If you were to steal, say, Sweden or Switzerland or Saudi Arabia, all economies with an annual GDP of around $600 billion, somebody would notice. And they’d likely do something about it. Especially if there was one such theft every year for a decade. Which would be the cumulative equivalent of tea-leafing Japan. Yet that is what gets stolen from developing nations every year as the proceeds of crime, corruption and tax evasion get illegally spirited out of poor countries and into offshore tax havens and bank accounts in rich countries.
The numbers come from third and latest report on illicit financial flows by Global Financial Integrity (GFI), a watchdog organization. Its tally: $859 billion lost in 2010, up 11% on 2009, and $6 trillion — an average of $600 billion a year — over the preceding decade.
GFI’s numbers are, if anything, conservative. It rakes over official data on cross-border capital flows looking for dollars that have been deliberately pushed through the cracks of international financial transfers for illicit gain. It doesn’t count money that has been smuggled out of countries in suitcases and the like.
Over the decade the report covers, China’s illicit outflows, at $2.7 trillion, accounted for just under half the world total. The next nine countries on GFI’s list collectively had $1.7 trillion of their wealth syphoned off, with Mexico the largest individual country with illicit outflows of $476 billion followed by Malaysia ($285 billion), Saudi Arabia ($210 billion) and Russia ($152 billion).
By virtue of its size, China has an outflow to GDP ratio that is lower than that of many developing countries. Saudi Arabia, Malaysia, Costa Rica, Panama, Equatorial Guinea and Indonesia are most severely affected in this regard. (GFI has an interactive map of the data.) It is still an enormous theft. Think of how many hospitals or schools the money could have built.
The heavily preferred method of transferring illicit capital out of China is through the corrupt misinvoicing of trade (charging a foreign customer price A, booking a sale of price B and pocketing the difference). But the practice is pervasive. GFI calculates that trade misinvoicing accounts for 80% of illicit capital flows worldwide and is larger than 10% of exports in almost all years.
In the two fast growing regions for illicit capital flows, sub-Saharan Africa and the Middle East and North Africa (MENA), bribery, kickbacks, and the proceeds of corruption are the primary drivers of wealth theft. Illicit flows increased by 26.3% in MENA and 23.8% in the rest of Africa in the decade.
Another way of looking at the scale of this theft is to compare it with official development assistance (ODA). Net ODA in 2010 was $88 billion, barely a tenth of total illicit capital outflows. For every one dollar poor countries get in aid, they lose 10 to theft.
Attacking domestic corruption, as China is doing, is one way to tackle the problem. Bringing greater transparency to international financial transactions, including requiring the confirmation of the beneficial ownership of the anonymous shell companies, foundations and trusts into which so much of these illicit funds disappear, is a primary recommendation of GFI.
Its other suggestions are to harmonize anti-money laundering laws across countries and enforce those already on the statutes, and requiring country-by country reporting of sales, profits and taxes paid by multinationals. The last in particular is a point where developed and developing countries could find common cause.