A record $991.2bn in illicit capital flowed out of developing and emerging economies in 2012 — facilitating crime, corruption, and tax evasion, according to the latest study released by US-based Global Financial Integrity (GFI).
The study is the first GFI analysis to include estimates of illicit financial flows for 2012.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
The report — GFI’s 2014 annual global update on illicit financial flows — pegs cumulative illicit outflows from developing economies at US$6.6 trillion between 2003 and 2012, the latest year for which data is available.
Titled "Illicit Financial Flows from Developing Countries: 2003-2012," the report finds that illicit outflows are growing at an inflation-adjusted 9.4 percent per year — roughly double global GDP growth over the same period.
"As this report demonstrates, illicit financial flows are the most damaging economic problem plaguing the world’s developing and emerging economies," said GFI President Raymond Baker, a longtime authority on financial crime.
"These outflows — already greater than the combined sum of all FDI and ODA flowing into these countries — are sapping roughly a trillion dollars per year from the world’s poor and middle-income economies."
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalData"Most troubling, however, is the fact that these outflows are growing at an alarming rate of 9.4 percent per year — twice as fast as global GDP," continued Mr. Baker.
"It is simply impossible to achieve sustainable global development unless world leaders agree to address this issue head-on. That’s why it is essential for the United Nations to include a specific target next year to halve all trade-related illicit flows by 2030 as part of post-2015 Sustainable Development Agenda."
Findings
Authored by GFI Chief Economist Dev Kar and GFI Junior Economist Joseph Spanjers, the study reveals that illicit financial flows hit an historic high of US$991.2 billion in 2012 — marking a dramatic increase from 2003, when illicit outflows totaled a mere US$297.4 billion. Over the span of the decade, the report finds that illicit financial flows are growing at an inflation-adjusted average rate of 9.4 percent per year.
Still, in many parts of the world, the authors note that illicit flows are growing much faster — particularly in the Middle East and North Africa (MENA) and in Sub-Saharan Africa, where illicit flows are growing at an average annual inflation-adjusted rate of 24.2 and 13.2 percent, respectively.
Totaling US$6.6 trillion over the entire decade, illicit financial flows averaged a staggering 3.9 percent of the developing world’s GDP. As a share of its economy, Sub-Saharan Africa suffered the largest illicit financial outflows — averaging 5.5 percent of its GDP — followed by developing Europe (4.4 percent), Asia (3.7 percent), MENA (3.7 percent), and the Western Hemisphere (3.3 percent).
"It’s extremely troubling to note just how fast illicit flows are growing," stated Dr. Kar, the principal author of the study. "Over the past decade, illicit outflows from developing countries increased by 9.4 percent each year in real terms, significantly outpacing economic growth. Moreover, these outflows are growing fastest in and taking the largest toll — as a share of GDP — on some of the poorest regions of the world. These findings underscore the urgency with which policymakers should address illicit financial flows."
Trade Misinvoicing Dominant Channel
The fraudulent misinvoicing of trade transactions was revealed to be the largest component of illicit financial flows from developing countries, accounting for 77.8 percent of all illicit flows — highlighting that any effort to significantly curtail illicit financial flows must address trade misinvoicing.
Major Global Development Implications
The US$991.2 billion that flowed illicitly out of developing countries in 2012 was greater than the combined total of foreign direct investment (FDI) and net official development assistance (ODA), which these economies received that year. Illicit outflows were roughly 1.3 times the US$789.4 billion in total FDI, and they were 11.1 times the US$89.7 billion in ODA that these economies received in 2012.
"Illicit financial flows have major consequences for developing economies," explained Mr. Spanjers, the report’s co-author.
"Emerging and developing countries hemorrhaged a trillion dollars from their economies in 2012 that could have been invested in local businesses, healthcare, education, or infrastructure. This is a trillion dollars that could have contributed to inclusive economic growth, legitimate private-sector job creation, and sound public budgets. Without concrete action addressing illicit outflows, the drain on the developing world is only going to grow larger."
