Asia tops the developing world in everything -- including illicit financial outflows, as revealed by the Global Financial Integrity project (GFI) in its recent report, "Illicit Financial Flows from Developing Countries Over the Decade Ending 2009".

And within Asia, China of course leads the way with illicit financial outflows of $2.74 trillion over the decade, followed by Malaysia with $350 billion.

How do illicit financial outflows actually occur?  The GFI identifies two types.  First, there is trade mispricing.  Second, there are unrecorded capital flows like the transfer of the proceeds of bribery, theft, kickbacks and tax evasion.  For the developing world, trade mispricing accounted for 54% of capital flight over the period 2000-2009, whereas unrecorded capital flows represented 46%.

Asia leads with 45% of the developing world's illicit financial outflows, followed by the Middle East and North Africa (MENA) with 19%, developing Europe with 17%, Western Hemishere with 15% and Africa with 5%.  Africa has seen the strongest growth (22%) in illicit financial flows, followed by MENA (20%), developing Europe (17%), Asia (6%), and Western Hemisphere (4%).

Over the decade, the developing world's top countries for illicit financial outflows are China ($2.74 trillion), Russia ($504 billion), Mexico ($501 billion), Saudi Arabia ($380 billion) and Malaysia ($350 billion).  Other Asia countries in the top 20 include: the Philippines (13th with $121 billion), Indonesia (14th with $119 billion) and India (15th with $104 billion).  90% of the illicit flows from Asia were transferred abroad through trade mispricing.

Trade mispricing is a phenomenon whereby individuals and corporations use fraudulent commercial invoices to smuggle money out of a country, usually in order to facilitate tax evasion.  They manipulate the price and quantity of traded goods to send money offshore, and then collect the extra money later, usually in a bank account in a tax haven or secrecy jurisdiction.

These estimates of illicit financial outflows are deeply troubling in many respects:

First, they are very conservative since they do not include smuggling, the mispricing of cross-border services, or the mispricing of merchandise trade that occurs within the same invoice exchanged between exports and importers.

Second, the illicit outflows measured in this report are approximately 10 times the amount of official development assistance going into developing countries.  This means that for every $1 in economic development assistance which goes into a developing country, $10 is lost via these illicit outflows.

Third, the tax revenue loss represents teachers that are not hired, hospitals that are understaffed, and additional taxes levied on those already paying their fair share.  The very real cost in human suffering and loss of life from tax evasion throughout the developing world is massive.

Fourth, the massive illicit outflows from China may be an indicator of the country's inherent fragility.  This giant rip-off can only weaken the country, and provoke social and political unrest.  Moreover, it is also suggestive of Chinese elites' lack of confidence in their country's future.

In this context, China's elite is also very active getting passports or permanent resident visas in countries like Australia and Canada.  Further, there is much talk around the traps in Australia at the moment of Chinese investors being very keen to invest as much money as possible as a hedge against the forthcoming leadership change in China.  Indeed, Chinese buyers are right now the leading investors in the Australian housing market, at a time when large numbers of Chinese citizens do not have adequate housing.

As we have suggested in other articles, China may be a lot more fragile than many people think.

References:

Illicit Financial Flows from Developing Countries Over the Decade Ending 2009

http://iffdec2011.gfintegrity.org/