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G7 Whiffs on Illicit Financial Flows as FfD Conference Approaches

Clark Gascoigne
Sophie Haggerty
G7 leaders meet in Schloss Elmau, Germany on June 8, 2015 | Credit: Arron Hoare/Number 10/Flickr [CC BY-NC-ND 2.0]

G7 leaders meet in Germany on June 8, 2015 | Credit: Arron Hoare/Number 10/Flickr [CC BY-NC-ND 2.0]

World Leaders Urged to Target Illicit Flows, Trade Misinvoicing at Addis Summit

This article was originally published by the Thomson Reuters Foundation.

The outlook was promising. In the outrage over the unfolding FIFA corruption scandal, UK Prime Minister David Cameron vowed Saturday to put corruption on the agenda of this week’s G7 Summit in Germany.

Writing in The Huffington Postthe Prime Minister declared:

“Corruption is the cancer at the heart of so many of the problems we face around the world today… Our efforts to address global poverty are too often undermined by corrupt governments preventing people getting the revenues and benefits of growth that are rightfully theirs.”

He continued:

“World leaders simply cannot dodge this issue any longer. We have to show some of the same courage that exposed Fifa and break the taboo on talking about corruption. I will start tomorrow at the G7 in Germany…”

Despite this passionate plea, world leaders failed to advance efforts to curtail illicit financial flows (IFFs) at the conclusion of their meetings.

While yesterday’s G7 Communiqué does mention illicit financial flows briefly (See pg. 3)—reiterating previous, key commitments to the automatic exchange of financial information and the importance of beneficial ownership transparency—the leaders made no mention of illicit financial flows in the context of the Post-2015 Development Agenda, which is set to be hashed out at next month’s Financing for Development (FfD) Conference in Addis Ababa, Ethiopia.

Likewise, the topic of trade misinvoicing—the method for channeling nearly 80 percent of all measurable illicit outflows from developing countries—is not mentioned anywhere in the document, despite lengthy discussions around the matter of trade.

Outsized Impact on Poorest Countries

This inaction by G7 leaders is particularly stark given a new study published last week by Global Financial Integrity (GFI), which shows the outsized-impact that illicit outflows have on the poorest countries in the world.

While GFI’s longstanding research estimates that illicit financial flows drain roughly US$1 trillion from developing and emerging economies each year, the new GFI analysis reviewed illicit outflows from 82 of the poorest countries in the world and compared them to various development indices. The study found, for example, that:

  • One-quarter of the countries studied have an IFFs/GDP ratio that is larger than 10 percent;
  • 32 have illicit outflows that are greater than 10 percent of total trade; and
  • 20 have illicit outflows that are bigger than their inward foreign direct investment and foreign aid combined.

Some notable, country-specific examples include:

  • Liberia, where illicit outflows were equivalent to 61.6 percent of its GDP;
  • Equatorial Guinea, whose annual illicit outflows averaged nearly US$4,000 per person; and
  • Nepal, whose illicit outflows were 186 times larger than its inward foreign direct investment.

Illicit financial flows are the most damaging economic problem afflicting the developing world. With the important FfD conference just over a month away, G7 leaders missed a once-in-a-generation opportunity to take a truly strong position on illicit flows when it really matters.

Need to Address Trade Misinvoicing

While the G7 fumbled, diplomats—hashing out the details of next month’s summit in Addis Ababa—need not follow their lead.

Trade misinvoicing—the fraudulent over- and under-invoicing of trade transactions—accounts for roughly 80 percent of all measurable illicit outflows from the developing world.

Urgent action is needed by the international community to assist all developing nations in curtailing trade misinvoicing. As FfD negotiations continue, curtailing trade misinvoicing must be a focus, particularly given its clear link to domestic resource mobilization.

As such, GFI looks forward to a robust FfD agreement that:

  • Mandates the IMF to regularly measure trade misinvoicing levels from all developing countries;
  • Commits the world community to halve trade misinvoicing in all developing countries by 2030; and
  • Requires donor countries to provide financing for trade-pricing databases and training in customs departments, so poor nations can interdict misinvoiced goods before they leave the ports.

The Financing for Development Conference—combined with the Sustainable Development Goals, set to be adopted in September—present a tremendous opportunity to transform the international development agenda for the next 15 years. By targeting trade misinvoicing, world leaders can meaningfully address the largest component of the largest challenge to global development.

Clark Gascoigne is the communications director at Global Financial Integrity (GFI), a Washington, DC-based research and advisory organization working to curtail illicit financial flows. Sophie Haggerty is an intern with GFI.

This article was originally published by the Thomson Reuters Foundation.  Any views expressed in this article are those of the author and not of Thomson Reuters Foundation.