Tuesday, July 15, 2014

New Report from GFI on Illicit Financial Flows: Answering Common Questions

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New Report from GFI on Illicit Financial Flows: Answering Common Questions

December 12, 2013

By EJ Fagan

EJ Fagan was New Media Coordinator for the FTC from 2011-2013. He is now Deputy Communications Director for Global Financial Integrity. You can follow him on Twitter @ejfagan.
Yesterday, Global Financial Integrity released the report, Illicit Financial Flows from Developing Countries 2002-2011, which found that developing countries lost $947 billion in illicit financial flows in 2011, and $5.8 trillion over the ten-year study period.
The subject of illicit financial flows is still a new one, and can be confusing. To help answer some common questions about the report, we’ve put together a quick FAQ below:
What Are Illicit Financial Flows? What Does This Report Measure?
Illicit financial flows are cross-border transfers of funds that are illegally earned, transferred, or utilized. These kinds of illegal transactions range from corrupt public officials transferring kickbacks offshore, to tax evasion by commercial entities, to the laundered proceeds of transnational crime.
Illicit Financial Flows from Developing Countries 2002-2011 does not measure all illicit financial flows. It uses two primary methodologies to estimate two different methods for illegally transferring funds across borders.
The first, Hot Money Narrow (HMN), looks at money that has disappeared from the balance of payments. GFI infers that is likely to represent kickbacks, bribery, and other forms of unrecorded wire transactions. Countries that are rich in natural resources, like oil, tend to have higher HMN numbers relative to others. HMN accounts for about 20.3% of illicit financial flows estimated in this report.
The second, Gross Excluding Reversals (GER), looks at trade misinvoicing, a common method used by commercial entities for the cross-border movement of illegal money. Exporters and importers manipulate trade invoices to over-represent or under-represent the value of the goods they are shipping. Often, this will involve re-invoicing the goods through a secrecy jurisdiction. The result is that a certain sum of money disappears on one side of the border—either from the importer or exporter. We detect this by comparing what a country says it is exporting, and what the rest of the world says it imports from that country, and vice versa.
Certain types of trade misinvoicing are used for different purposes. Drug cartels and terrorist networks have been known to use it to launder money. Importers and exporters use it to evade customs duties. Other tax evaders, criminals and corrupt public officials in developing countries use it to hide wealth or ill-gotten gains. GFI’s methodology is unable to distinguish between the different sources of trade mispricing.
What Impact Do Illicit Financial Flows Have?
US$947 billion is a tremendous amount of money to drain out of developing countries. It represents roughly ten times the amount of official development assistance (ODA) flowing in from advanced economies (.xls). In fact, a report by GFI found that even after you account for all types of financial flows, including investment, remittances, debt forgiveness, and natural resource exports, the continent of Africa is a net creditor to the world. GFI has not yet applied this analysis to the rest of the developing world.
Further, illicit financial flows have a subversive effect on government in a few ways. First, they encourage corruption, by allowing corrupt public officials to siphon money away from public coffers and into secret offshore bank accounts. Second, every country case study that GFI has performed has shown that increased illicit financial flows grow a country’s underground economy. As the underground economy expands, criminal elements become more powerful and more difficult for law enforcement to fight. To make matters worse, the research also shows that as a country’s underground economy grows, criminals respond by moving more money out of the country, and so on. This vicious cycle helps to explain why illicit flows grew at 10% per year from 2002-2011.
Finally, illicit financial flows are one of the world’s biggest, and least talked about, drivers of inequality. Those with the wealth and resources to use highly sophisticated money laundering techniques to smuggle money out of the country are almost exclusively powerful and affluent, and their victims are ordinary citizens.
What About Abusive Transfer Pricing?
Abusive transfer pricing is frequently cited as a resource drain out of developing countries, and can easily be confused with trade misinvoicing. Multinational corporations use transfer pricing to allocate costs and revenues between their webs of subsidiaries. Abusive transfer pricing occurs when the multinational corporation seeks to distort the prices its subsidiaries pay each other in transactions solely for the purpose of shifting profits from high-tax jurisdictions—such as most developing countries—to low-tax jurisdictions, like tax havens.
The trade misinvoicing numbers in this report should not be confused with abusive transfer pricing. Abusive transfer pricing generally does not involve two different invoices on different sides of the border. Instead, abusive transfer pricing involves placing false values on single invoices. This is a serious problem for developing countries, but it is not detected by GFI’s trade misinvoicing methodology. As abusive transfer pricing tends to occur with one single invoice on both sides of the border, there is no discrepancy between what is reported in the exporting country and what is reported in the importing country. Without the discrepancy, GFI cannot detect it.
The motivations and driving factors behind abusive transfer pricing and trade misinvoicing may also differ, requiring potentially different policy solutions. Abusive transfer pricing is driven mainly by a motivation to reduce corporate taxes for an entity, while trade misinvoicing is often used to move or launder money for tax evasion as well as many other crimes.

New Report from GFI on Illicit Financial Flows: Answerin...
Yesterday, Global Financial Integrity released the report, Illicit Financial Flows from Developing Countries 2002-2011, which found that developing cou...

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Posted  Tuesday, July 15, 2014 |  by- PAUL OGEMBA

Kamani sues govt over Anglo Leasing information

Tycoon Deepak Kamani has moved to court to stop the Kenyan government from releasing information

Business tycoon Deepak Kamani has moved to court to stop the Kenyan government from releasing information to the Swiss authorities in relation to the controversial Anglo Leasing contracts.
Mr Kamani, his father Chamanlal Kamani and his brother Rashmi Kamani want Attorney General Githu Muigai barred from acting on a request by the Swiss federal attorney for information about them relating to money laundering and dealings with companies implicated in the Anglo Leasing scandal.
(Read: Deepak Kamani quizzed over Anglo Leasing - VIDEO)
Through lawyer Paul Nyamodi, they argued that the AG had publicly stated he would act on the request that alleges that the three were involved in money laundering between 1999 and 2004 and could be extradited to Switzerland to face prosecution.
“From the face of the request, it is apparent that any intended prosecution of the petitioners will be a violation of their rights if the AG goes ahead without giving them an opportunity to be heard,” said Nyamodi.
Justice Isaac Lenaola, however, declined to grant temporary orders restraining the AG from releasing the records sought by the Swiss government.
“I don’t think there is any prima facie case to grant interim orders before the hearing of the petition. There is nothing to warrant the orders at this stage and direct the respondents to file their replies before the hearing,” ruled Lenaola.
The Kamanis were linked to companies that were awarded 13 out of 18 Anglo Leasing security contracts. The remaining five went to Sri Lankan businessman Anura Perera, who was recently paid Sh1.4 billion by the government.
(Read: Anura Perera, the billionaire behind questionable deals)
The Swiss authorities wrote to Prof Muigai on June 3 requesting records of payments the government made to Anglo Leasing companies associated with the Kamanis, the bank documentations of the transfer of money and any deed of property transferred.
They further wanted recorded witness statements, evidence of any corrupt payment made by the government to the companies and any document likely to confirm the three were engaged in money laundering.
The companies listed as having benefitted from the Sh18 billion contracts were Sound Day Corporation, Apex Finance Corporation, Anglo Leasing and Finance Limited, Infotalent Limited, Globetel Incorporated and Midland Finance and Securities Limited.
Mr Nyamodi argued that the request violates the provisions of the Mutual Legal Assistance Act since the alleged particulars of the offence do not constitute an offence in Kenya.
“The request undermines the sovereignty of the country by questioning the contractual capability of the contracts the government entered with the companies and does not disclose any legal basis or criminal liabilities on the petitioners,” said Nyamodi.
In any event, Mr Nyamodi submitted that the Ethics and Anti-Corruption Commission is currently conducting investigations into the matter and any report given to the Swiss authorities would prejudice the investigations.
Mr Deepak Kamani supported the application through an affidavit alleging that the request was a punishment for refusing to bribe the Swiss ambassador to Kenya.
He stated that before the request was made, the ambassador, Mr Jacques Pitteloud, met him and demanded that he pay US$55 million (Sh4.5 billion) to the Swiss government as settlements for the contracts his companies entered with the government.
“I told Mr Pitteloud that I could not afford the amount and even if I could afford I would not part with any money since I had done nothing wrong. It appears the request was a fulfilment of his promise to expect a rough time for failing to cooperate,” swore Kamani.
He added that the request was part of a concerted effort to force them into settling Anglo Leasing-related contracts in an unlawful manner.
Justice Lenaola directed the AG to respond to the petition within 14 days and scheduled the hearing for August 5.

Kamani sues govt over Anglo Leasing information
Kamani sues govt over Anglo Leasing information
Posted  Tuesday, July 15, 2014 |  by- PAUL OGEMBA Kamani sues govt over Anglo Leasing information

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Crime, corruption, and tax evasion drained US$946.7 billion from the developing world in 2011, up more than 13.7 percent from 2010. These findings by Washington based Think Tank Global Financial Integrity, which peg cumulative illicit financial outflows from developing countries at US$5.9 trillion between 2002 and 2011 are part of a new study. "As the world economy sputters along in the wake of the global financial crisis, the illicit underworld is thriving – siphoning more and more money from developing countries each year," says GFI President Raymond Baker.

Illicit Financial Outflows from Developing World Nearly $6 Trillion in Decade between 2002 and 2011

December 19, 2013 | Global Financial Integrity
The report Illicit Financial Flows from Developing Countries: 2002-2011 is GFI’s 2013 annual update on the amount of money flowing out of developing economies as a result of crime, corruption and tax evasion, and it is the first of GFI’s reports to include data for the year 2011.
GFI President Raymond Baker criticizes: “Anonymous shell companies, tax haven secrecy, and trade-based money laundering techniques drained nearly a trillion dollars from the world’s poorest in 2011, at a time when rich and poor nations alike are struggling to spur economic growth.  While global momentum has been building over the past year to curtail this problem, more must be done.  This study should serve as a wake-up call to world leaders: the time to act is now.”
Authored by GFI Chief Economist Dev Kar and GFI Junior Economist Brian LeBlanc, the study is the first by GFI to incorporate trade data on re-exports from Hong Kong and the first to integrate bilateral trade data for those countries which report it—making this report the most accurate analysis of illicit financial outflows produced by GFI to date.
“The estimates provided by our new methodology are still likely to be extremely conservative as they do not include trade misinvoicing in services, same-invoice trade misinvoicing, hawala transactions, and dealings conducted in bulk cash,” explained Dr. Kar, who served as a Senior Economist at the International Monetary Fund before joining GFI in January 2008.  “This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities, which are often settled in cash, are not included in these estimates.”
The US$946.7 billion of illicit outflows lost in 2011 is a 13.7 percent uptick from 2010—which saw developing countries hemorrhage US$832.4 billion—and a dramatic increase from 2002, when illicit outflows totaled just US$270.3 billion.  The study estimates the developing world lost a total of US$5.9 trillion over the decade spanning 2002 through 2011.
“It’s extremely troubling to note just how fast illicit flows are growing,” stated Dr. Kar.  “Over the past decade, illicit outflows from developing countries increased by 10.2 percent each year in real terms—significantly outpacing GDP growth.  This underscores the urgency with which policymakers should address illicit financial flows.”
Moreover, the US$946.7 billion that flowed illicitly out of developing countries in 2011 was approximately 10 times the US$93.8 billion of net official development assistance (ODA) [XLS | 49 KB] that went into these specific 150 developing countries that year. This means that for every US$1 in economic development assistance going into a developing country, roughly US$10 of capital are lost via illicit outflows.
“Illicit financial flows have major consequences for developing economies,” explained Mr. LeBlanc, the co-author of the report.  “Poor countries hemorrhaged nearly a trillion dollars from their economies in 2011 that could have been invested in local businesses, healthcare, education, or infrastructure.  This is nearly a trillion dollars that could have been used to help pull people out of poverty and save lives.  Without concrete action, the drain on the developing world is only going to grow larger.”
Dr. Kar and Mr. LeBlanc’s research tracks the amount of illegal capital flowing out of 150 different developing countries over the 10-year period from 2002 through 2011, and it ranks the countries by the volume of illicit outflows. 
Sub-Saharan Africa Suffers Biggest Relative Problem
The new report is also the first GFI study to examine illicit financial outflows on a regional basis as a percent of GDP, determining that Sub-Saharan Africa—whose illicit outflows averaged 5.7 percent of GDP each year—suffers the most due to such outflows.  Globally, annual illicit financial outflows averaged 4.0 percent of GDP.

Illicit Financial Flows from Developing World Nearly $6 Trillion in last Decade


Photo: Siegfried Modola/IRIN
Nairobi: Kenya cleared in anti-money laundering review.
Kenya has been taken off the list of countries at high risk for money laundering and terrorist financing, the government said on Tuesday.
In 2010, the Financial Action Task Force (FATF), the official global watchdog, placed Kenya on its "grey list" of high risk countries failing to combat money laundering, drug trafficking, corruption and terrorism.
Following a visit to Kenya in May and a review at the FATF meeting in Paris in June, Kenya has been given the all clear. This is welcome news for the government which plans to strike a deal with the City of London to build Nairobi into a major international financial hub.
"On the basis of the on-site visit report, the FATF concluded that Kenya has established the legal and regulatory framework to address the strategic deficiencies that the FATF had identified," Henry Rotich, cabinet secretary for the treasury, said in a newspaper statement.
"This is an achievement we all should embrace... I therefore wish to take this opportunity to thank all those who have been involved in this process for their relentless efforts to achieve this milestone."
As a result, Kenya no longer has to give public updates on progress made in implementing its anti-money laundering regime.
FATF was set up in 1989 to set international standards on anti-money laundering and combating terrorist financing.
During the review, FATF found that Kenya had ensured an effective financial intelligence unit, introduced laws to identify and freeze terrorist assets, established procedures for confiscating funds related to money laundering and imposed sanctions against people who did not comply with anti-money laundering requirements.
Data calculated for Thomson Reuters Foundation by Global Financial Integrity (GFI), a Washington-based financial watchdog, showed the amount of illicit money entering Kenya from faulty trade invoicing, crime, corruption and shady business activities increased more than five-fold in the last decade to equal roughly 8 percent of Kenya's economy.
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