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Illicit financial flows are in our judgment the biggest economic impediment to sustainable development. At GFI, we estimate illicit outflows from developing countries at US$950 billion a year. This nearly US$1 trillion a year drains hard currencies, heightens inflation, reduces tax collection, curtails investment, and undermines free trade. It undercuts the foundations of societies, limits poverty alleviation efforts, and complicates security concerns. This is why it is so important that curbing illicit flows becomes a priority within the SDG agenda – it gets at the heart of the systemic causes of poverty and inequality for billions of people around the globe.

We are past the point of talking about whether or not there is a problem. The UN, OECD, and the World Bank all acknowledge this reality that demands urgent attention. We are ready to pivot from recognizing the problem to the policy considerations needed to solve the problem.

I want to make three points in the time available.

First, our estimate of US$950 billion—almost US$1 trillion—a year shifting illicitly out of developing countries is based on data filed by governments with the World Bank and the IMF. This is balance of payments data and balance of trade data. It is the same data that is used every day by international institutions, governments, banks, and corporations to make decisions on loans, investments, interest rates, exchange rates, even political issues, security concerns, and more. It is time to recognize that the data is good.

I’m making this point because occasionally we hear comments that, “This may not be right. Trade data and balance of payments data can have errors.” Our answer is, “Of course they can have errors.” Every economic study that has ever been done is based on data that may have errors. But it is the best data available, and it is the data used by millions of people every day in making very important economic, financial, and political decisions.

Furthermore, we know that this staggering figure is extremely conservative. Our data includes trade that has been reinvoiced moving from exporter to importer. It does not include misinvoicing that occurs within the same invoice exchanged by agreement between exporters and importers; it does not include the misinvoicing of services and intangibles in international trade; and our estimate does not include bulk cash transactions from drug trading, human trafficking, much of counterfeiting, most of credit fraud, etc. If all of these could be quantified and added to the US$950 billion figure, it would be far, far higher.

Second point. The most common way to move illicit money is the misinvoicing of trade.  What has happened over the last 30 or 40 years is that we have pushed free trade as an answer to global economic growth. Now, having spent 35 years in global business before segueing into the think-tank world, I’m all for free trade. But what we have not done over the last 30 or 40 years is insist on legitimate trade, trade that abides by the laws of all countries – customs duty regulations, VAT tax assessments, banking statutes, exchange control requirements, and more. We’ve largely ignored the pricing of trade while boosting the freedom of trade. Trade misinvoicing, the biggest part of the problem, lends itself to correction. Transparency in trade pricing is the answer.

Third point. We are at a key moment. Three things are coming together in 2015. One, the report of the High Level Panel on Illicit Financial Flows Out of Africa, sponsored by the UNECA and led by H.E. Thabo Mbeki, the former President of South Africa, is coming out early in the new year. This report will identify trade misinvoicing as the most commonly used means of draining illicit money out of the continent and will recommend very purposeful and aggressive measures to curtail this reality. Two, the Financing for Development conference will be held in Addis Ababa in July, addressing very key questions concerning funding for development in the coming years. This conference will hopefully seek some balance between strengthening ODA on one hand and domestic resource mobilization on the other hand.  Three, the UN General Assembly will consider Sustainable Development Goals for the coming 15 years. The issue of illicit financial flows is recommended for inclusion in the SDGs, but, at the moment, it is lumped in with corruption, arms trading, and other concerns.

We believe that a very specific SDG target needs to be set to address the reality of illicit financial flows – cut IFFs stemming from trade misinvoicing by 50 percent in 15 years. This specific target has a number of advantages:

1. It is quantifiable and verifiable and progress can be monitored annually.

2. It focuses on the biggest part of the IFFs problem, the part on which there is very good data.

3. As this component of IFFs is curtailed, it will have collateral and positive effects on curtailing the criminal and corrupt flows of IFFs.

4. It binds richer and poorer countries in a common commitment.

5. It is achievable.

The past MDGs were based largely on the donor-recipient model for economic development. The SDGs must be based on a partnership model. We must act together to assure further and faster economic improvement in the lives of billions of people around the globe. Nothing is more important to this effort than legitimate trade – legitimate trade – global trade that respects the letter and the intent of the law and the interests of every person on the planet.

Let us exert the political will to curtail illicit financial flows in the immediate years ahead, and we will together change the way the world works for the betterment of all its people.

Finally, for those of you interested in continuing this discussion, I would like to mention that the Financial Transparency Coalition—a consortium of governments, NGOs, and academics, of which GFI is a founding member—will be holding its annual conference in Lima, Peru on Tuesday and Wednesday this week.  The proceedings will be live-streamed on the Coalition's website, and I strongly encourage everyone to tune in to the event.

Thank you.


(Speech at the World Bank conference on illicit financial flows)
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