Financial Transparency Coalition

Illicit Financial Outflows Cost Developing World $859 Billion in 2010, Rebounding Rapidly from Financial Crisis

Nearly $6 Trillion Stolen from Poor Countries in Decade between 2001 and 2010

WASHINGTON, DC – Crime, corruption, and tax evasion cost the developing world $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 findings are part of a new study released today by Global Financial Integrity (GFI), a Washington-based research and advocacy organization.

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.

“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.  “Regardless of the methodology, it’s clear: developing economies are hemorrhaging 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.”

Methodology

As developing countries begin to loosen capital controls, the possibility exists that the methodology utilized in previous GFI reports—known as the World Bank Residual Plus Trade Mispricing method—could increasingly pick-up some licit capital flows.  The methodology introduced in this report— the Hot Money Narrow Plus Trade Mispricing method—ensures that all flow estimates are strictly illicit moving forward, but may omit some illicit financial flows detected in the previous methodology.

“The estimates provided by either methodology 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 Dr. Kar, who previously served as 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.”

Findings

The $858.8 billion of illicit outflows lost in 2010 is a significant uptick from 2009, which saw developing countries lose $776.0 billion under the new methodology.  The study estimates the developing world lost a total of $5.86 trillion over the decade spanning 2001 through 2010.¹

“This has very big consequences for developing economies,” explained Ms. Freitas, a co-author of the report.  “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.”

Dr. 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, the 20 biggest exporters of illicit financial flows over the decade are:

1. China ………………….. $274 billion average ($2.74 trillion cumulative)
2. Mexico ………………………………. $47.6 billion avg. ($476 billion cum.)
3. Malaysia ……………………………. $28.5 billion avg. ($285 billion cum.)
4. Saudi Arabia ……………………… $21.0 billion avg.  ($210 billion cum.)
5. Russia ………………………………… $15.2 billion avg. ($152 billion cum.)
6. Philippines …………………………. $13.8 billion avg. ($138 billion cum.)
7. Nigeria ……………………………….. $12.9 billion avg. ($129 billion cum.)
8. India ………………………………….. $12.3 billion avg. ($123 billion cum.)
9. Indonesia …………………………… $10.9 billion avg. ($109 billion cum.)
10. United Arab Emirates ………….. $10.7 billion avg. ($107 billion cum.)
11. Iraq ………………………………….. $10.6 billion avg. ($63.6 billion cum.)²
12. South Africa ……………………… $8.39 billion avg. ($83.9 billion cum.)
13. Thailand …………………………… $6.43 billion avg. ($64.3 billion cum.)
14. Costa Rica …………………………. $6.37 billion avg. ($63.7 billion cum.)
15. Qatar …………………………………. $5.61 billion avg. ($56.1 billion cum.)
16. Serbia ………………………………… $5.14 billion avg. ($51.4 billion cum.)
17. Poland ……………………………… $4.08 billion avg. ($40.8 billion cum.)
18. Panama …………………………….. $3.99 billion avg. ($39.9 billion cum.)
19. Venezuela ………………………….. $3.79 billion avg. ($37.9 billion cum.)
20. Brunei ………………………………. $3.70 billion avg. ($37.0 billion cum.)

For a complete ranking of average annual illicit financial outflows by country, please refer to Table 2 of the report’s appendix on page 36, or download the rankings by average annual illicit outflows here [PDF | 51 KB].

Also revealed are the top exporters of illegal capital in 2010, which were:

1. China …………………………………………….. $420.36 billion
2. Malaysia ………………………………………….. $64.38 billion
3. Mexico ……………………………………………… $51.17 billion
4. Russia ……………………………………………… $43.64 billion
5. Saudi Arabia …………………………………….. $38.30 billion
6. Iraq………………………………………………….. $22.21 billion
7. Nigeria …………………………………………….. $19.66 billion
8. Costa Rica………………………………………….. $17.51 billion
9. Philippines ……………………………………….. $16.62 billion
10. Thailand……………………………………………. $12.37 billion
11. Qatar ……………………………………………….. $12.36 billion
12. Poland ……………………………………………… $10.46 billion
13. Sudan ………………………………………………… $8.58 billion
14. United Arab Emirates ………………………….. $7.60 billion
15. Ethiopia …………………………………………….. $5.64 billion
16. Panama ……………………………………………… $5.34 billion
17. Indonesia ……………………………………………. $5.21 billion
18. Dominican Republic …………………………….. $5.03 billion
19. Trinidad and Tobago ……………………………. $4.33 billion
20. Brazil ………………………………………………….. $4.29 billion

An alphabetical listing of illicit financial outflows is available for each country in Table 9 on pg. 62 of the report.  You can also download the alphabetical listing of illicit financial flows data for each country here [PDF | 64 KB].

Connections to Previous GFI Studies

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 illicit financial outflows between 2000 and 2011.

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

Mexico, the second-largest cumulative exporter of illicit capital over the decade, was also the topic of a January 2011 GFI report by Dr. Kar.  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.

Possible Solutions

Global Financial Integrity advocates that world leaders increase the transparency in the international financial system as a means to curtail the illicit flow of money highlighted by Dr. Kar and Ms. Freitas’ research.  Policies advocated by GFI include:

• Addressing the problems posed by anonymous shell companies, foundations, and trusts by requiring confirmation of beneficial ownership in all banking and securities accounts, and demanding that information on the true, human owner of all corporations, trusts, and foundations be disclosed upon formation and be available to law enforcement;
• Reforming customs and trade protocols to detect and curtail trade mispricing;
• Requiring the country-by-country reporting of sales, profits and taxes paid by multinational corporations;
• Requiring the 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
• Ensuring that the anti-money laundering regulations already on the books are strongly enforced.

Funding

Funding for the new report, “Illicit Financial Flows from Developing Countries: 2001-2010,” was generously provided by the Ford Foundation.

To schedule an interview with GFI spokespersons on this report, contact Clark Gascoigne at +1 202 293 0740, ext. 222 or cgascoigne@gfintegrity.org. On-camera spokespersons are available in Washington, DC.

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Footnotes:

1. The less conservative, methodology used in previous GFI updates measured $936.1 billion in 2009.  Were the previous methodology applied to 2010, it would have measured $1.138 trillion in illicit outflows from the developing world, a 26 percent increase over the previous year.  Table 11 on pg. 70 provides a breakdown of illicit financial flow estimates for each country based on the original methodology.
2. Data for Iraq was not available in 2001-2004, thus the average illicit outflows of US$10.6 billion reflect only the years 2005-2010.  Likewise, the cumulative outflows of US$63.6 billion for Iraq are cumulative outflows for 2005 through 2010 only.

Notes to Editors:

• More information about the GFI report is available on the GFI website here.  A PDF of the full report can be downloaded here [PDF | 3.3 MB].  An “Explore” page, complete with an interactive heat-map, and .zip files of the report’s data is available here.
• A tip-sheet for journalists can be downloaded here [PDF | 222 KB].
• A PDF with full country rankings by average annual illicit financial outflows is available here [PDF | 51 KB].
• An alphabetical listing of total illicit financial flows data for each country each year is available here [PDF | 64 KB].
• A separate press release for Indian journalists is available here.
• All monetary values are listed in US dollars (USD).

Contact:

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

EJ Fagan
efagan@gfintegrity.org
+1 202 293 0740, ext. 227

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

For additional information please visit www.gfintegrity.org.

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