Big Concern: illcit financial flows and capital flight

Capital flight from the developing countries and emerging economies has been worrying many jurisdictions including India. Illicit Financial Flows (IFF) from developing and emerging economies kept pace at nearly US$1 trillion in 2014, said Global Financial Integrity’s (GFI) in their report - ‘Illicit Financial Capital to and from Developing Countries: 2005–2014’.

Russia is on the top with US$ 122.86 billion followed by China at the second position (US$ 249.57 billion) in terms of quantum of black money moving out of a country for 2012, the latest year for which estimates have been made. The illicit fund outflows from India accounts for nearly 10 per cent of a record US $ 991.2 billion worth of illegal capital that moved out of all developing and emerging nations in 2012 to facilitate crime, corruption and tax evasion.

The Report states that the cumulative illicit outflows from developing economies between 2003 and 2012 stands at US$ 6.6 trillion. This includes US $ 439.59 billion worth illicit money that has been moved out of India in these 10 years, put the country in 4th position in overall ranking for a decade, after China (US$ 1.25 trillion), Russia (US$ 973.86 billion) and Mexico (US$ 514.26 billion).

The latest in a series of Annual Reports by GFI (December 2015) provides estimates of the illicit flow of money out of the developing world. The study finds that during the 10-year period—2004–13, ‘Illicit Financial Flows from developing and emerging economies lost US$ 7.8 trillion, with illicit outflows increasing at an average rate of 6.5 per cent per year—nearly twice as fast as Global GDP. In real terms, these flows increased at 6.5 per cent per annum—nearly twice as fast as Global GDP. After a slow down during the Global Financial Crisis (GFC), illicit out flows have been rising, topping US$ 1 trillion since 2011and reaching a new peak of US$ 1.1 trillion in 2013.’

In its latest report, GFI estimated that an amount of US$ 770 billion in black money entered India during 2005–2014 and nearly US$ 165 billion in illicit funds exited the country during the same period. During 2014 alone about US$ 101 billion black money entered the country while US$ 23 billion exited.

IFF or Illegal Capital Flight were generally the product of tax evasion, corruption, bribery and kickbacks, and criminal activities. The present value of India’s total illicit financial flows is at least US$ 462 billion. This is based on the short-term US Treasury Bill Rate as a proxy for the rate of return on assets. India’s current external debt of US$ 682.3 billion is 18.8% of GDP. In present value terms, India lost an equivalent of about 36 per cent of its 2008 GDP, which represents a staggering loss of capital. Some 68 per cent of India’s aggregate illicit capital loss occurred after India’s economic reforms in 1991, indicating that de-regulation and trade liberalization actually contributed to or accelerated the transfer of illicit money abroad. The study revealed that high net-worth individuals and private companies were found to be the primary drivers of illicit flows out of India’s private sector. India’s underground economy is also a significant driver of illicit financial flows. The report further stated that from 1948 through 2008, the Indian private sector shifted from depositing illicit money in banks in developed countries and moved more of its money into Offshore Financial Centres (OFC). The share of OFC deposits increased from 36.4 per cent in 1995 to 54.2 per cent in 2009. The author of the report, Dev Kar, says that the total present value of India’s illicit assets held abroad accounts for approximately 72 per cent of India’s underground economy. This means that almost three-quarters of illicit assets comprising India’s underground economy, is estimated to account for 50 per cent of India’s GDP (approximately US $640 billion at the end of 2008), ends up outside the country. The outflows were mainly due to ‘trade mispricing’, and ‘other’, which includes kickbacks, bribes, embezzlement and other forms of corruption. The fraudulent mis-invoicing of trade transactions by multi-national corporations was revealed to be the largest component of illicit financial flows from developing countries, accounting for 83.4 percent of all illicit flows—highlighting that any effort to significantly curtail illicit financial flows must address trade mis-invoicing.

The Tax Justice Network (TJN) in its report for 2023 warned that countries are on course to lose nearly US$ 5 trillion in tax to multinational corporations and wealthy individuals using tax havens to underpay tax over the next 10 years. The future losses of public money would be equivalent to losing a year of worldwide spending on public health.

In her opening remarks for the UNDP Conference, Administrator Helen Clark noted that ‘illicit flows seriously impede LDCs’ (Least Developed Countries) efforts to raise resources for social and economic development. These flows are often absorbed into banks, tax havens and offshore financial centres in developed countries’

Transnational organized crime can destabilize countries and entire regions, undermining development assistance in those areas and increasing domestic corruption, extortion, racketeering and violence.

TJN in its report “The Price of Offshore Revisited”, released in July 2012, estimates the total figure hidden globally at US$ 21 trillion, and this number could be as high as US$ 32 trillion. According to James Henry, the author of the report, at least US$ 72.7 billion (Rs 4,06,900 crore) worth of assets have moved from India to secretive offshore jurisdictions between 1976 and 2010.

TJN states that more than US$ 12 trillion has been siphoned out of Russia, China and other emerging economies into the secretive world of offshore finance. The analysis, carried out by Columbia University Professor James S Henry for TJN, shows that ‘by the end of 2014, US$ 1.3 trillion of assets from Russia were sitting offshore.’

The February 2011 GFI report, ‘Transnational Crime in the Developing World,’ finds that the illicit trade in ‘Goods, Guns, People and Natural Resources’ is a US$ 650-billion enterprise, which most negatively impacts the developing world.

‘Transnational organized crime reaches into every region, and every country across the world. Stopping this transnational threat represents one of the international community’s greatest global challenges,’ said UNODC’s Executive Director, Yury Fedotov. ‘Crucial to our success is our ability to raise public awareness and generate understanding among key decision and policy makers.’ The US$ 870-billion turnover from transnational organized crime is six times the amount of official development assistance, and is comparable to 1.5 per cent of the GDP, or 7% of the world’s exports of merchandise, Fedotov said.

In total, 47 academics from British universities, including Oxford and the London School of Economics, have signed the letter that argues tax evasion weakens both developed and developing economies, as well as driving inequality. The signatories’ state: ‘Territories allowing assets to be hidden in shell companies or which encourage profits to be booked by companies that do no business there are distorting the working of the global economy.’

Oxfam, The Poverty fighting organization said that 50 largest US companies, including Apple, Microsoft and Wal-Mart are parking about US$ 1.6 trillion in offshore tax havens to reduce their US tax burden; according to a study published in April 2016. Though not illegal, the companies ‘used a secretive network of 1,751 subsidiaries in tax havens to stash their earnings outside the US’, Oxfam said in the report released ahead of the next meetings of the IMF) and World Bank. Robbie Silverman, Oxfam’s Senior Advisor said, ‘Tax avoidance has become standard business practice across the globe. Corporate tax dodgers cheat America out of approximately, US$ 135 billion in unpaid tax revenues every year.’ Apple is at the top of the ranking with more than US$ 200 billion in offshore funds, followed closely Pfizer Laboratories (US$ 193.6 billion) and Microsoft’s IT group (US$ 124 billion), the report said.

Tax havens do not just happen. The British Virgin Islands did not become a tax and secrecy haven through its own efforts. These havens are the deliberate choice of major governments, especially the United Kingdom and the United States, in partnership with major financial, accounting, and legal institutions that move the money. The abuses are not only shocking but staring us directly in the face.

(Writer is former DG. DRI, DG. NCB, DG. EIB and Member CBIC - Retd)