Illegal capital flight peaked during 2008 political chaos

[Naveed Yaseen]

By Mansoor Ahmad
LAHORE: Illegal flight of capital is a norm in Pakistan that reached its peak during the political chaos of 2008, while during the 2002-06 period, according to the US-based Global Financial Integrity report, it ranged from $2.03 to $3.06 billion per year.

The report states that China, with average illegal outflows of $289 billion during 2002-06 period, was on top while India with illegitimate outflows of $27.34 billion came in at number 5. Pakistan with $3.067 billion came in at the 36th position amongst 160 countries surveyed by Global Financial Integrity.

The report states that legal flight of capital is recorded on the books of the entity or individuals making the transfer, and earnings from interest, dividends and realised capital gains normally return to the country of origin. The methods used to transfer money illegally outside the country, as mentioned in the report, are generally practiced in Pakistan.

About illegal flight of capital, GFI report points out that it is intended to disappear from any record in the country of origin, and earnings on the stock of illegal capital flight outside of a country do not normally return to the country of origin.

Illegal capital flight can be generated through a number of means that are not revealed in national accounts or balance of payments figures, including trade mispricing, bulk cash movements, hawala transactions, smuggling and more.

The greater part of unrecorded flows are indeed illicit, violating the national criminal and civil codes, tax laws, customs regulations, VAT assessments, exchange control requirements and banking regulations of the countries out of which unrecorded/illicit flows occur.

The GFI report reveals that according to its estimates, illicit financial flows out of developing countries are some $850 billion to $1 trillion a year. Even this estimate according to GFI is conservative. It does not include, for example, major forms of value drainages out of poorer countries not represented by money, namely:

1) Trade mispricing that is handled by collusion between importers and exporters within the same invoice, not picked up in mispricing models based on IMF Direction of Trade Statistics, a technique utilised extensively by multinational corporations.

2) The proceeds of criminal and commercial smuggling such as drugs, minerals, and contraband goods.

3) Mis-priced asset swaps, where ownership of commodities, shares, and properties are traded without a cash flow.

Non-trade capital flight often involves the acquisition of cash or other instruments payable to the bearer.

The acquired currency, say dollars, could exit the country in a number of ways such as (i) by someone carrying suitcases full of cash, (ii) through professional courier service, (iii) by mail or, (iv) through electronic money transfers that are unlikely to be recorded in the weak bank reporting systems in many poor developing countries.

“Hawala-style” swap arrangements are impossible to trace using official statistics and may also be used to illegally send money out of the country. Even traded goods involving customs invoices and declarations cannot capture mis-invoicing concluded by word of mouth and never reported on official documents (through same-invoice faking).

Smuggling is another type of trade transaction that is not captured in customs documents. Smuggling tends to be rampant when there are significant differences in cross-border prices in certain goods between countries that share a long and porous frontier. The profits from smuggling often generate illicit flows as smugglers seek to shield their ill-gotten gains from the scrutiny of officials, even as smuggling distorts the quality of bilateral trade.

The resulting trade data distortions may indicate that there is inward flow of illicit capital into a country when in fact the reverse is true.

Apart from the macroeconomic factors that give rise to “commercial dirty money,” lack of governance and political instability also drive the “corrupt” and “criminal” components of illicit outflows.

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