The benevolence of developed nations and their resolve to eradicate poverty and push poorer states of the global south up the development ladder is evidenced by the $125bn (£102bn) in aid that is transferred to their former colonies each year. But aid is not the only benefit that reaches former imperial possessions. Other financial resources include foreign investment and trade flows, non-financial transfers such as debt cancellation and unrequited transfers like workers’ remittances.
In 2012, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. In the same year, some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. This is a reversal of the accepted development narrative since capital is effectively flowing in reverse.
These large outflows consist of payments on debt which included $4.2tn in interest payments since 1980, which dwarfs the aid that poor countries received during the same period. Struggling states also suffer from the outflows of unrecorded illicit capital seepages. It is estimated that poor countries have lost a total of $13.4tn through unrecorded capital flight since 1980. Most unrecorded leakages take place when money is spirited out of developing economies and hidden in countries listed on the Financial Secrecy Index, which ranks jurisdictions according to their secrecy and the scale of their offshore financial activities.
An estimated $21 to $32 trillion of private financial wealth is located, untaxed or lightly taxed in secrecy jurisdictions around the world. In 2012, developing countries lost $700bn through trade misinvoicing. During that period, the inflow of aid was one fifth of that amount. Combating illicit financial flows (IFFs) is expressly included as part of the UN 2030 Development Agenda under Target 16.4. Other supporting measures include- reclaiming lost tax revenue which will contribute to Target 17.1 that aims to ‘Strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection’, with the corresponding indicators 17.1.1 ‘Total government revenue as a proportion of GDP, by source’ and 17.1.2 ‘Proportion of domestic budget funded by domestic taxes’. Indirectly, the money collected and saved will be able to address all other goals and targets of the sustainable development plan. The United Nations 2030 Sustainable Development Agenda is part of a plan of action for people, planet and prosperity.
Involvement in the craft of IFFs is motivated by the wish to avoid stringent capital controls through trade misinvoicing and operates as well through profit shifting, capital flight, direct and indirect tax avoidance, tariff and non-tariff measures avoidance and fraudulent acquisition of tax rebates and export subsidies. Measuring IFFs is not straightforward. The World Bank’s definition is not universally accepted. In some jurisdictions ‘illicit’ can be understood as illegal as well as ‘forbidden by rules or custom’, implying that the flows may not necessarily be illegal. IFFs can thus include ‘legally ambiguous transfers’ such as profit shifting through transfer pricing. Weak legal frameworks in many poor countries may render such oblique practices within the scope of the law, though ‘normatively unacceptable’.
IFFs embrace many modalities including hard cash, smuggling of gold and other precious and scrap metals, P2P money, bitcoin and other cryptocurrencies. Described in some quarters as trade-theft, it also includes same-invoice faking. Companies and corporations sometimes report false prices on their trade invoices in order to spunk money away to secrecy jurisdictions. Using the tactic of ‘same-invoice faking’ merchants sometimes shift profits illegally among subsidiaries by mutually faking trade invoice prices on both sides to evade local tax structures. Some companies shift capital to a related subsidiary which may enjoy the status of being a tax resident company in jurisdictions where the tax rate may effectively be zero or not far from it and where funds are hard to trace. Since 1980, unrecorded capital flight and illicit capital flight in developing countries amounted to a loss of $13.4tn.
Same-invoice faking is very difficult to detect, but it is estimated that it amounts to losses of about $700bn per year. These figures take into account theft through trade in goods. If services were to be considered, it is estimated that the net resource outflows can reach as much as $3tn per year. This is nearly 24 times more than the aid budget. For every $1 of aid that developing countries receive, they lose $24 in net outflows. These outflows bundle off an important source of revenue to finance development, causing worsening living standards and dwindling economic growth rates in poor countries. One of the main tenets of Flag Theory is that one should have a second citizenship, as it is an important part of international diversification. But just having other passports doesn’t end your tax obligations.
