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Illicit Financial Flows: The Most Damaging Economic Condition Facing the Developing World

Global Financial Integrity Releases Capstone Book on Illicit Financial Flows with Support from the Ford Foundation

Russia’s illicit outflows were 8.3% of GDP (1994-2012); Illicit outflows from Mexico (1970-2012) and the Philippines (1960-2012) were 4.5% of GDP

$682.2 billion drained illicitly out of India 1948-2012; $561.7 billion leaked out of Brazil 1960-2012

Dr. Thomas Pogge, Leitner Professor of Philosophy and International Affairs at Yale University, calls illicit financial outflows a drag on human rights realization in developing countries

Erik Solheim, the OECD’s Development Assistance Committee chair, considers the links between IFFs and development

Book is dedicated to all those who suffer the indignities of poverty due to illicit financial flows.

This September 2015 publication from Global Financial Integrity is the summation of a great partnership with the Ford Foundation. The book features five condensed and updated quantitative country studies on illicit financial flows (IFFs) from India, Mexico, Russia, the Philippines, and Brazil by GFI Chief Economist Dr. Dev Kar, as well as chapters written by GFI President Raymond Baker and Managing Director Tom Cardamone. Dr. Thomas Pogge, Leitner Professor of Philosophy and International Affairs at Yale University, writes on the human rights impact of illicit financial flows. The relationship between illicit flows and development is considered by Erik Solheim, the chair of the OECD’s Development Assistance Committee.

Report Launch – September 21 and 22

The book will be launched at a two-day conference on September 21 and 22 at the National Press Club in Washington, DC. Panelists, keynote speakers, and moderators have been drawn from the public, private, and non-profit sectors to cover multiple sides of this important issue. This event will include discussions and keynote remarks from experts on the nature of illicit financial flows, country-level perspectives, and how and why curtailing these IFFs should be a priority for the global community.

“This book is the capstone of our collaboration with the Ford Foundation,” noted Raymond Baker, President of Global Financial Integrity. “We are truly grateful for their early support, which allowed GFI to put illicit financial flows on the global development agenda. This book encapsulates all that we have achieved together.” Mr. Baker’s introductory chapter, entitled “A Brief Biography of Illicit Financial Flows,” examines the evolution of the issue from obscurity to global prominence over the past ten years. The Ford Foundation provided $1.2 million in grant support to GFI over an eight year period.

Illicit Financial Outflows as a Drag on Human Rights Realization in Developing Countries

In his chapter, Dr. Thomas Pogge notes that today’s huge human rights deficit is almost entirely avoidable. Here, Dr. Pogge argues that “the morally significant issue is not whether such deprivations were even worse twenty-five years ago. Rather, the morally significant issue is whether such deprivations are today partly or wholly avoidable, and if so, at what cost.” Curbing illicit financial outflows must be an aspect of reducing these human rights deficits; massive rights deficit reductions could be achieved if developing countries were able to capture and collect appropriate tax on illicit financial outflows from multinationals and their own wealthiest citizens.

Five Country Studies: India, Mexico, Russia, the Philippines, and Brazil

Dr. Kar is the lead author for the book’s five central chapters on India, Mexico, Russia, the Philippines, and Brazil, as well as a preceding methodological overview. These chapters are condensed versions of our previously released country studies, with updated estimates of illicit flows calculated using GFI’s more rigorous methodology to date. “The drivers and dynamics of illicit financial flows in these five countries are varied. Though trade misinvoicing is a common theme, the studies demonstrate that the composition of illicit flows can vary drastically from country to country. Tailored country-specific policy reforms, complemented by progress at the international level, are thus crucial to stemming the nefarious phenomenon of illicit financial flows,” stated Dr. Kar, who served as a Senior Economist at the International Monetary Fund before joining GFI in January 2008.

The updated estimates of illicit flows to and from these five economies are striking:

Illicit Financial Flows and Development
Mr. Solheim, chair of the OECD’s DAC and former Norwegian Minister of International Development and Environment, lays out development opportunities to fight IFFs. He examines opportunities for political leadership, development cooperation, and global partnerships to stop bribery and corruption, tax evasion and illicit financial flows, and money laundering, as well as to enhance stolen asset recovery. “Just increasing average tax collection by 1 percent would add more than twice the total amount of global aid for public spending health and education in developing countries,” Mr. Solheim argues. In his chapter, he notes that the best way to combat illicit flows is through a country-specific approach, and “[r]ich developed countries must do more to devise and enforce adequate laws to track and prevent illegal money transfers.”

The Road to Addis and Beyond

Mr. Cardamone, who has led GFI’s advocacy efforts at the Financing for Development (FfD3) Conference for the post-2015 Sustainable Development Goals (SDGs), noted that “Illicit financial flows are now enshrined in these agreements as part of development orthodoxy. The Ford Foundation’s foresight allowed GFI to push the issue of illicit financial flows such that the international community now accepts that these flows are a reality, and that curbing them is a crucial part of the development equation.” Mr. Cardamone’s closing chapter plots progress on IFFs since 2007, culminating in the Financing for Development Conference in Addis Ababa in July 2015 and the related SDG process pledging to address illicit financial flows. The chapter goes on to suggest policy measures to reduce illicit flows in the coming years.

Global Financial Integrity hopes that the release of this book will spur further international action on illicit financial flows, which continue to be a scourge on the developing world. Though the issue has made great progress in the preceding decade, Winston Churchill’s timeless 1942 quote is certainly relevant:

“Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Read the Report

The full PDF of the report can be downloaded here.  Additionally, the full report can be read in the Scribd window below.

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Acknowledgements

About the Authors

Raymond Baker is the President at Global Financial Integrity and the author of Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System.He has for many years been an internationally respected authority on corruption, money laundering, growth, and foreign policy issues, particularly as they concern developing and emerging economies and impact upon western economic and foreign interests. He has written and spoken extensively, testified often before legislative committees in the United States, Canada, the European Union, and the United Kingdom, been quoted worldwide, and has commented frequently on television and radio in the the United States, Europe, Africa, Latin America, and Asia. Mr. Baker is a member of the High Level Panel on Illicit Financial Flows from Africa, chaired by former President of South Africa Thabo Mbeki. He also serves on the World Economic Forum’s Council on Transparency and Anti-Corruption. He also serves on the Board of Directors of the Center of Concern and on the Policy Advisory Board of Transparency International-USA.

Tom Cardamone is the Managing Director of Global Financial Integrity (GFI). For two decades he has been an analyst, Project Director and Executive Director for, and a consultant to, several non-profit organizations. Prior to joining GFI, Cardamone was a consultant to non-governmental organizations in the areas of strategic organizational and program planning, development and web site content. From 2000 to 2003 he was Executive Director of the Center for Arms Control and Non-Proliferation, a leading Washington, D.C.-based arms control organization. During his career Cardamone has advocated numerous policy positions on television, radio and in print media including appearances on CNN, Canadian Broadcasting and Swiss Broadcasting and in newspapers including The New York Times, The Wall Street Journal, and The Washington Post.

Dev Kar is the Chief Economist at Global Financial Integrity. Prior to joining GFI, Dr. Kar was a Senior Economist at the International Monetary Fund (IMF), Washington DC. During a career spanning nearly 32 years at the IMF, he worked on a wide variety of macroeconomic and statistical issues, both at IMF headquarters and on different types of IMF missions to member countries (technical assistance, Article IV Consultations with member countries, and Use of IMF Resources). He has published a number of articles on macroeconomic and statistical issues both inside and outside the IMF. Dr. Kar has a Ph.D. in Economics (Major: Monetary Economics) and an M. Phil (Economics) (Major: International Economics) from the George Washington University and an M.S. (Computer Science) from Howard University (Major: Database Management Systems). His undergraduate degree in Physics is from St. Xavier’s College, University of Calcutta, India.

Thomas Pogge is the Director of the Global Justice Program and the Leitner Professor of Philosophy and International Affairs at Yale University. Having received his Ph.D. in philosophy from Harvard, Thomas Pogge has published widely on Kant and in moral and political philosophy, including various books on Rawls and global justice. In addition to his Yale appointment, he is the Research Director of the Centre for the Study of the Mind in Nature at the University of Oslo, a Professorial Research Fellow at the Centre for Applied Philosophy and Public Ethics, and Adjunct Professor of Political Philosophy at the Centre for Professional Ethics of the University of Central Lancashire. Pogge is also editor for social and political philosophy for the Stanford Encyclopedia of Philosophy and a member of the Norwegian Academy of Science. With support from the Australian Research Council, the UK-based BUPA Foundation and the European Commission (7th Framework) he currently heads a team effort towards developing a complement to the pharmaceutical patent regime that would improve access to advanced medicines for the poor worldwide and toward developing better indices of poverty and gender equity. He is also president of Academics Stand Against Poverty, an international professional association focused on helping poverty researchers and teachers enhance their positive impact on severe poverty.

Erik Solheim took the lead of the main body of world donors the OECD Development Assistance Committee (DAC) in January 2013. He is also serving as United Nations Environment Programme’s special envoy for environment, conflict and disaster. From 2007 to 2012 he held the combined portfolio of Norway’s Minister of the Environment and International Development; he also served as Minister of International Development from 2005 to 2007. During his time as minister Norwegian aid reached 1%, the highest in the world. Solheim has focused on fragile states, encouraged use of New Deal principles and worked to align DAC-donors behind state building and peace processes in war torn countries. From 2000 to 2005, Mr. Solheim was the main negotiator in the peace process in Sri Lanka. As minister he contributed to peace processes in Sudan, Nepal, Myanmar and Burundi. Erik Solheim cites as one of his most important achievements his role in establishing the UN REDD, the global coalition to conserve the world rain forests. He has received several awards for his work on climate and the environment, including UNEP’s “Champion of the Earth” award.

The authors wish to thank and acknowledge Christine Clough (Program Manager and Acting Communications Director), Joseph Spanjers (Junior Economist), Channing May (Policy Associate), Loosi Azarian (Administrative Assistant), Uyen Le (Economics Intern), Yuchen Ma (Economics Intern), Sophie Haggerty (Communications Intern), and Emily Armstrong (Policy Intern) for their contributions to the production of this report.

GFI and the authors would also like to acknowledge Gil Leigh of Modern Media for his contributions to the layout and design of the publication and Jennifer Nordin for her contributions to the editing of the publication.

Funding

Funding for this report was generously provided by the Ford Foundation.

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