Corruption Watch

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<!--QuoteBegin-->QUOTE<!--QuoteEBegin--><b>India ranks fifth in ‘dirty money’ outflow</b>
pioneer.com
Pioneer News Service | New Delhi
In the wake of the issue of illegal outflow and parking of huge sums of money in foreign banks by Indians raised by Leader of Opposition LK Advani and other Opposition leaders, comes the latest report by Global Financial Integrity (GFI) that has ranked India fifth among 127 countries in illicit financial outflows. According to the report, the total illicit financial <b>outflow from India was US $27.3 billion per year (during the period 2002-2006).</b>

The GFI is a study group operating from Washington and supported by Ford Foundation with an aim to bring ‘financial transparency’ and expose ‘dirty money’ by advocating a curb on tax havens.

The study classifies the illegal outflow of money into two groups: ‘normalised’ and ‘non-normalised’ channels. India ranks fifth in the normalised category and sixth in non-normalised category. The GFI report says the total range of illegal money flow is $850 billion to 1.06 trillion per year.<b> In both categories Mainland China (excluding Hong Kong) ranks the first with more than $230 billion illegal outflow.</b>

“Economic model estimates are ‘normalised’ or filtered, which yields the lower end of a range of estimated illicit financial flows. In contrast ‘non-normalised’ method of deriving illicit financial flows for a country includes all cases where estimates of illicit financial flows were encountered, no matter how small and even if only for one year out of the five studied. This method yields the higher end of a range of estimated illicit financial flows,” says GFI, explaining the criteria for tracking the illegal flow.

The study says the Asian region accounts for the 50 per cent of the illegal money outflow and Europe accounts for 17 per cent, due to the huge illegal operations in Russia. According to GFI, the study on Africa’s illegal money outflow was basically ‘deprived’ of ‘non-availability’ data.

In normalised category, <b>China is followed by Saudi Arabia (USD 55 billion), Mexico ($46 billion), Russia ($35 billion). In non-normalised category, the position of these counties remains the same up to fourth rank; Malaysia is placed fifth ($30 billion), pushing India to sixth rank.</b>

In normalised category, India is followed by Kuwait, Malaysia, Venezuela, Bolivia, Poland and Hungary. In non-normalised category, India is followed by Kuwait, Venezuela, Bolivia, Indonesia and Philippines.

The illegal outflows involve activities such as corruption (bribery and embezzlement of national wealth), proceeds of illicit business that becomes illicit when transported across borders in violation of laws and regulatory frameworks. “Illicit financial outflows occur through two channels - the clandestine use of international banking system to sent money out of a country captured by the Hot Money (Narrow) and World Bank Residual models and trade mis-invoicing which generates illicit funds that are shifted abroad,” points out the GFI report.

The Hot Money (Narrow) model estimates illicit financial flows by focusing strictly on the net errors and omissions line-item in a country’s external accounts. The net errors and omissions figure balances credits and debits in a country’s external accounts and reflects unrecorded capital flows and statistical errors in measurement. A persistently large and negative net errors and omissions figure is interpreted as an indication of illicit financial outflows, explains the report.

The World Bank Residual Model measures a country’s source of funds (inflows of capital) against its recorded use (outflows and/or expenditure of capital). Source of funds includes increases in net external indebtedness of the public sector and the net inflow of foreign direct investment. Use of funds includes the current account deficit that is financed by the capital account flows and additions to central bank reserves. An excess source of funds over the recorded use(or expenditure) points to a loss of unaccounted- for capital use and as such, indicates illicit financial outflow, says GFI.

The `Trade Mis-invoicing Model’ has long been recognised as a major conduit for illicit financial flows, the underlying motivation being that residents can illicitly acquire foreign assets by over-invoicing imports and under-invoicing exports. Discrepancies in partner-country trade data, after adjusting for the cost of freight and insurance, which imply over-invoicing of imports and /or under-invoicing exports, indicates illicit flows, points out GFI on arriving conclusions.
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