Last December an ageing Russian Ilyushin Il-76 cargo plane flying from Pyongyang, was detained during a scheduled refueling stop in Bangkok. When the belly of the plane was inspected security personnel found 35 tons of illicit military equipment that, it was later discovered, was on its way to Iran. While it is a positive development that the $18 million cargo of rockets, surface-to-air missile launchers and rocket-propelled grenades was detected before reaching its intended destination, the arms shipment was anything but a rare occurrence. Worse, the shadowy world of shell companies, nominee directors and multi-jurisdictional layering of corporate entities, which are at the heart of this affair, was left completely intact. Fortunately, the G20 nations can play a hugely positive role in ameliorating this growing problem.
In early December of last year, an unusual group of 40 organizations and individuals met at Yale University to discuss illicit capital flows out of developing countries, lack of transparency in the global financial system, and the impact these conditions have on human rights around the world. The meeting brought together experts from the fields of human rights and financial transparency to explore similarities in their work and develop a common agenda.
On May 4, the Obama administration announced a plan to crack down on offshore tax havens, which it said are costing the United States tens of billions of dollars each year. The President’s proposals were primarily aimed at finding ways to increase revenue from wealthy companies and investors who use loopholes in the law and offshore subsidiaries to reduce their US taxes. But the administration is largely missing a far more devastating problem related to offshore finance: money gained from criminal and other illicit sources. With the use of tax havens and other elements of an increasingly complex “shadow” financial network, vast sums of illegal money are being shifted throughout the global economy virtually undetected.
The United States Justice Department recently announced the arrest of 1,200 individuals on narcotics charges as part of the four-year, multi-agency law enforcement investigation targeting Mexian drug cartel La Familia known as “Project Coronado.” In addition to arrests, law enforcement agents confiscated $3.4 million in U.S. currency, 729 pounds of methamphetamine, 62 kilograms of cocaine, and 967 pounds of marijuana.
What Can Be Done about This Major Source of Poverty?
What are some examples of major global issues that are still unresolved today? One can say that they are the environment and the effect of climate change, the arms race and resultant proliferation of nuclear weapons, the pressure on the earth’s resources in terms of food and water, and the challenges that societies face with respect to education and healthcare.
But there is one very important issue the public is not generally aware of. It has the effect of increasing poverty in developing countries, and making it more difficult for them to invest in infrastructure, healthcare, education, and other priorities. And that is the outflow of capital from developing countries through corruption, business mispricing, money laundering, and other means.
Estados Unidos afronta una grave crisis económica interna y un entorno mundial cambiante para la banca y las prácticas comerciales. La manera en que la nación aborde estos dos cambios influirá en la forma en que se manejen las finanzas y los negocios en el país y en el extranjero en años venideros.
EE UU debe reformar sus políticas internas y tomar medidas enérgicas contra los paraísos fiscales y las jurisdicciones con secreto bancario que facilitan la evasión fiscal. Este proceso debe seguir el ritmo de las acciones emprendidas en los países del G-20 para acabar con el secreto bancario y reforzar la cooperación y el intercambio de información entre países.
Economists use two basic models to estimate illicit financial flows (IFFs), also known as illegal capital flight. According to the first method, if the source of funds (borrowing abroad and foreign direct investment) is higher than recorded use, the excess must have leaked out as unrecorded transactions and are therefore illicit by definition. The second method tracks the over-invoicing of imports and under-invoicing of exports by domestic residents in order to capture their illicit holdings of foreign currency abroad. The Global Financial Integrity (GFI) study estimated that black money to the tune of $22.7-$27.3 billion left India annually during 2002-2006.
That issue, of black money leaving India, and the total stock of slush funds held abroad by Indians, has become a hot-button political issue. Unfortunately, in the political fray a number of commentators have misinterpreted the GFI report and have confused the issues.
It Is Difficult to Adequately Track Illicit Money Leaving the Country. But Flows Are Likely to Be Immense
Global Financial Integrity (GFI) recently published a report titled Illicit Financial Flows from Developing Countries: 2002-2006 as part of a project financed by the Ford Foundation. This report, which was well received by academia, governments and non-governmental organizations, came to be widely discussed in the Indian media. The report found that black money to the tune of $22.7-27.3 billion a year has been leaving India over the five-year period, 2002-2006. It should be noted that even the upper range of GFI’s estimates likely understates the outflow of black money from India. After all, economic models cannot capture all the channels through which money can be transferred illegally out of a country. A few examples will suffice. It is well known that illicit hawala transactions are an important way by which residents can swap the rupee for foreign exchange. A US state department report estimates that hawala transactions in India range between $13 billion and $17 billion annually, and present a security threat to the country. Neither can economic models capture the outflow of black money as in a courier’s cross-border transfer of foreign exchange in a suitcase.