Outflow of illicit funds squeezing poor nations

The illicit capital flows out of the developing countries are one of the major factors that accelerates poverty.


India ranks fifth among the countries of the world in terms of siphoning off abroad illicit money of over $343 billion  between 2002 -2011. And it has secured the third position for the year 2011 for ‘exporting’ $84 billion.

Our archrival China has secured the first position for the decade with a whooping export of more than a trillion dollars. Russia follows suit with the second rank. These findings are the outcome of the recent study by Washington-based Global Financial Integrity (GFI). It found that the developing countries lost $6 trillion to illicit outflows in the decade with an average growth rate of 10 per cent per year outpacing the GDP growth. The most interesting aspect of these findings is that the first two rankings have gone to the communist ruled centralised economies of the world, China and Russia. Obviously, the flow of illicit money does not differentiate between a democratic and a communist regime. Even a democratically ruled pro people country like Venezuela in Latin America is also part of this illegal flow.

There is continental consensus in exporting the wealth acquired illegally. The top six exporting countries are from Asia, namely China, Malaysia, India, Indonesia, Thailand and Philippines. How and why such huge sums are being taken away form these countries? The main route is through misinvoicing the export-import trade and the balance of payments. Usually it is done by retaining funds abroad through under-invoicing.

Though macro economic policies of liberalization and deregulation are one of the main contributory factors, the GFI report underscores this factor.What is the final destination of such illicit money? The wealthy individuals, the emerging billionaires and the multinational corporations use these tax havens, which help them to hold the assents offshore beyond the reach of tax authorities. According to Tax Justice Network, the conservative estimate of the financial assets held offshore ranges around $21 to 32 trillion. Of these 55 per cent is stashed with only one offshore centre, namely the City of London Corporation. Offshore islands like Cayman and British Virgin are favourite destinations of illegal money.

In India we presume that the secret destinations are mainly the Swiss banks. However, in recent years new centres of tax havens have emerged in the UK, Amsterdam, USA and other parts of the globe offering secrecy services. For example Mauritius is a recent addition to this, catering to the needs of developing countries in Asia. In reality, it is linked to the financial web of City of London Corporation channelling the illegal money back to rich nations. Corrupt elites, despots and dictators from developing countries strip their countries of financial resources and relocate them to safe havens in developed nations.

Our leaders boast of increased FDI coming into the country after liberalisation. However, a deeper analysis of inflow shows that 43 per cent of this has come only from Mauritius.

Obviously, the illicit money from Indian businessmen and politicians are dressed up in Mauritius and it comes back under the disguise of FDI! The hands of Indian tax authorities are tied as they cannot take action. The illicit outflow from developing nations in 2011 was $ 950 billion that was ten times $ 94 billion that was doled out as Official Development Assistance by developed economies.

Raymond Baker of GFI says “for every one dollar that we have been generously handling out across the top of the table, we in the west have been taking back $10 of illicit money under the table”. Obviously the business of overseas aid brings back a windfall profit in the name of charity. The illicit capital flows out of the developing countries are one of the major factors that accelerates poverty. It enriches the coffers of rich nations creating further inequality in the world.

The epicentre of the financial crisis in 2008 can be traced to these offshore tax havens in the developed world. The foundation of these tax havens is based on illicit wealth from poorer nations, as well as from money laundering, tax evasion, crime, drug trafficking and state sponsored terrorism. Ironically, instead of taming such Frankenstein monster that created havoc in global financial systems, they were bailed out by the US government using the taxpayers’ money!

The call for international transparency in global financial systems, reforming customs and trade protocols, enforcing stringent anti money laundering regulations are few of the suggested solutions to reduce this outflow. Is it possible to rein the illicit export of capital from poorer nations? Though world leaders in G20 meetings have made feeble attempts, in reality the rich nations want to maintain the status quo, which helps them keep control over the world’s finances. The hollowness of the emerging world economies of BRIC nations need to be gauged from the outflow of illicit money that creates more inequity of wealth and poverty in the world.

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