Illicit financial flows exceed US$ 1 trillion for the 3rd year straight
Spending my Holidays on the sunny beaches of the Caribbean, I got some good time to catch up on some long overdue reading. With many tax administrations being absorbed with preparations for FATCA and/or CRS reporting, the ultimate goal for sharing tax information with other countries can get lost. Why does the world need all this sharing of tax information and why are countries pushing to get AEOI implemented?
The first study I picked up was the latest by Global Financial Integrity (GFI) on illicit financial flows due to tax evasion, crime, and corruption. The study (Illicit Financial Flows from Developing Countries: 2004 – 2013) calculates that illicit financial flows from developing and emerging economies exceeded US$ 1 trillion for the 3rd year straight and cumulatively account for US$ 7.8 trillion over a 10 year span. Think about this number for a moment….. not millions and not even billions, this is trillions of capital flowing out of these countries. To put this into perspective:
- It would take the total GDP of the bottom 100 countries combined (as ranked by the World Bank) to total US$ 1 trillion
- The total of illicit financial flows leaving these countries is more than the total of all foreign aid and foreign direct investment into these same countries
- It is estimated that in various countries for every single dollar of development aid ten dollars flow out of the country illegally
- Illicit financial flows averaged a staggering 4.0 percent of the developing world’s GDP
If you take the total illicit financial flows per country and divide that number with the GDP of the respective country, you can measure the illicit financial flows as a percentage of the GDP.
The most damaging economic problem
As per GFI’s President Raymond Baker, a longtime authority on financial crime, “this study clearly demonstrates that illicit financial flows are the most damaging economic problem faced by the world’s developing and emerging economies”. Personally, I fully agree with this statement and getting a grip on these illicit financial flows is essential for every country to stabilize their own financial market. If countries are able to contain half of these illicit financial flows, they would be able to self-fund a sustainable economic development in their respective countries. Due to these ongoing outflow of capital, many of the developing countries are in fact net creditors to the rest of the world, with more assets stashed abroad than they owe to foreign creditors (Henry 2012, Ndikumana/Boyce 2011). This helps explain the dire conditions of many communities in the developing world, whose members are unable to enjoy basic human rights such as housing, education, sanitation or health, among others. Even the United Nations recognizes this urgency and has recently adopted the Sustainable Development Goals for the next 15 years. It marks the first time that illicit financial flows are considered part of the development efforts and global commitment.
Getting a grip on illicit financial flows
Illicit financial flows can only be stopped when countries start exchanging information. That is why the push for sharing tax information through Automatic Exchange of Information (AEOI) is so important. Countries can start analyzing financial information of all their financial institutions’ account holders and track capital flows. Over 90 countries have committed to start exchanging data as early as 2017 using the Common Reporting Standard (CRS), following in the footsteps of the US’ Foreign Account Tax Compliance Act (FATCA), which has been put in effect by the IRS per 2015.
Impact on tax authority
My experience in dealing with governments is that implementing AEOI will not be done easily and complying with all regulations has a great impact on tax authorities. A streamlined process and automated technical system that meets international requirements and all stringent regulations will greatly relief the burden on a tax authority. Building this non-core process in-house will most often result in unfavorable results, high cost of maintenance, big cost overruns and increased risk of non-compliance. Buying a proven solution that meets all international standards and is already in use in other countries, is the much safer route to choose.
I have said it before in my previous blog, but I applaud the efforts for reducing illicit financial flows. And even though AEOI is only one of many steps in the process to be taken, complying with FATCA / CRS will eventually have a positive effect on the economic development and financial system of developing and emerging countries. I look forward to 2016 to see how countries will implement AEOI. Best wishes for everyone!