Financial Transparency Coalition

Trade Mispricing Fuels Massive Outflows from Southeast Asian Nation, Finds Annual GFI Study to Be Released Thursday

WASHINGTON, DC – The illicit mispricing of trade cost the Philippines US$114 billion from 2000-2009 with total illicit outflows over the decade due to crime, corruption and tax evasion amounting to US$142 billion, finds a forthcoming report from Global Financial Integrity (GFI)—a Washington-based research and advocacy organization.  The study,Illicit Financial Flows from Developing Countries over the Decade Ending 2009, which is embargoed for publication until Thursday, places the Southeast Asian nation in the top fifteen victims of illegal capital flight world-wide.

Sarah Freitas, a GFI Economist who co-authored the report with GFI Lead Economist Dev Kar, leaked the news today in a blog post on the website of the Task Force on Financial Integrity & Economic Development (financialtransparency.org).  Ms. Freitas writes:

The study found that the majority of the illicit outflow, US$113.7 billion, is due to the mispricing of imported and exported goods. Trade mispricing is a phenomenon where individuals and corporations use fraudulent commercial invoices to smuggle money out of the country, usually in order to facilitate tax evasion. A large corporation or very wealthy individual in the Philippines will trade with a counterpart in another country, but will manipulate the price and quantity of exported goods to send more money offshore than represented by what they report to the government. The individual or corporation then collects the extra money later, usually in a bank account in a tax haven or secrecy jurisdiction.

This means that while the Philippines has seen significant outflows from corruption, bribery, and kickbacks, their biggest priority when addressing illicit capital flight should be to tackle trade-related tax evasion. Tax revenue loss represents teachers that are not hired, hospitals that are understaffed, and additional taxes levied on those already paying their fair share. We believe that the very real cost in human suffering and loss of life from tax evasion in the Philippines, and elsewhere throughout the developing world, is massive.

The Philippines is a country with enormous economic potential. It has a high literacy rate and significant economic growth over the past decade. However, growth failed to keep pace with many of the Philippines’ neighbors. To make matters worse, much of the economic gain in the country has gone to relatively few people.  Income inequality in the Philippines, as measured by a Gini index of 45.8, ranks among the worst in the region. These same wealthy Philippine citizens are the ones who are likely using trade mispricing to move money out of the country. This helps explain why despite economic growth, tax revenue as a percentage of GDP has been declining since 1990.

The Philippines is only one of many nations featured in the organization’s upcoming report. Indeed, in comparable blog posts published over the past couple of weeks, Ms. Freitas revealed illicit outflow data onRussia, Syria and Ethiopia—three more of the 160 different developing nations included in the study.  The report, which is scheduled to be published Thursday, December 15, 2011, is the annual update to GFI’s previous studies measuring the illicit financial flows from the developing world.  This will be the first of GFI’s studies to include data for the year 2009.

To schedule an interview with Ms. Freitas or Dr. Kar, or to receive an embargoed copy of the report, contact Clark Gascoigne at cgascoigne@gfintegrity.org  or +1 202 293 0740 ext.222.

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

Contact:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 ext.222