A Review of the Nigerian Energy Industry

Illicit financial outflows cost developing world $859bn in 2010

*New report finds crime, corruption, and tax evasion at near-historic highs in 2010      *Nearly $6 trillion stolen from poor countries in decade between 2001 and 2010

18 December 2012, Sweetcrude, WASHINGTON, DC – Crime, corruption, and tax evasion cost the  developing world $858.8 billion in 2010, just below the all-time high of  $871.3 billion set in 2008—the year preceding the global financial  crisis.  The findings are part of a new study released today by Global  Financial Integrity (GFI), a Washington-based research and advocacy  organization.

The report, “Illicit Financial Flows from Developing Countries: 2001-2010,”  is GFI’s annual update on the amount of money flowing out of developing  economies via crime, corruption and tax evasion, and it is the first of  GFI’s reports to include data for the year 2010.

Co-authored by GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas,  the study is the first by GFI to incorporate a new, more conservative,  estimate of illicit financial flows, facilitating comparisons with  previous estimates from GFI updates.

“Astronomical sums of  dirty money continue to flow out of the developing world and into  offshore tax havens and developed country banks,” said GFI Director Raymond Baker.   “Regardless of the methodology, it’s clear: developing economies are  hemorrhaging more and more money at a time when rich and poor nations  alike are struggling to spur economic growth. This report should be a  wake-up call to world leaders that more must be done to address these  harmful outflows.”

Methodology

As developing  countries begin to loosen capital controls, the possibility exists that  the methodology utilized in previous GFI reports—known as the World Bank  Residual Plus Trade Mispricing method—could increasingly pick-up some  licit capital flows.  The methodology introduced in this report— the Hot  Money Narrow Plus Trade Mispricing method—ensures that all flow  estimates are strictly illicit moving forward, but may omit some illicit  financial flows detected in the previous methodology.

“The  estimates provided by either methodology are still likely to be  extremely conservative as they do not include trade mispricing in  services, same-invoice trade mispricing, hawala transactions, and  dealings conducted in bulk cash,” explained Dr. Kar, who previously  served as a senior economist at the International Monetary Fund.  “This  means that much of the proceeds of drug trafficking, human smuggling,  and other criminal activities, which are often settled in cash, are not  included in these estimates.”

Findings

The $858.8  billion of illicit outflows lost in 2010 is a significant uptick from  2009, which saw developing countries lose $776.0 billion under the new  methodology.  The study estimates the developing world lost a total of  $5.86 trillion over the decade spanning 2001 through 2010.1

“This  has very big consequences for developing economies,” explained Ms.  Freitas, a co-author of the report.  “Poor countries lost nearly a  trillion dollars that could have been used to invest in healthcare,  education, and infrastructure.  It’s nearly a trillion dollars that  could have been used to pull people out of poverty and save lives.”

Dr.  Kar and Ms. Freitas’ research tracks the amount of illegal capital  flowing out of 150 different developing countries over the 10-year  period from 2001 through 2010, and it ranks the countries by magnitude  of illicit outflows. According to the report, the 20 biggest exporters  of illicit financial flows over the decade are:

  1. China ………………….. $274 billion average ($2.74 trillion cumulative)
  2. Mexico ………………………………. $47.6 billion avg. ($476 billion cum.)
  3. Malaysia ……………………………. $28.5 billion avg. ($285 billion cum.)
  4. Saudi Arabia ……………………… $21.0 billion avg.  ($210 billion cum.)
  5. Russia ………………………………… $15.2 billion avg. ($152 billion cum.)
  6. Philippines …………………………. $13.8 billion avg. ($138 billion cum.)
  7. Nigeria ……………………………….. $12.9 billion avg. ($129 billion cum.)
  8. India ………………………………….. $12.3 billion avg. ($123 billion cum.)
  9. Indonesia …………………………… $10.9 billion avg. ($109 billion cum.)
  10. United Arab Emirates ………….. $10.7 billion avg. ($107 billion cum.)
  11. Iraq ………………………………….. $10.6 billion avg. ($63.6 billion cum.)2
  12. South Africa ……………………… $8.39 billion avg. ($83.9 billion cum.)
  13. Thailand …………………………… $6.43 billion avg. ($64.3 billion cum.)
  14. Costa Rica …………………………. $6.37 billion avg. ($63.7 billion cum.)
  15. Qatar …………………………………. $5.61 billion avg. ($56.1 billion cum.)
  16. Serbia ………………………………… $5.14 billion avg. ($51.4 billion cum.)
  17. Poland ……………………………… $4.08 billion avg. ($40.8 billion cum.)
  18. Panama …………………………….. $3.99 billion avg. ($39.9 billion cum.)
  19. Venezuela ………………………….. $3.79 billion avg. ($37.9 billion cum.)
  20. Brunei ………………………………. $3.70 billion avg. ($37.0 billion cum.)

For  a complete ranking of average annual illicit financial outflows by  country, please refer to Table 2 of the report’s appendix on page 36, or  download the rankings by average annual illicit outflows here [PDF | 51 KB].

Also revealed are the top exporters of illegal capital in 2010, which were:

  1. China …………………………………………….. $420.36 billion
  2. Malaysia ………………………………………….. $64.38 billion
  3. Mexico ……………………………………………… $51.17 billion
  4. Russia ……………………………………………… $43.64 billion
  5. Saudi Arabia …………………………………….. $38.30 billion
  6. Iraq………………………………………………….. $22.21 billion
  7. Nigeria …………………………………………….. $19.66 billion
  8. Costa Rica………………………………………….. $17.51 billion
  9. Philippines ……………………………………….. $16.62 billion
  10. Thailand……………………………………………. $12.37 billion
  11. Qatar ……………………………………………….. $12.36 billion
  12. Poland ……………………………………………… $10.46 billion
  13. Sudan ………………………………………………… $8.58 billion
  14. United Arab Emirates ………………………….. $7.60 billion
  15. Ethiopia …………………………………………….. $5.64 billion
  16. Panama ……………………………………………… $5.34 billion
  17. Indonesia ……………………………………………. $5.21 billion
  18. Dominican Republic …………………………….. $5.03 billion
  19. Trinidad and Tobago ……………………………. $4.33 billion
  20. Brazil ………………………………………………….. $4.29 billion

An  alphabetical listing of illicit financial outflows is available for  each country in Table 9 on pg. 62 of the report.  You can also download  the alphabetical listing of illicit financial flows data for each  country here [PDF | 64 KB].

Connections to Previous GFI Studies

China,  the largest cumulative exporter of illegal capital flight, as well as  the largest victim in 2010, was the topic of an October 2012  country-specific report by GFI’s Kar and Freitas.  Using the older  methodology, “Illicit Financial Flows from China and the Role of Trade Misinvoicing,” found that the Chinese economy suffered $3.79 trillion in illicit financial outflows between 2000 and 2011.

“Our  reports continue to demonstrate that the Chinese economy is a ticking  time bomb,” said Dr. Kar. “The social, political, and economic order in  that country is not sustainable in the long-run given such massive  illicit outflows.”

Mexico, the second-largest cumulative exporter  of illicit capital over the decade, was also the topic of a January 2011  GFI report by Dr. Kar.  The study, “Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy,”  found that Mexico lost a total of $872 billion in illicit financial  flows over the 41-year period from 1970 to 2010.  Moreover, illicit  outflows were found to drive Mexico’s domestic underground economy,  which includes—among other things—drug smuggling, arms trafficking and  human trafficking.

Possible Solutions

Global  Financial Integrity advocates that world leaders increase the  transparency in the international financial system as a means to curtail  the illicit flow of money highlighted by Dr. Kar and Ms. Freitas’  research.  Policies advocated by GFI include:

  • Addressing the problems posed by anonymous shell companies, foundations, and trusts by requiring confirmation of beneficial ownership  in all banking and securities accounts, and demanding that information  on the true, human owner of all corporations, trusts, and foundations be  disclosed upon formation and be available to law enforcement;
  • Reforming customs and trade protocols to detect and curtail trade mispricing;
  • Requiring the country-by-country reporting of sales, profits and taxes paid by multinational corporations;
  • Requiring the automatic cross-border exchange of tax information on personal and business accounts;
  • Harmonizing predicate offenses under anti-money laundering laws across all Financial Action Task Force cooperating countries; and
  • Ensuring that the anti-money laundering regulations already on the books are strongly enforced.

Funding

Funding for the new report, “Illicit Financial Flows from Developing Countries: 2001-2010,” was generously provided by the Ford Foundation.

To  schedule an interview with GFI spokespersons on this report, contact  Clark Gascoigne at +1 202 293 0740, ext. 222 or  cgascoigne@gfintegrity.org. On-camera spokespersons are available in  Washington, DC.

Footnotes:

  1. The  less conservative, methodology used in previous GFI updates measured  $936.1 billion in 2009.  Were the previous methodology applied to 2010,  it would have measured $1.138 trillion in illicit outflows from the  developing world, a 26 percent increase over the previous year.  Table  11 on pg. 70 provides a breakdown of illicit financial flow estimates  for each country based on the original methodology.
  2. Data for  Iraq was not available in 2001-2004, thus the average illicit outflows  of US$10.6 billion reflect only the years 2005-2010.  Likewise, the  cumulative outflows of US$63.6 billion for Iraq are cumulative outflows  for 2005 through 2010 only.
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  • It is shocking to note that a country like Nigeria lost $129 billion in the last decade to illicit financial flows alone. Unfortunately, the authorities couldn’t care less.