As millions of leaked confidential documents from one of the world’s most secretive companies, Panamania law firm Mossack Fonseca, surface to reveal the extent of the use of tax havens by the rich and powerful, it is worth remembering the global scale and significance of the problem.
The December 2015 report from Global Financial Integrity, “Illicit Financial Flows from Developing Countries: 2004-2013,” finds that developing and emerging economies lost US$7.8 trillion in illicit financial flows from 2004 through 2013, with illicit outflows increasing at an average rate of 6.5 percent per year—nearly twice as fast as global GDP.
As a percentage of GDP, Sub-Saharan Africa suffered the biggest loss of illicit capital. Illicit outflows from the region averaged 6.1 percent of GDP annually. Globally, illicit financial outflows averaged 4.0 percent of GDP.
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We in the West have over the past four or five decades built a global shadow financial system designed to move corrupt money, criminal money, and tax evading and tax avoiding money across borders. Tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, money laundering techniques, and trade misinvoicing are the most commonly used components of this structure. Holes left in the laws of our western countries facilitate the movement of money through this shadow financial system and ultimately into our own economies.
We are dealing with a systemic problem. We have allowed, indeed facilitated, the growth of a non-transparent, secretive global shadow financial system. We have done this under the mistaken impression that it contributes to, and is indeed necessary for, free trade and economic growth. I was in the private sector for 35 years, doing business all over the developing world, before seguing into the think-tank world. I know that business can be done, and be very profitable, without using the global shadow financial system.
The key fallacy in our global crime fighting efforts is the idea that we can make the criminals give up their use of the global shadow financial system, while we continue to use the system for our tax evasion and tax avoidance activities. This is not possible. Crime and tax evasion must be put on the same level. You are being asked to fight the crime while operating within a system that facilitates the crime. You are being asked to enforce the law within a system that is full of holes in the law.
I’ve had the pleasure over the last three-and-a-half years of serving on the High Level Panel on Illicit Financial Flows From Africa, led by former President of South Africa Thabo Mbeki. We’ve travelled all over Africa talking at all levels about the confluence of crime and corruption and tax evasion. It is perfectly clear to us that you cannot deal with these problems piecemeal. You cannot successfully curtail one aspect of these closely related problems if you ignore the others; this is a systemic problem and the solution must address the whole of the system. No continent is so plagued by the confluence of crime and corruption and tax evasion as Africa.
In Nigeria, $6 billion to $12 billion of oil is being stolen annually straight out of the pipelines. Look at poaching in East Africa, decimating animal populations. The drug trade is alive and well in most costal countries, handling aircraft and vessels arriving from Latin America and Asia and departing primarily for Europe. Illegal logging, illegal fishing, illegal gold mining, and more are all facilitated by the shadow financial system.
The High Level Panel very conservatively estimates that $50 billion to $60 billion a year is disappearing illegally out of the continent, more than the total amount of foreign aid and foreign direct investment coming into the continent. Think of this: the shadow financial system has made Africa a net creditor to the rest of the world, a net transferor to the rest of the world. Illicit financial flows are in our judgment the biggest economic impediment to sustainable development. This is unacceptable, not only for Africa but also for all developing countries, and indeed for the whole world.
*Raymond Baker is a member of Young Presidents’ Organization (YPO), the president of Global Financial Integrity and the author of Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System, published by John Wiley & Sons and cited by the Financial Times as one of the “best business books of 2005.” He has for many years been an internationally respected authority on corruption, money laundering, growth, and foreign policy issues, particularly as they concern emerging market and developing countries and impact western economic and foreign interests.