the United States, provide foreign aid (technically known as Official Development Assistance) to help developing nations prosper. Illicit flows of capital out of developing nations undermine these investments. In 2012, 11 times more money flowed out of developing economies through illicit transactions than flowed in from development assistance.

Intentionally inaccurate trade invoicing accounted for 78 percent of all illicit flows of capital out of developing nations. This means that abuse – both directly by corporations seeking to shift wealth out of developing nations and by criminals using shell corporations to hide their crimes – runs to the heart of problem.

U.S. policymakers have a role to play in reducing illicit financial flows. Global Financial Integrity has documented examples of the ways these flows rob developing nations of capital.  The United States has been ranked the “second easiest place for a kleptocrat, criminal, or terrorist to form an anonymous company.”

In turn, GFI recommends that the U.S. join with other world leaders to “focus on curbing the opacity in the global financial system—compromising, among other things, tax haven secrecy, anonymous companies, and money laundering techniques—which facilitates these outflows.”

Shining a light into the black corners of the international market will require high levels of international cooperation, accurate reporting by governments and corporations, and strong actions by policymakers and government regulators. GFI recommends that national governments:

  • Establish public registries of corporate ownership so the real people benefitting from business transactions cannot hide behind anonymity.
  • Increase the information available to financial regulators, including corporate ownership information.
  • Adopt and enforce effective anti-money laundering policies that are consistent with the recommendations of the Financial Action Task Force.
  • Require multinational corporations to disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis.
  • Enact policies that ensure relevant tax information is automatically exchanged between nations.
  • Improve scrutiny of trade transactions involving tax havens.
  • Improve customs enforcement so officers are better prepared to detect intentionally inaccurate invoicing in trade.
  • Cut trade-related illicit financial flows in half by 2030 and make this goal a part of the United Nation’s Sustainable Development Goals.

The recommendations GFI presents should be pursued with a sense of urgency to curb these problems and ensure that money needed for development and public investments stays in developing countries.

To read the entire text of Global Financial Integrity’s Report, click here.

For Further Reading:

400 Richest Americans Paid Same Effective Tax Rate as a Family Earning $105,000, The Fine Print, 12/2/2014

Here’s the First Company to Ever Disclose CEO-to-Worker Pay Ratio While Citing the Dodd-Frank Act, The Fine Print, 11/17/2014

End of the "Double Irish" Scheme Could Take a Bite Out of Apple's Tax Avoidance, The Fine Print, 10/22/2014

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chad Edward hatten
chad Edward hatten