Financial Transparency Coalition

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At the Center for Global Development / Washington Post forum yesterday, Nigerian Finance Minister and nominee for the World Bank Presidency Ngozi Okonjo-Iweala answered a series of questions about the World Bank, and the challenges it faces moving into the future. The whole interview is available on video here.

The subject of illicit financial flows, and their impact on development, was brought up at 66:00-70:00. The transcript:

Question: When you mention the word ‘taxes’, I thought immediately of the illicit financial flows issue and the amount of money escaping from developing countries. Not principally through corruption or, you know, gangs of drug lords, but rather the use of mispricing through transfer pricing, the transfer mispricing phenomenon where corporations don’t pay their fair share. Does the World Bank have a role in addressing that issue as countries lose substantial amounts of money?

Ngozi Okonjo-Iweala: “The question of taxes and illicit financial flows and mispricing is a very important one. And I think that, when I think about who should be dealing with this, I think the IMF should also be brought into the picture on this one. They have more of a comparative advantage in dealing with this than the World Bank.

But nevertheless, I think that at the beginning, the front end, the downstream, part of this issue, where countries are entering into some agreements. I just have one in mind. Take my country, and the joint venture agreement that it has entered into with oil companies. That’s the front end. If the World Bank suddenly has some comparative advantage in either assisting or bringing in knowledge in crafting these agreements in a manor that is much more beneficial to themselves… there is complete asymmetry of information on this issue. I think that if we had more help upstream, we would be able to reap more benefits. Now that’s where I think the World Bank should come in.

Now, the IMF should come in and look overall at these kinds of flows and how we can deal with these issues. I think they have a strong comparative advantage for doing that. ”

When you think about asymmetries of information,  its important to understand what developing world governments are often up against. It took a team of six tax researchers at ActionAid a full year to uncover the $31 million in tax avoidance practices of SABMiller, just one of many firms operating in each developing country. Multinationals like SABMiller have armies of experienced, well-paid lawyers and accountants ready to use abusive transfer pricing to pay no taxes. Ms. Okonjo-Iweala has worked very hard in Nigeria to understand and limit this practice, but she is fighting an uphill battle.

According to Global Financial Integrity, [1] the developing world lost US$903 billion in 2009 to illicit financial flows. Of that sum, GFI found that 53.9% can be attributed to trade mispricing, or just under US$500 billion in outflows.

Okonjo-Iweala has been offered a vision of the World Bank that sees the institution function as a ‘knowledge bank’, assisting developing countries with these issues. This seems like the perfect place to start. Even if she can make a small dent in

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[1] Ms. Okonjo-Iweala serves on Global Financial Integrity’s advisory board.