Stolen asset recovery
Illicit financial flows growing faster than global
economy, reveals new report
Research
from Global Financial Integrity shows that prevention is the best cure for the
$1tn a year that is stolen from the developing world
In
Guatemala, providing officials with world pricing information has helped stem
illicit financial flows, which have a negative impact on development.
Photograph: Johan Ordonez/AFP/Getty Images
Tuesday 16 December
2014 00.01 GMT
$991.2bn
was funnelled out of developing and emerging economies through crime,
corruption and tax evasion in 2012 alone, according to the latest
report by the Washington-based
group, Global Financial Integrity (GFI),
published on Monday.
The
report finds that, despite growing awareness, developing countries lose more
money through illicit financial flows (IFF) than they gain through aid and foreign
direct investment. And IFFs are continuing to grow at an alarming rate – 9.4% a
year. That’s twice as fast as global GDP growth over the same period. Though
China tops the list of affected countries in terms of the total sum of money
lost, as a percentage of the economy, sub-Saharan Africa was
the worst affected region as illicit outflows there average 5.5% of GDP.
“The
report shows a continuation of the trillion dollar-a-year leak from developing
countries,” says Raymond Baker, GFI president. “Why is it growing? Because it
remains so easy to do. We have not turned the tide on the ease with which money
can be shifted out of developing countries.”
There
are lots of ways to get money out of a country undetected but the easiest is
through trade misinvoicing, which is the overpricing of imports and the
underpricing of exports – and accounts for 77% of all illicit financial flows.
“Suppose you live in Cameroon,” says Baker, “and want to get money out. As an
importer, you ask your supplier abroad to increase the price by 20% and invoice
you for 120%. When you pay that extra 20% is put into an account for you.” The
practice works in exactly the same way for exports: an exporter sells a product
for less than it’s worth (50%) so that the balance of its true value (the
remaining 50%) is paid into a foreign private account instead.
As
these flows by their very nature are intended to be kept secret, GFI combs
through balance of payments data that governments submit every year with the
International Monetary Fund. They also look for gaps in trade statistics: “If
Cameroon says it exported $100m to France but France says it imported $300m,
then exports have been underpriced by $200m,” explains Baker.
So
what then must governments do to stop this hemorrhaging? Could policymakers get
the money back?
The Stolen Asset Recovery Initiative (Star)
at the World Bank exists to assist governments with the latter issue. While the
thought of identifying, seizing and repatriating stolen assets sounds like
deeply satisfying investigative work, it is no easy task. The Anti-corruption
Resource Centre calls asset recovery “one
of the greatest challenges for the global anti-corruption movement.”
In
China, the 2014 “fox hunt” was an attempt to recover lost assets to the tune of
$128.8bn but the project had limited success. The web editor of China Daily, Si
Huan, considers why:
“The
legal prerequisite for recovering officials’ illicit assets is a court verdict
declaring them guilty of corruption. Without such a verdict, Chinese judicial
officials cannot approach their foreign counterparts for help. And since the
majority of corrupt officials are yet to be arrested, China cannot
recover their ill-begotten assets.”
The
challenge of coordinating judicial practices across international borders is
just one of the reasons why, despite support from governments and international
institutions, the amounts recovered and returned has been woefully small
compared to the vast sums of illicit flows. In a
recent paper by Star and the OECD,
between 2006-2012, $2.6bn of allegedly stolen assets were frozen, and just
$423.5m returned.
But
the process of asset recovery can also be discouragingly long. According
to Star, earlier this year the
government of Liechtenstein returned $225m to Nigeria, following 14 years of
legal maneuvering. It is for these reasons that Baker recommends measures that
prevent money from being lost over those that seek to recover funds once lost.
He calls for the establishment of public registries that make the true owners
of companies and other legal entities accessible and says banks should be
required to know the “beneficial owners” of any account opened at their
institution.
The
lowest hanging fruit he suggests is to equip customs authorities with
information on world market pricing. This information would allow them to check
that goods are being imported or exported at their true value by seeing what
the normal market price is and comparing that against invoices.
Baker
argues that it would only cost $300m to equip every developing country in the
world with the data they need to curtail misinvoicing. Recognising that world
pricing data is not sufficient, he adds: “Yes, they would need enforcement
mechanisms, but most customs departments have that. They just don’t have the
data to put to use.” This information Baker says, is helping the government of
Guatemala to curtail illicit financial flows though he concedes that “Guatemala
continues to have a challenge with illegal money going out and coming in.”
But
John Christensen, director of the Tax
Justice Network, thinks change will
not be top-down. “It is the political and business elite who are the problem so
it is hard to expect them to lead.”
Instead
Christensen advocates for more support to civil society organisations and
especially to investigative journalists. Building the capacity of these groups
to expose illicit financial flows “raises public awareness and builds political
pressure.” He cites the Middle
East and North Africa as good
examples. Spurred on by the revelations of the Arab Spring, networks of NGOs in
Tunisia and Egypt have campaigned for stolen assets to be frozen and returned.
Christensen
called this “a defining moment” but accepts that change will take a while.
Ultimately to recover assets while closing the door to further illicit flows
are two sides of the same coin.
Certainly working with customs officials,
journalists and NGOs may have a more immediate impact but in what Christensen
identifies as “the sophisticated infrastructure that creates a market for
secrecy and enables criminal activity to thrive,” recovering stolen assets will
also go a long way to ending impunity.
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