Following the Financial Flows

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 KleptoCast 17: Casey Michel talks to Matthew Salomon of Global Financial Integrity about global illicit financial flows – and how to stop them.


By Casey Michel

At a certain point, the advantages of countries enacting a beneficial ownership registry – a database to track those benefiting from ownership of companies – become as lengthy as they do obvious. Not only would such a register allow journalists and authorities alike an easier time tracking the kleptocrats and cartels accessing companies from Delaware and Nevada to Portugal and Luxembourg, but such a registry would presumably help unwind some of the more onerous regulations forcing financial institutions to untangle webs of anonymity – to say nothing of helping slow the growth of overall costs-of-living across the West. The benefits of a beneficial ownership registry, in a sense, speak for themselves.

However, for those still on the fence about enacting some kind of register – say, for those in places like Wyoming or Belize who continue to rake in millions in anonymous company formation – a new report from Matthew Salomon and Joseph Spanjers of Global Financial Integrity (GFI) helps detail just how broad, and how dangerous, the fallout from the absence of a beneficial ownership registry can be. Taking a glance at global illicit financial flows (IFFs), GFI’s new read details the massive magnitude of off-the-books financial transfers, much of which stems from the simple inability of authorities to track beneficial ownership.

Tracking trillions

Comprised of phenomena like deliberate misinvoicing of merchandise trade and leakages in the balance of payments, IFFs represent a staggering, and largely unchecked, proportion of international financial transfer. While current numbers remain but estimates – these are, after all, financial flows purposely obscured – GFI found that trade misinvoicing remains the dominant strain of IFFs, comprising nearly 90 percent of total IFF outflows from one country to another. (Trade misinvoicing is, as Salomon and Spanjers note, a form of “trade-based money laundering made possible by the fact that trading partners write their own trade documents, or arrange to have the documents prepared in a third country (typically a tax haven) – a method known as re-invoicing.”) As it pertains to the actual direction of financial flow, the report continued, “misinvoicing of services and intangibles, same-invoice faking, and cash movements related to many criminal activities tend to affect outflows from developing countries more than inflows to those countries.”

All told, when it comes to the recent growth of IFFs, GFI’s top-line numbers are astounding. In just 2014, with the most recent data available, total IFFs stood somewhere between $2 and $3.5 trillion. GFI’s estimates mean that total IFFs have grown 8.5-10 percent annually from 2005-14. Such findings also indicate that, over that same ten-year span, IFFs may represent up to 24 percent of total developing country trade.

However, not all regions – nor all IFFs – are created equal. For instance, Sub-Saharan Africa bests all comers as it pertains to illicit outflows, which represent potentially over 11 percent of the region’s total trade from 2005-14. Elsewhere, “Developing Europe” – that is, the post-communist space – leads when it comes to illicit inflows, at upwards of 21 percent of the region’s total trade. And while it maintains a lower rate than other regions, Asia boasts the highest estimates of total illicit inflows, estimated at over $1.2 trillion.

Unsurprisingly, many of those countries boasting the highest rates for things like trade misinvoicing are those traditionally affiliated with other offshoring tactics. But even then, GFI’s estimates are overwhelming. To wit, GFI estimates that the rate of trade misinvoicing for inflows in 2014 in countries like Benin, Djibouti, The Bahamas, and Vanuatu, when measured against total trade in each respective country, may be over 100 percent – with Panama over 422 percent and Liberia coming in at a breathtaking 660 percent.

Registering accurately

Despite increased international attention, the global growth of IFF outflows, as the report lays out, have remained steady over the past half-dozen years – while the expansion of IFF inflows kept even over the decade GFI studied. And given the magnitude of the IFFs involved, it’s difficult to over-estimate the fallout of such trajectory, especially in the developing countries in question.

Not only have such IFFs allowed the explosion of trade in transnational crime – also valued in the trillions – but they’ve done untold damage to domestic development. As Salomon and Spanjers note, the IFFs uncovered in the report may represent “tax revenues lost by developing country governments which would then be unavailable for use by those governments toward reducing inequality, eliminating poverty, and, more generally, raising the quality of life for people living in those countries.” Enhancing networks of corruption, encouraging governmental malfeasance, straining already straitened oversight bodies – the fallout from such IFFs reaches wide, undercutting any and all poverty-reduction or good governance programs elsewhere. And as long as such IFFs remain, the report continues, “such social corrosion exacerbates the deterioration, making it more and more difficult for a country to achieve and sustain adequate living standards for its citizens.”

Thankfully, there are signs certain governments and multi-lateral bodies are finally starting to appreciate the breadth of the problem on hand. For instance, in 2015 the UN’s Sustainable Development Goals finally included pledges to combat IFFs, while the Addis Ababa Financing for Development Conference that same year committed attendant nations to “substantially reduce illicit financial flows by 2030, with a view to eventually eliminating them.” Germany, the US, the UK, and the Netherlands have already made public commitments toward reducing IFFs, with developing countries like Ethiopia, Indonesia, the Philippines, and Tanzania following suit when it comes to combating IFF outflows.

As aforementioned, one of the best – and easiest – ways to stall the further expansion of IFFs is simple: enact a beneficial ownership registry, and force financial institutions to identify the beneficial owners of accounts in question. “Countries and international institutions should require gatekeepers to the financial system – lawyers, accountants, corporate service providers, and financial institutions – to identify the beneficial owners of their accounts and clients,” the report’s authors write. This, in addition to following Financial Action Task Force (FATF) guidelines and expanding tax information exchange, should help place an immediate dent in IFFs. GFI even offers a new tool to allow customs officials to “determine if goods are priced outside typical ranges for comparable products.”

The solutions, as the report makes clear, are readily available. (Indeed, even the Cayman Islands recently passed legislation to begin building its own beneficial ownership registry.) All the remains lacking – like the beneficial ownership registries noted above – is a clear will. And it until those changes come to pass, trillions more will continue to trickle between countries, unchecked, untaxed, and doing untold damage to the developing countries left behind.

Casey Michel has worked as a researcher and journalist in the United States and former Soviet Union.