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Illicit financial outflows cost developing world trillion of dollars: GFI Study
A US based research Organisation on financial malpractices recently urged world leaders to increase transparency in the international financial system to curtail the illicit flow of money. Global Financial Integrity (GFI), a Washington based research and advocacy organization also advocated the need of addressing the problems posed by anonymous shell companies, foundations, and trusts by ensuring confirmation of beneficial ownership in all banking and securities accounts.

Information on the true human owner of all corporations, trusts, and foundations be disclosed upon formation and be available to law enforcement, the organization said in a recent release. GFI also suggests reforming customs and trade protocols to detect and curtail trade mispricing, the country-by-country reporting of sales, profits and taxes paid by multinational corporations, automatic cross-border exchange of tax information on personal and business accounts, harmonizing predicate offenses under anti-money laundering laws across all Financial Action Task Force cooperating countries and enforcement of the anti-money laundering regulations already on the book.

The GFI study said nearly $6 Trillion had been stolen from Poor Countries of the world in the decade between 2001 and 2010. The study estimated that the developing world had lost a total of $5.86 trillion over the decade mainly due to crime, corruption and tax evasion.

Astronomical sums of dirty money continue to flow out of the developing world and into offshore tax havens and developed country banks,” said GFI Director Raymond Baker. “It’s clear that developing economies are haemorrhaging more and more money at a time when rich and poor nations alike are struggling to spur economic growth. This report should be a wake-up call to world leaders that more must be done to address these harmful outflows,” Mr. Baker said.

India is placed in the eighth position, well behind China, Mexico, Malaysia and Saudi Arabia, as exporter of illicit financial flows with $12.3 billion average and $ 123 billion cumulative.

The developing world lost $858.8 billion in 2010, just below the all-time high of $871.3 billion set in 2008—the year preceding the global financial crisis. The $858.8 billion of illicit outflows lost in 2010 is a significant uptick from 2009, which saw developing countries lose $776.0 billion.

The estimates are still likely to be extremely conservative as they do not include trade mispricing in services, same-invoice trade mispricing, hawala transactions, and dealings conducted in bulk cash,” explained co-author of the study DevKar, who was previously  a senior economist at the International Monetary Fund.

This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities, which are often settled in cash, are not included in these estimates,” Mr. Kar said.

The report, “Illicit Financial Flows from Developing Countries: 2001-2010,” is GFI’s annual update on the amount of money flowing out of developing economies via crime, corruption and tax evasion, and it is the first of GFI’s reports to include data for the year 2010.

Co-authored by GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas, the study is the first by GFI to incorporate a new, more conservative, estimate of illicit financial flows, facilitating comparisons with previous estimates from GFI updates.

Poor countries lost nearly a trillion dollars that could have been used to invest in healthcare, education, and infrastructure. It’s nearly a trillion dollars that could have been used to pull people out of poverty and save lives,” said co-author Sarah Freitas.

Mr. Kar and Ms. Freitas’ research tracks the amount of illegal capital flowing out of 150 different developing countries over the 10-year period from 2001 through 2010, and it ranks the countries by magnitude of illicit outflows.

According to the report, among the 20 biggest exporters of illicit financial flows over the decade are China ($274 billion average &$2.74 trillion cumulative), Mexico ($47.6 billion avg. &$476 billion cum.), Malaysia ($28.5 billion avg. &$285 billion cum.) and Saudi Arabia ($21.0 billion avg. $210 billion cum.)

China, the largest cumulative exporter of illegal capital flight, as well as the largest victim in 2010, was the topic of an October 2012 country-specific report by GFI’s Kar and Freitas. Using the older methodology, “Illicit Financial Flows from China and the Role of Trade Misinvoicing,” found that the Chinese economy suffered $3.79 trillion in illcit financial outflows between 2000 and 2011.

Our reports continue to demonstrate that the Chinese economy is a ticking time bomb,” said Mr.Kar. “The social, political, and economic order in that country is not sustainable in the long-run given such massive illicit outflows,” he observed.

Mexico, the second-largest cumulative exporter of illicit capital over the decade, was also the topic of a January 2011 GFI report. The study, “Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy,” found that Mexico lost a total of $872 billion in illicit financial flows over the 41-year period from 1970 to 2010.  Moreover, illicit outflows were found to drive Mexico’s domestic underground economy, which includes—among other things—drug smuggling, arms trafficking and human trafficking.

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