Global Financial Integrity

This June 2015 report, the latest in a series by Global Financial Integrity (GFI), highlights the outsized impact that illicit financial flows have on the world’s poorest economies.  The study looks at illicit financial flows from some of the world’s poorest nations and compares those values to some traditional indicators of development—including GDP, total trade, foreign direct investment, public expenditures on education and health services, and total tax revenue, among others—over the period 2008–2012.

The report also produces several scatter plots in which illicit flows values for all developing and emerging market nations are compared to key trade indicators and various development indices, such as human development, inequality, and poverty, to determine if correlations exist between the two.

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Overview

Correlation to Higher Poverty

By two different measures of poverty, the study reveals a positive correlation between higher levels of poverty and larger illicit outflows.  That is, countries with higher levels of illicit financial flows (relative to GDP) tend to struggle with higher levels of poverty.

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Correlation to Higher Inequality

By two different measures of inequality, the report finds a positive correlation between higher levels of illicit financial outflows and higher income inequality.

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Correlation to Lower Human Development

The study finds that there is a negative correlation between human development and illicit outflows. That is, countries with higher levels of IFFs (relative to GDP) tend to have a lower score on the human development index.

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Tables

All of the tables from the report can be downloaded in Excel here or they can be viewed interactively below.

Table 1. Illicit Financial Outflows to GDP

Rank	Country	Ratio
1	Togo	76.3%
2	Liberia	61.6%
3	Vanuatu	35.6%
4	Djibouti	35.5%
5	Solomon Islands	22.2%
6	Equatorial Guinea	21.8%
7	Samoa	21.8%
8	Honduras	21.7%
9	Nicaragua	20.4%
10	Lesotho	19.2%
11	Paraguay	18.6%
12	Zambia	18.1%
13	Guyana	17.3%
14	Malawi	16.9%
15	Sao Tome and Principe	12.8%
16	Comoros	12.2%
17	Chad	11.2%
18	Ethiopia	11.2%
19	Armenia, Republic of	11.1%
20	Congo, Republic of	11.1%
21	Swaziland	9.8%
22	Lao People's Democratic Republic	9.7%
23	Gambia, The	8.8%
24	Nigeria	7.9%
25	Cote d'Ivoire	7.3%

Table 2. Illicit Financial Outflows to Total Trade

Rank	Country	Ratio
1	Togo	105.0%
2	Liberia	80.6%
3	Djibouti	71.3%
4	Vanuatu	67.6%
5	Samoa	45.3%
6	Ethiopia	31.7%
7	Honduras	31.2%
8	Nicaragua	28.9%
9	Comoros	26.1%
10	Solomon Islands	25.6%
11	Malawi	24.6%
12	Zambia	24.1%
13	Syrian Arab Republic	23.7%
14	Paraguay	23.3%
15	Gambia, The	22.5%
16	Armenia, Republic of	21.6%
17	Sao Tome and Principe	21.1%
18	Rwanda	21.1%
19	Chad	20.2%
20	Lao People's Democratic Republic	19.8%
21	Nepal	17.8%
22	Guyana	16.4%
23	Nigeria	16.3%
24	Guinea-Bissau	16.2%
25	Equatorial Guinea	16.1%

Table 3. Illicit Financial Outflows to Population

Rank	Country	IFFs / Capita	GDP / Capita
1	Equatorial Guinea	$3,978.19	$18,982.29
2	Vanuatu	$996.65	$2,862.42
3	Samoa	$670.00	$3,086.90
4	Paraguay	$574.24	$3,108.22
5	Guyana	$495.13	$2,865.75
6	Djibouti	$486.20	$1,379.45
7	Honduras	$442.22	$2,045.98
8	Togo	$401.43	$527.96
9	Armenia, Republic of	$359.21	$3,252.57
10	Congo, Republic of	$323.55	$2,897.13
11	Nicaragua	$317.35	$1,543.53
12	Solomon Islands	$302.61	$1,371.60
13	Swaziland	$280.39	$2,964.56
14	Zambia	$220.92	$1,213.64
15	Liberia	$187.85	$319.90
16	Syrian Arab Republic	$183.21	.
17	Lesotho	$180.41	$993.85
18	Sao Tome and Principe	$151.06	$1,185.37
19	Nigeria	$124.60	$1,925.40
20	Cabo Verde	$124.41	$3,503.40
21	El Salvador	$113.85	$3,452.53
22	Papua New Guinea	$110.53	$1,490.90
23	Lao People's Democratic Republic	$104.22	$1,086.96
24	Chad	$102.40	$912.76
25	Comoros	$96.32	$801.87

Table 4. Illicit Financial Outflows to Foreign Direct Investments

Rank	Country	Ratio
1	Nepal	18568.1%
2	Burundi	12732.6%
3	Togo	4122.7%
4	Samoa	3044.2%
5	Paraguay	2064.4%
6	Tajikistan	1819.7%
7	Cameroon	1634.9%
8	Ethiopia	1354.9%
9	Malawi	835.9%
10	Burkina Faso	724.3%
11	Guinea-Bissau	711.4%
12	Comoros	625.9%
13	Vanuatu	614.2%
14	Djibouti	566.2%
15	Philippines	518.7%
16	Cote d'Ivoire	471.5%
17	Honduras	464.6%
18	Rwanda	460.5%
19	Swaziland	398.2%
20	Chad	371.2%
21	Liberia	306.1%
22	Zambia	293.3%
23	Nicaragua	289.6%
24	Nigeria	257.3%
25	Lao People's Democratic Republic	242.9%

Table 5. Illicit Financial Outflows to Official Development Assistance and Foreign Direct Investment

Rank	Country	Ratio
1	Paraguay	957.6%
2	Togo	513.1%
3	Philippines	460.0%
4	Honduras	255.1%
5	Nigeria	209.4%
6	Swaziland	209.3%
7	Papua New Guinea	201.1%
8	India	199.6%
9	El Salvador	190.9%
10	Indonesia	184.5%
11	Djibouti	179.4%
12	Vanuatu	175.5%
13	Chad	151.8%
14	Zambia	143.5%
15	Nicaragua	142.6%
16	Samoa	117.7%
17	Nepal	116.5%
18	Armenia, Republic of	111.8%
19	Cote d'Ivoire	109.9%
20	Guyana	108.4%
21	Lesotho	99.7%
22	Comoros	98.1%
23	Lao People's Democratic Republic	97.1%
24	Cameroon	96.5%
25	Syrian Arab Republic	96.2%

Table 6. Illicit Financial Outflows to Public Spending on Education

(from highest average 2008–2012 [IFFs]/[Education Spending] to lowest)

Rank	Country	Ratio
1	Togo	2435.9%
2	Liberia	1649.3%
3	Zambia	1314.3%
4	Vanuatu	842.4%
5	Chad	555.9%
6	Guyana	511.5%
7	Samoa	471.6%
8	Nicaragua	423.1%
9	Paraguay	361.0%
10	Lao People's Democratic Republic	359.8%
11	Armenia, Republic of	335.9%
12	Malawi	315.3%
13	Solomon Islands	254.0%
14	Ethiopia	245.0%
15	Congo, Republic of	235.2%
16	Gambia, The	230.4%
17	Nepal	228.8%
18	Cote d'Ivoire	224.8%
19	Lesotho	204.1%
20	Mali	177.9%
21	Sao Tome and Principe	172.5%
22	Uganda	170.9%
23	Philippines	170.6%
24	Guinea	153.1%
25	Rwanda	147.1%

Table 7. Illicit Financial Outflows to Public Spending on Health

(from highest average 2008–2012 [IFFs]/[Health Spending] to lowest)

Rank	Country	Ratio
1	Togo	1088.7%
2	Vanuatu	931.4%
3	Congo, Republic of	483.5%
4	Equatorial Guinea	478.1%
5	Liberia	455.7%
6	Djibouti	417.1%
7	Samoa	361.0%
8	Chad	329.6%
9	Solomon Islands	315.5%
10	Lao People's Democratic Republic	304.2%
11	Comoros	302.5%
12	Zambia	284.0%
13	Nicaragua	265.2%
14	Armenia, Republic of	264.6%
15	Guyana	264.0%
16	Ethiopia	259.5%
17	Honduras	251.6%
18	Paraguay	242.7%
19	Malawi	200.1%
20	Gambia, The	192.2%
21	Lesotho	190.7%
22	Sao Tome and Principe	180.3%
23	Papua New Guinea	160.5%
24	Nigeria	124.4%
25	Swaziland	116.7%

Table 8. Illicit Financial Outflows to Total Tax Revenues

(from highest average 2008–2012 [IFFs]/[Tax] to lowest)

Rank	Country	Ratio
1	Samoa	98551.8%
2	Togo	497.6%
3	Congo, Republic of	373.7%
4	Liberia	257.4%
5	Nigeria	229.4%
6	Paraguay	156.7%
7	Ethiopia	152.5%
8	Nicaragua	147.0%
9	Honduras	146.0%
10	Vanuatu	142.0%
11	Equatorial Guinea	138.7%
12	Zambia	124.8%
13	Sao Tome and Principe	83.9%
14	Lao People's Democratic Republic	73.9%
15	Armenia, Republic of	64.0%
16	Nepal	56.9%
17	Cote d'Ivoire	52.4%
18	Rwanda	51.7%
19	Mali	46.1%
20	Lesotho	45.1%
21	Uganda	44.2%
22	Burkina Faso	42.9%
23	India	39.6%
24	Indonesia	37.2%
25	Gambia, The	37.0%

Table 9. Illicit Financial Outflows to Capital Stock

(from highest average 2008–2012 [IFFs]/[Capital Stock] to lowest)

Rank	Country	Ratio
1	Togo	24.6%
2	Liberia	23.4%
3	Equatorial Guinea	19.3%
4	El Salvador	7.2%
5	Nigeria	6.6%
6	Congo, Republic of	6.5%
7	Chad	6.4%
8	Honduras	6.4%
9	Zambia	6.0%
10	Djibouti	5.7%
11	Paraguay	5.3%
12	Cote d'Ivoire	4.1%
13	Mali	3.6%
14	Sao Tome and Principe	3.2%
15	Sudan	2.8%
16	Lesotho	2.7%
17	Armenia, Republic of	2.7%
18	Ethiopia	2.5%
19	Rwanda	2.3%
20	Malawi	2.2%
21	Gambia, The	1.8%
22	Uganda	1.8%
23	Comoros	1.7%
24	Swaziland	1.3%
25	Lao People's Democratic Republic	1.3%

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Policy Recommendations

Illicit financial flows from developing countries are facilitated and perpetuated primarily by opacity in the global financial system. This endemic issue is reflected in many well-known ways, such as the existence of tax havens and secrecy jurisdictions, anonymous companies and other legal entities, and innumerable techniques available to launder dirty money—for instance, through misinvoicing trade transactions. This is, essentially, trade fraud and is often referred to as trade-based money laundering when used to move the proceeds of criminal activity.

Curtailing Trade Misinvoicing

Of the estimated US$1 trillion in measurable illicit outflows each year, trade misinvoicing is the method most often used to move funds offshore.¹ Close to 80 percent of all outflows use misinvoicing as the preferred method of movement—meaning that curbing trade misinvoicing must be a major focus for policymakers around the world.

This year presents a spectacular opportunity to tackle the scourge of illicit financial flows. The Millennium Development Goals (MDGs) are set to expire in 2015, and, in September, the United Nations will formally transition to its post-2015 development agenda. Known as the Sustainable Development Goals (SDGs), this framework will establish objectives in 17 areas of global development.² Additionally, in July, the Financing for Development (FfD) process will conclude with a UN conference in Addis Ababa, Ethiopia.³ The FfD process will create a document that is a formal demonstration of political will to address the issues of economic development and global poverty. The FfD and SDG processes will go hand-in-hand to set the global development agenda for the next 15 years.

This is why GFI is calling on the United Nations to adopt, in these documents, a clear and precise prescription to address illicit flows including:

• A declaration that the global community aims to eliminate illicit flows eventually and to reduce them by 50 percent in each developing country by 2030.

• An official definition of IFFs as follows: “illicit financial flows are the cross-border movement of funds that are illegally earned, transferred, and/or utilized.”

• Calling on the IMF to estimate the volume of illicit financial flows for each developing country and then monitor their yearly progress toward a 50 percent reduction by 2030.

• A formal commitment to ensuring that commercially available trade databases, and related training, are made available to developing country customs departments, which will enable them to identify, investigate and interdict goods that have been misinvoiced in order to substantially reduce illicit flows.

Additionally, the following measures should be taken by all states:

Anti-Money Laundering

All countries should, at a minimum, take whatever steps are needed to comply with all of the Financial Action Task Force (FATF) Recommendations to combat money laundering and terrorist financing.⁴

Regulators and law enforcement officials should strongly enforce all of the anti-money laundering laws and regulations that are already on the books, including through criminal charges and penalties for individuals employed by financial institutions who are culpable for allowing money laundering to occur.

Beneficial Ownership of Legal Entities

All countries and international institutions should address the problems posed by anonymous companies and other legal entities by requiring or supporting meaningful confirmation of beneficial ownership in all banking and securities accounts.

Additionally, information on the true, human owner of all corporations and other legal entities should be disclosed upon formation, updated on a regular basis, and made freely available to the public in central registries. The United Kingdom⁵ and Denmark⁶ have made progress on this front recently, with the UK passing legislation to create public registries of beneficial ownership—at least for corporations—and Denmark committing to do likewise. Other countries should follow their lead. In December 2014, as part of revisions to the European Union’s Anti-Money Laundering Directive (AMLD), the EU decided to require member states to create central registries of beneficial ownership, and mandated that the information be provided not only to law enforcement and financial institutions, but also to members of the public with a “legitimate interest” in the information—although there is no indication of what interests will be considered legitimate.⁷ GFI urges all EU member states to quickly implement the central registry requirement and to go beyond the standard required by the AMLD to ensure that all information collected is made freely available to the public.

Automatic Exchange of Financial Information

All countries should actively participate in the global movement toward the automatic exchange of financial information as endorsed by the G20 and the OECD. 89 countries have committed to implementing the OECD/G20 standard on automatic information exchange by the end of 2018.⁸ Still, the G20 and the OECD need to do a better job at ensuring that developing countries—especially least developed countries—are able to participate in the process and are provided the necessary technical assistance to benefit from it.

Country-by-Country Reporting

All countries should require multinational corporations to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis, as a means of detecting and deterring abusive tax avoidance practices.

Footnotes

1. Kar and Spanjers, Illicit Financial Flows from Developing Countries: 2003–2012, 15.
2. Open Working Group on Sustainable Development Goals. Open Working Group Proposal for Sustainable Development Goals. New York: United Nations, July 19, 2014. http://sustainabledevelopment.un.org/sdgsproposal.html.
3. Financing for Development Office. Third International Conference on Financing for Development. New York: United Nations. http://www.un.org/esa/ffd/ffd3/.
4. Financial Action Task Force. The FATF Recommendations: International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation. Paris, France: FATF, Feb. 2012. http://www.fatf-gafi.org/topics/fatfrecommendations/documents/fatf-recommendations.html.
5. Global Financial Integrity (GFI). Landmark UK Transparency Law Raises Pressure on White House, Congress. Washington, DC: GFI, Mar. 26, 2015. https://gfintegrity.org/press-release/landmark-uk-transparency-law-raises-pressure-on-white-house-congress/.
6. Christensen, Johan and Anne Skjerning. “Regeringen vil åbne det nye ejerregister for alle.” Dagbladet Børsen (Copenhagen, Denmark), November 7, 2014. http://borsen.dk/nyheder/avisen/artikel/11/97562/artikel.html.
7. European Parliament. Money Laundering: Parliament and Council Negotiators Agree on Central Registers. Brussels, Belgium: The European Parliament, Dec. 17, 2014. http://www.europarl.europa.eu/news/en/news-room/content/20141216IPR02043/html/Money-laundering-Parliament-and-Council-negotiators-agree-on-central-registers.
8. Global Financial Integrity (GFI). GFI Notes Significant Progress on Automatic Information Exchange but Warns that Poorest Countries Are Being Shunned. Washington, DC: GFI, Oct. 30, 2014. https://gfintegrity.org/press-release/gfi-notes-significant-progress-automatic-information-exchange-warns-poorest-countries-shunned/.

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Read the Report

In addition to downloading the full PDF of the study, the full report can be read, shared, and embedded via the Scribd window below.

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About

Global Financial Integrity

Founded in 2006, Global Financial Integrity (GFI) is a non-profit, Washington, DC-based research and advisory organization, which produces high-caliber analyses of illicit financial flows, advises developing country governments on effective policy solutions, and promotes pragmatic transparency measures in the international financial system as a means to global development and security.

Authors

Joseph Spanjers is a Junior Economist at Global Financial Integrity. Prior to joining GFI, Joseph conducted international trade research in Minneapolis and supervised a State Department scholarship program in Morocco. Joseph received a BS in Economics and a BA in Global Studies from the University of Minnesota.

Håkon Frede Foss is an Economics Fellow at Global Financial Integrity. He holds a master’s degree in Economics and Business Administration from the Norwegian School of Economics, as well as bachelor’s degrees from the University of Oslo and the Norwegian School of Economics. He has worked as a financial journalist for Dagens Næringsliv, the Norwegian business daily.

Acknowledgements

The authors wish to thank and acknowledge Raymond Baker (President), Tom Cardamone (Managing Director), Christine Clough (Program Manager), Clark Gascoigne (Communications Director), Rasmus Hansen (Policy Intern), Dev Kar (Chief Economist), Mikael Bélanger Karan (Policy Intern), Uyen Le (Economics Intern), Yuchen Ma (Economics Intern), and Channing May (Policy Associate) 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.

Funding

Funding for this report was generously provided by the Government of Finland.

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