Trade fraud sapping economies of developing countries

Developing countries have lost at least $620 billion to illegal financial dealings within a 10-year period, Global Financial Integrity (GFI) said in a report released Monday. The persistent illicit money flows, both in and out of the countries, continue to cause economic and social repercussions.

Illicit financial flow, which is the illegal movement of money or capital between countries, grew between 8.5 and 10.1 percent between 2005 and 2014. By 2014, illicit inflows reached a minimum of $1.4 trillion, the report said. The combined flows resulted in about 14 to 24 percent of the countries’ merchandise trade.

“This is a staggering figure, underlining the enormous harm done to developing countries by illicit financial flows, however they are generated,” said Raymond Baker, GFI president. “Maximizing domestic resources and achieving sustainable development goals is dependent upon substantially curtailing illicit financial flows.”

Sub-Saharan Africa has the highest loss from illegal money flow at about 5.3 to 9.9 percent of its total trade in 2014. Developing Europe, which includes countries such as Hungary and Turkey, has the highest illicit gains, between 12.4 and 21 percent of the region’s total trade.

The illegal money movement occurs mostly through fraudulent invoicing, which accounts for about 87 percent of the illicit flows. Heather Lowe, GFI legal counsel and director of government affairs, told me the illicit flow includes tax evasion, avoiding customs duties, and covering the movement of bribes, among other sources. Illegal gains negatively affect a country’s tax revenue and could undercut the price of domestic goods. In most cases, the money either ends up in tax havens or international saving centers, she added. Illicit outflows result in some countries’ governments losing their revenue, while some others battle with increased inequality and could lose their legitimacy.

“Over time, such social corrosion exacerbates deterioration, making it more and more difficult for a country to achieve and sustain adequate living standards for its citizens,” the report said.

GFI called on the governments of developing countries to focus on curbing trade fraud by significantly boosting customs enforcement. Customs officers should receive appropriate training and information such as the latest commodity-level world market pricing information. The report also called for the enforcement of anti–money laundering laws and encouraged all countries to mandate multinational companies publicly disclose their financial information on a country-by-country basis.

“Illicit financial flows must be curtailed if domestic resource mobilization initiatives are to stand any chance of succeeding,” GFI said.