Report: Corruption Cheats Developing Countries of Needed Money

Jeffrey Young
December 16,2013

WASHINGTON — The developing world needs huge sums of money to address its many problems with health, housing, education, and more. A new report says corrupt practices by multinational companies, their government enablers, and others, however, are depriving people of a better life.

A financial watchdog group, Washington-based Global Financial Integrity [GFI], says astounding sums of money are extracted every year from African, Asian, and Latin American nations. GFI’s new report says that in 2011, some $947 billion was taken out of these countries through what it calls illicit capital outflows.

GFI Director Raymond Baker said the 10-year total is even more staggering. “Over the decade from 2002 to 2011, we’re talking about $5.9 trillion that have moved out of the developing countries. Nothing is as harmful as this loss of capital to the poorer countries of the world.”

GFI’s report says China tops the list for that decade, with slightly more than $1 trillion in illegal outflows. Russia was second, with $880 billion. Mexico came in third with nearly $462 billion extracted. The highest ranked African nation was Nigeria, at 10th on the list, with more than $142 billion.

D
ifferent corrupt practices contribute to these illicit capital outflows, according to Alex Cobham of the Center for Global Development in London.

“Partly, it’s about the proceeds of crime. It’s the laundering, particularly, of drugs, of drug proceeds, and the proceeds of human trafficking," said Cobham. "But it’s also corruption itself, the theft of state assets - but that tends to be a small component. The largest component, from almost all of the estimates that we have, for almost all of the countries, is commercial tax evasion.”

Both Baker and Cobham say that tax evasion is largely accomplished through something called mispricing of trade - undervaluing minerals, goods, and other exports to tax authorities. Mispricing of trade also provides an avenue of corruption through false invoices providing kickbacks.

Sub-Saharan Africa is especially hit hard by illicit capital extraction. GFI’s report says in 2011, that region lost 5.7 percent of its gross domestic product, largely through tax avoidance done by mispricing natural resources and manufactured goods.

Global Financial Integrity’s director says developed nations must take the lead to reduce the massive extraction of capital that keeps some states and their people impoverished.

“The short answer to curtailing the problem of illicit financial flows is transparency - greater transparency in the global financial system. This means getting rid of disguised corporations, this means exchanging tax information across borders, this means companies automatically reporting their sales and profits and taxes paid in every jurisdiction where they’re in business,” said Baker.

Baker and others say that if developing nations could get their fair share from what is produced and extracted, they would have much more money to spend on public health, schools, housing, and other essential needs.