MANILA, Philippines (UPDATED) – In the last half a century, a staggering $410 billion in illicit money – an amount not seen in other countries – has flowed in and out of the Philippines, according to an international advocacy group.

The $133 billion in outflows and $277 billion in inflows mean that so much trade goes on unreported, depriving government of revenues that could have been used for development and much-needed social programs.

“This is a crisis situation for this country,” Tom Cardamone, managing director of Global Financial Integrity (GFI), told Rappler on Monday, February 3. “Without addressing it in the immediate term, it’s unclear where the economy is going to go from here with that kind of tax loss.”

Cardamone presented key findings of a study on illicit financial flows to and from the Philippines spanning 52 years, from 1960 to 2011.

GFI, a non-profit research and advocacy group based in Washington DC, chose to focus on the Philippines because the country has “continually ranked very high” in terms of illicit money flowing in and out of it over the last several years. 

Among the other important findings of GFI economists Dev Kar and Brian LeBlanc are the following:

• Over $12 billion in tax revenues has been lost to trade misinvoicing since 1990.  Since 2000, government has been losing an average of $1.46 billion in tax revenues each year. What was lost in 2011 ($3.85 billion) is equal to 95% of the total government expenses on social benefits. This is the exact reason why people “should care about this particular issue because there is so much money not being collected by the government that could be used to improve the daily lives of everybody,” Cardamone said. He added that these figures are an indication of how bad the problem is in the Philippines.
• Illicit inflows are actually a big drain on the economy – 25% of imported goods are not properly invoiced.
• The Philippines was the 6th largest exporter of illicit capital from the developing world from 2001-2010. Over a 52-year period, the Philippines lost $176.6 billion via capital flight. This became more serious in the last decade ending 2009, the year before the presidential elections.
• Since 1990, at least $23 billion has been lost in tax revenues as a result of evasion of customs duties through trade misinvoicing.
• In the Philippines, trade misinvoicing relative to total trade is increasing by 3% per annum, unlike South Korea, where trade misinvoicing relative to total trade dropped by 4% a year.

Decline in corruption control

Cardamone said there appears to be a correlation between levels of corruption and levels of illicit flows.

Compared to South Korea, the Philippines recorded a lower 32 percentile rank in its control of corruption. This means that 68% of all countries in the world managed to better control corruption than the Philippines. Korea scored a much higher 69 percentile rank.

Since 1995, the earliest year that data were available, the Philippines has shown a “steady decline in the control of corruption.” Weak governance translates to more illicit capital through trade misinvoicing as a share of total trade.

Countries poorly governed also tend to have a large, if not growing, underground economy. In the case of the Philippines, this constitutes about 39% of the GDP.

In December 2013, the Philippines improved its corruption perceptions index ranking, scoring 36, an improvement over 2012’s rating of 34. (READ: PH improves in global corruption survey) This, however, still pales in comparison to South Korea.

Needed: Sustained political will

Cardamone said that the first step in fixing the problem is “political will by the highest levels of government.” He added that it appears it has begun with President Benigno Aquino III who, during his last State of the Nation Address, singled out the customs bureau for its incompetence and inability to curb smuggling.

Then customs chief and Aquino’s partymate, Ruffy Biazon, has been replaced by former finance undersecretary John “Sunny” Sevilla, who faces a tough challenge of professionalizing the bureau. A technocrat, he might just turn out to be what the Bureau of Customs needs.

Cardamone said the BOC should be under someone who understands systems within big bureaucracies, knows how to train people, and understands what methods and procedures are needed to create a bureau that operates efficiently.

“What’s needed is for the President to have the head of the department’s back, so to speak. He has to support that new position. It can’t be a fleeting interest in trying to address this problem. It has to be a long-term sustained effort by the highest levels of the government, that this is going to change,” Cardamone added.

He also said that if government is perceived to be functioning correctly and efficiently with relatively low levels of corruption, it can create a level of confidence within the business community. This, in turn, can encourage businessmen to pay taxes because they understand the benefits of doing so. 

The “Open Government” programs that the administration has put in place can also help, but given the 6-year term of presidents, Cardamone said, “You have to put people in place who will continue to promote those systems after the president is out of office. The media has to continually report on this story long after the president who initiated it has left office.”

Civil society likewise has to insist that government works efficiently and cleanly, Cardamone said. “All those things put in place over time will force the next president to pay attention to these things too. If he or she is perceived by the electorate to not really care about corruption…in all likelihood he is going to have a hard time getting elected.”

In the study, GFI also recommended that instead of raising tax rates in the short-term, government should instead “broaden the tax base” in the long-term. This will help prevent tax evasion. – Rappler.com