The volume of illicit outflows is staggering and expanding quickly, growing at an average annual rate of 6.5 percent. According to 2015 Global Financial Integrity (GFI) report, Illicit outflows out of developing countries have been rising over the years, topping US$ 1 trillion since 2011 and reaching a new peak of US$ 1.1 trillion in 2013.
The report reveals that illicit financial outflows exceeded combined official development assistance (ODA) and inward foreign direct investment (FDI) in all developing countries for all but three years of the 2004-2013 time period.
Up to US$1.1 trillion flowed illicitly out of developing countries in 2013, while those countries received US$99.3 billion in development assistance.
Simply put, for every development-targeted dollar entering the developing world in 2013, over US$10 exited illicitly. This has held true since 2010, underscoring the fact that illicit financial outflows remain central to the development equation.
The report reveals that over the ten year time period of the study, an average of 83.4 percent of illicit financial outflows were due to the fraudulent misinvoicing of trade.
The authors of report- Dev Kar and Joseph Spanjers put it clearly that these figures present a development challenge that merits serious attention and action from domestic and international policymakers towards improving financial transparency.
Illicit flows are illegal movements of money or capital from one country to another, The GFI classifies such flows as illicit if the funds crossing borders are illegally earned, transferred and utilized.
Titled Illicit Financial flows from developing countries 2004-2013, the report notes that the primary tool for transferring IFFs is trade misinvoicing. The report notes this practice accounted for 83.4 percent of measurable IFFs on average, an average of US$654.7 billion per year.
Misinvoicing of trade is accomplished by misstating the value or volume of an export or import on a customs invoice.
Trade misinvoicing is a form of trade-based money laundering made possible by the fact that trading partners write their own trade documents, or arrange to have the documents prepared in a third country (typically a tax haven), a method known as re-invoicing.
Fraudulent manipulation of the price, quantity, or quality of a good or service on an invoice allows criminals, corrupt government officials, and commercial tax evaders to shift vast amounts of money across international borders quickly, easily, and nearly always undetected.
Illicit inflows often reflect activities that deprive developing countries of customs duties (particularly in the case of import under-invoicing), facilitate crime and corruption, and flow into the underground economy. GFI views “net” illicit financial flows as analogous to “net crime,” a clearly illogical concept
Asia continues to be the largest contributor to gross illicit outflows, providing 38.8 percent of the developing world total from 2004-2013. It is followed by Developing Europe at 25.5 percent, the Western Hemisphere at 20.0 percent, Sub-Saharan Africa at 8.6 percent, and MENA+AP countries at 7.1
The outsize presence of Asia in these figures is, unsurprisingly, driven by outflows from mainland China—the leading source of illicit outflows for 8 of the 10 years covered by the GFI study.
However, major resource drainage from India, Malaysia, Thailand, and Indonesia also boosted the region’s global ranking in illicit outflows. The Developing Europe region is dominated by Russia, which surpassed China’s total in both 2008 and 2011. Mexico and Brazil account for much of the Western Hemisphere total.
As a share of global IFFs, regional totals for Developing Europe and MENA+AP have remained relatively stable over the 10 year time period.
The 72 page report notes that Sub-Saharan Africa’s share dropped from 11.0 percent of the global total in 2007 to 6.4 percent in 2012, before rising slightly to 6.8 percent in 2013. The Western Hemisphere’s share has dropped from 26.0 percent in 2004 to 19.5 percent in 2013. Asia has taken over much of the pie, quickly rising from a low of 33.5 percent of the total in 2008 to 44.2 percent in 2013.
The top ten group emphasizes Asia’s dominance as the top exporter of illicit capital: five of the top ten countries are located in the region.
The Western Hemisphere and Sub-Saharan Africa regions are each represented by two countries- South Africa and Nigeria, with Russia alone representing Developing Europe in the top ten. (Kazakhstan and Turkey, also members of the Developing Europe group, come in 11th and 12th, respectively). Iraq, in the 16th spot, is the MENA+AP country with the highest average illicit outflows.
Top Source Countries
The top six countries have also stayed in the same order. South Africa made the largest jump from the tenth to the seventh spot, surpassing Nigeria to become the largest IFF source country on the African continent. Thailand and Indonesia traded spots, with Thailand moving ahead of Indonesia. Nigeria has dropped from the ninth to the tenth spot.
The top ten group emphasizes Asia’s dominance as the top exporter of illicit capital: five of the top ten countries are located in the region. The Western Hemisphere and Sub-Saharan Africa regions are each represented by two countries, with Russia alone representing Developing Europe in the top ten. (Kazakhstan and Turkey, also members of the Developing Europe group, come in 11th and 12th, respectively). Iraq, in the 16th spot, is the MENA+AP country with the highest average illicit outflows.
The top ten countries account for a significant 62.3 percent of the global illicit financial outflows.
Share of hot money narrow (HMN) and trade misinvoicing (GER)
Trade misinvoicing (GER) dominates measurable illicit outflows, averaging 83.4 percent of total illicit outflows during the years 2004 to 2013.However, report notes there has been a noticeable growth in the hot money narrow (HMN) estimate of balance of payment leakages over ten year period. Though initially only accounting for 6.9 percent of illicit outflows in 2004, HMN rose to 19.4 percent of illicit flows by 2013.
Although GER as a share of total IFFs has decreased in the last ten years. Trade misinvoicing has still roughly doubled from 2004 to 2013 and continues to be on an upward trajectory.
Trade misinvoicing can be broken down further into its components of export under-invoicing and import over-invoicing.
While export under-invoicing accounted for 65.9 percent of total illicit outflows in 2004, that share has fallen steadily to just 37.9 percent in 2013. This fall in export under-invoicing as a method to transfer funds has been offset by a sharp increase in unrecorded balance of payments transfers (from 6.9 percent to 19.4 percent of total outflows) and in import over-invoicing (increasing from 27.2 percent to 42.6 percent of total outflows) over the ten year period
Both export under-invoicing and import over-invoicing lead to an understatement of corporate profits.
For example, the former undervalues export sales while the latter raises import costs, lowering corporate while shifting a significant portion abroad. There may be an added incentive to over-invoice imports as import taxes have declined due to trade-based globalization.
Governments in developing countries have been increasingly relying on corporate and other direct taxes to offset the loss in revenues. If the marginal duty rate on imports is lower than the corporate tax rate, private businesses can still profit by over-invoicing imports as long as the higher import costs reduce corporate taxes more than they increase the additional duties payable.
The regions where trade misinvoicing has the strongest relative effect are the Western Hemisphere and Developing Europe, each with an average of just shy of 89 percent of its outflows stemming from fraudulent misinvoicing . Asia comes next with 83.6 percent, followed by Sub-Saharan Africa at 71.5 percent and MENA+AP at 63.6 percent. Overall, trade misinvoicing represents 83.4 percent of total IFFs