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Illicit Financial Flows, Media, and the Importance of
Cross-Border Journalism Networks
2014 Financial Transparency Coalition Conference
Clark GascoigneCommunications DirectorGlobal Financial Integrity
Lima, PeruOctober 13, 2014
What Are Illicit Financial Flows?
Illicit financial flows include cross-border flows of capital that are:
• Illegally earned,• Illegally transferred, or • Illegally utilized.
If the capital breaks the law in its point of origin, transfer, or absorption, than it can be classified as an illicit flow.
What Are Illicit Financial Flows?
Some examples of illicit financial flows include movements of capital stemming from:
• Tax evasion,• Capital control dodging,• Corruption,• Fraud,• Terrorist financing,• Drug smuggling,• Illicit wildlife trafficking,• Money laundering, or• Various other crimes.
Cumulative Illicit Outflows from All Developing & Emerging Countries
US$5.9 trillion flowed illicitly out of developing economies from 2002 through 2011.
– US$4.6 trillion (or 77.9%) from trade misinvoicing.
– US$1.3 trillion (or 22.1%) due to illicit hot money outflows.
– Illicit outflows are growing at an inflation-adjusted rate of 10.2% per year.
Illicit Outflows from Developing Countries: 2002-2011
(in millions of U.S. dollars)
Components of Illicit Financial Flows from Developing Countries: 2002-2011
(in millions of U.S. dollars)
How much is due to…
– Corruption?– Tax Evasion?– Drug Trafficking?– Other Crimes?
Answer: We don’t really know.
GFI looks at macroeconomic data that allows us to detect illicit flows of money, but doesn’t allow us to know the underlying motivation for each illicit flow.
GFI Methodology
Two components:• Leakages in the Balance of Payments (Illicit Hot Money
Outflows)– Money that disappears from economy (e.g. via unrecorded wire
transfers, direct theft of government revenues, etc.)
• Trade Misinvoicing Outflows– Detects discrepancies between what a country says it exports
to/imports from its trading partners, and what its trading partners report as exports/imports.
Trade Misinvoicing outflows are added to Illicit Hot Money outflows to generate an estimate of total illicit outflows.
How Trade Misinvoicing Works
GFI’s Methodology Doesn’t Capture All Forms of Illicit Flows
Not Captured:• Domestic money laundering, (Not Cross-Border)
• Petty bribery, (Not Cross-Border)
• Hawala transactions,• Dealings conducted in bulk cash,• Dealings conducted in virtual currencies (e.g. Bitcoin), • Trade misinvoicing in services,• Same-invoice trade misinvoicing, and• “No-invoice” trade misinvoicing,• Among other things…
GFI’s estimates are very conservative.
Cumulative Illicit Outflows from Developing Western Hemisphere Countries
US$1.13 trillion flowed illicitly out of developing Western Hemisphere economies from 2002 through 2011.
– US$987.5 billion (or 87.3%) from trade misinvoicing.
– US$143.2 billion (or 12.7%) due to illicit hot money outflows.
Illicit Outflows from Developing Western Hemisphere Countries: 2002-2011
(in millions of U.S. dollars)
Illicit Outflows from Developing Western Hemisphere Countries: 2002-2011
(in millions of U.S. dollars)
Illicit Outflows from Peru: 2002-2011
(in millions of U.S. dollars)
MEDIA COVERAGE OF ILLICIT FLOWS
Evolutions from 2000 through 2014
A Decade Ago…
• Two Convicted In Drug-Money Laundering CaseFlorida Sun-Sentinel, February 17, 2001
• 2 Convicted in Teachers Union Embezzlement Case The Washington Post, September 1, 2005
• Metabolife Pleads Guilty in Tax CaseAssociated Press, October 6, 2005
• Bank Settles U.S. Inquiry Into Money LaunderingThe New York Times, November 9, 2005
When There Was Coverage…
Financial Centres: Offshore and Beyond the Pale“Tax havens are an unavoidable part of globalisation and, ultimately, a healthy one”The Economist, February 22, 2007
http://www.economist.com/node/8740214
Things Changed
In January 2012:
Corporate Anonymity: Light and Wrong“Incorporation with limited liability is a privilege. It should not include anonymity”The Economist, January 21, 2012
http://www.economist.com/node/21543164
And in a Complete ReversalA February 2013 special report from The Economist highlights the problems
with the global shadow financial system:
• Tax Havens: The Missing $20 Trillion“How to stop companies and people dodging tax, in Delaware as well as Grand Cayman”
The Economist, February 16, 2013
http://www.economist.com/news/leaders/21571873-how-stop-companies-and-people-dodging-tax-delaware-well-grand-cayman-missing-20
• Special Report: Storm Survivors“Offshore financial centres have taken a battering recently, but they have shown remarkable
resilience, says Matthew Valencia”
The Economist, February 16, 2013
http://www.economist.com/news/special-report/21571549-offshore-financial-centres-have-taken-battering-recently-they-have-shown-remarkable
• “Onshore Financial Centres: Not a Palm Tree in Sight”“Some onshore jurisdictions can be laxer than the offshore sort”
The Economist, February 16, 2013
http://www.economist.com/news/special-report/21571554-some-onshore-jurisdictions-can-be-laxer-offshore-sort-not-palm-tree-sight
• And many more articles…
International Consortium of Investigative Journalists
Secrecy for Sale: Inside the Global Offshore Money Maze
Possibly the Largest Cross-Border Collaboration in the History of Journalism
April 2013-Present
http://www.icij.org/offshore
ICIJ24chasa (Bulgaria), ABC Color Digital (Paraguay), Armando.info/Ipys (Venezuela), The Asahi Shimbun (Japan), BBC's Panorama (UK), Canadian Broadcasting Corporation (CBC) (Canada), Center for Investigative Reporting - Investigative Journalism Center (CIN -IJC) (Croatia), CIPER (Chile), Commonwealth Magazine (Hong Kong), El Comercio (Ecuador), El Confidencial (Spain), El País (Spain), Finnish Broadcasting Company YLE (Finland), Fokus (Sweden), Folha de S. Paulo (Brazil), The Guardian (UK), Hetq - Association of Investigative Journalists (Armenia), The Indian Express (India), Isra News Agency (Thailand), The Irish Times (Ireland), Korea Center for Investigative Journalism - Newstapa (South Korea), Kyiv Post (Ukraine), La Nación (Argentina), La Nación (Costa Rica), Le Matin Dimanche and SonntagsZeitung (Switzerland), Le Monde (France), Le Soir (Belgium), L'Espresso (Italy), M&G Centre for Investigative Journalism (amaBhungane) (South Africa), Malaysia Kini (Malaysia), Ming Pao (Hong Kong), NDR (Germany), New Age (Bangladesh), NEWS (Austria), Norwegian Broadcasting Corporation NRK (Norway), Novaya Gazeta (Russia), Novi Magazin (Serbia), Origo (Hungary), Pak Tribune - Pakistan News Service (Pakistan), Philippine Center for Investigative Journalism (Philippines), Premium Times (Nigeria), Radio Free Europe/Radio Liberty (Azerbaijan), Romanian Centre for Investigative Journalism (Romania), Rustavi TV (Georgia), Süddeutsche Zeitung (Germany), The New York Times, The Sydney Morning Herald (Australia), The Sunday Times (UK), Ta Nea (Greece), Trouw (Netherlands), and The Washington Post (USA)
ICIJSecret Files Expose Offshore’s Global Impact“Dozens Of Journalists Sifted Through Millions Of Leaked Records And Thousands Of Names To Produce ICIJ’s Investigation Into Offshore Secrecy”International Consortium of Investigative Journalists (ICIJ), April 3, 2014http://www.icij.org/offshore/secret-files-expose-offshores-global-impact
Una Investigación Revela Miles de Nombres de Evasores Fiscales“El Escándalo Afecta a 170 Países y Muestra un Sistema Globalizado de Evasión que Blanquea Billones de Euros”El País, April 4, 2013http://internacional.elpais.com/internacional/2013/04/04/actualidad/1365091716_864968.html
ChinaLeaks: Los Paraísos Fiscales Esquivan el CercoEl País, January 20, 2014http://internacional.elpais.com/internacional/2014/01/20/actualidad/1390247817_671326.html?rel=rosEP
Thomson Reuters Foundation
Amount Of Dirty Money Leaving Developing World Jumped 14 Pct In 2011-ReportThomson Reuters Foundation, December 11, 2013
(By Stella Dawson)
"Developing countries lost nearly $1 trillion to fraud, corruption and shady business transactions in 2011, vastly outpacing the foreign aid they received and the pace of dirty money leaving emerging nations is accelerating, a new report found.”
http://www.trust.org/item/20131211234419-58nur/
Trade Misinvoicing Coverage
Trade and Money Laundering: UncontainedThe Economist, May 3, 2014Trade is the Weakest Link in the Fight against Dirty Moneyhttp://www.economist.com/news/international/21601537-trade-weakest-link-fight-against-dirty-money-uncontained
Illicit Inflows?
Illicit inflows are not a benefit to an economy.
They:
• Flow into the underground economy,• Fuel crime,• Cannot be taxed,• Often it flows in through under-invoicing of imports,
which evades customs duties.
Illicit Inflows?Chic Nairobi Throbs To The Beat Of Dirty Money
Thomson Reuters Foundation, December 10, 2013
"New data calculated for Thomson Reuters Foundation by Global Financial Integrity (GFI), a Washington-based financial watchdog, show the amount of illicit money entering Kenya from faulty trade invoicing, crime, corruption and shady business activities has increased more than five-fold in a decade to equal roughly 8 percent of Kenya’s economy – and in recent years the pace of dirty money inflows has been accelerating."
http://www.trust.org/item/20131209150854-1kirf /
Some MischaracterizationsReporting on GFI’s data on illicit flows from Kenya, the Daily Nation wrote:
Multinationals Exploit Loopholes To Evade Tax
Daily Nation (Kenya), September 21, 2013
"It is estimated Kenya loses up to Sh11.5 billion annually as a result of intricate transfer pricing practices, according to Global Financial Integrity, a US-based international financial watchdog."http://www.nation.co.ke/business/Multinationals-exploit-loopholes-to-evade-tax/-/996/2002314/-/9r6uywz/-/index.html
Some MischaracterizationsReporting on GFI’s global IFF data, Reuters wrote:
Charities Say Graft, Tax Evasion Hold Back Poor Countries' Development
Reuters, Apr 10, 2013
"The developing world loses around $1 trillion every year through practices like tax evasion, corruption and money laundering, mainly by multinational corporations...."http://in.reuters.com/article/2013/04/10/india-tax-haven-graft-idINDEE93908B20130410
Some Mischaracterizations
Reporting on a GFI report about illicit flows from Africa, the International Business Times headline read:
“Graft Bleeding Africa Of Many Billions: Report”International Business Times, March 13, 2013
http://www.ibtimes.com/graft-bleeding-africa-many-billions-report-1122503
Contact Information
Today’s Speaker:
Clark GascoigneCommunications DirectorGlobal Financial [email protected]+1 202 293 0740 ext.222 (Office)
+1 202 815 4029 (Mobile)
www.gfintegrity.org
