Illegal Cross-Border Money Flows Starve Developing Countries of Resources, Expert Says

A United Nations advisory body has urged governments and the global business community to help prevent and recover illicit cross-border financial flows (IFFs) as part of efforts to get the finance sector behind the long-term goals of the UN’s 2030 Agenda for Sustainable Development.

“It is the (illicit) financial flows that not only deprive developing countries of financial resources for development, but also undermine the willingness of developed countries to provide development assistance,” said Yu Yongding, a member of the UN’s High-Level Panel on International Financial Accountability, Transparency and Integrity (FACTI), on Wednesday in an online panel discussion on the issue jointly hosted by Caixin.

Yu is also a senior fellow at the Chinese Academy of Social Sciences (CASS), a government-backed think tank.

Formed in March 2020, the FACTI Panel aims to improve the world’s chances of achieving sustainable development by making recommendations that both strengthen current efforts to combat illicit financial flows, and close remaining gaps in the international system.

A final report released in February by the FACTI Panel said IFFs from cross-border corruption, money laundering, tax abuse, and other transnational financial crimes drain considerable resources from sustainable development. These resources, if recovered or retained, have immense transformative potential in reducing inequalities, improving people’s well-being and socioeconomic and health benefits, the report said.

Bribery of all types around the world amounts to about $1.5 trillion to $2 trillion every year, while up to $1.6 trillion, or 2.7% of global GDP, is lost in money laundering by criminals, according to data compiled by the report. While governments may lose $500 to $600 billion in tax revenue every year from profit-shifting by multinational enterprises, an estimated $7 trillion of the world’s private wealth is funneled through secrecy jurisdictions and haven countries, data showed.

For example, Germany loses $35 billion a year due to tax avoidance, a sum equivalent in value to the installation costs of almost 8,000 turbines for wind electricity generation projects. The annual tax revenue India loses can cover hospital treatments for 55 million low-income patients.

The illegal siphoning off of government revenues “have real consequences in all countries,” Tijjani Muhammad-Bande, president of the UN General Assembly, said in March 2020.

The systematic problem, the FACTI Panel suggests, requires a systemic solution involving the participation of countries, companies and the international community.

This includes enacting legislation to combat cross-border financial crimes, setting up international tax norms and standards, facilitating the global exchange of financial data and information, creating a multilateral mediation mechanism to help countries with assets recovery and establishing specialized institutions under the UN to promote global governance in matters such as tax.

However, some experts expressed concerns during the Wednesday panel discussion over the practicality of some of the proposals.

The FACTI Panel proposed to set a global minimum corporate tax rate of 20% to 30% on profits to help limit incentives against profit shifting and increase fairness, according to the report. U.S. Treasury Secretary Janet Yellen said in early April the U.S. is working with G-20 countries to agree on a global minimum corporate tax rate.

However, another CASS senior fellow, Zhang Ming, said the global tax rate proposal tended to meet significant resistance from self-interest forces, such as multinational companies and tax havens, making it difficult to promote in the short term.

The introduction of a global minimum corporate tax rate would further disadvantage developing countries with little international competitiveness as they often use low taxes to attract inward investment, said Zhang Liqing, director of the center for international finance studies at Central University of Finance and Economics in Beijing. They may need some type of exemption or compensation, he said.

In terms of using the IFFs for sustainable development, it is very challenging to define who owns the property of the IFFs and who has the right to allocate the recovered funds, CASS’s Zhang Ming said.

The two CASS fellows agreed the mounting political tensions between China and the U.S. added uncertainty to gaining the international cooperation needed for the fight against IFFs.

Contact reporter Luo Meihan (meihanluo@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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