Staggering Amount of Illicit Financial Flows Found In Greece and Portugal

June 11th, 2010

Photograph by Andrea Guerra

These days it seems as though word of a country’s economic crisis is commonplace. The world watched as Greece unexpectedly veered toward bankruptcy, and then other European Union (EU) countries—namely Portugal, Ireland, Italy, and Spain—were eyed with suspicion. Dr. Dev Kar, Global Financial Integrity‘s lead economist, writes that “Portugal lost a total of about US$138 billion through illicit transfers over a five-year period ending 2009”  in an article published today in The Portugal News. Here it goes again…

With the global economy already on unstable ground, Greece’s economic crisis created doubt in the EU and spurred fears that the crisis might spread to other EU countries and even, possibly, the United States.  Few saw Greece’s downturn coming, but as the true magnitude of their government debt has been released, few can avoid the seriousness of the issue.  But how did we get here?  And where did all of Greece’s money go?

In a blog post last month, Dr. Kar wrote that illicit financial flows “cost Greece an estimated US$160 billion over the last decade.” With Greece unable to tax the illicit money coming and going, the money needed for their consumption boom came in the form of external debt. Within the past decade, this debt jumped from a manageable 73% of GDP to almost 160% of GDP.

Dr. Kar explained, “The need of the hour is that Greek policy makers must not only ensure that the economy is placed on a sustainable path to debt solvency and economy growth, they must improve governance and implement economic reform so that Greeks would favor licit domestic, over illicit foreign, investments.”

Greece may have received the largest bailout in both IMF and EU history, but the common denominator for economic struggle is still largely unchecked. Case in point: illicit financial flows are also playing a role in Portugal’s  troubled economy. Over the course of five years, Portugal lost about US$138 billion. Considering this and the US$160 billion lost by Greece over a decade, and it seems evident that illicit financial flows have some connection to economic crises.

“Research at Global Financial Integrity (GFI) confirms that deteriorating economic conditions have been fueling massive illicit flows from Portugal over several years,” according to Dr. Kar.

So what exactly are these illicit flows? Model estimates indicate that Portuguese traders over-invoiced exports and under-invoiced imports. Dr. Kar suggests that traders over-invoiced exports to gain value added tax (VAT) refunds and under-invoiced imports to evade duties or VAT on imports.

To avoid such issues, the Task Force on Financial Integrity and Economic Development advocates that “the parties conducting a sale of goods or services in a cross-border transaction sign a statement in the commercial invoice certifying that no trade mispricing in an attempt to avoid duties or taxes has taken place.” In March, GFI released a report, which found that over the past 40 years African nations lost between US$854 billion and US$1.8 trillion in illegally transferred funds. Today, we see that Portugal is facing a high debt linked with trade mispricing as well.

With Spain, Italy and Ireland also under watchful eyes, the implications for the future of the Euro and other economies remain up for debate.

Written by Kelley Brescia

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