Tax havens and illicit money

Yoly Villanueva-Ong
Countries receiving illicit funds through offshore secrecy jurisdictions in US, Britain, and Australia are also to blame

A report called “Illicit Financial Flows to and from the Philippines: A Study in Dynamic Simulation, 1960-2011,” revealed that more than $410 billion flowed illegally in and out of the country over the 52-year period covered. 

Global Financial Integrity (GFI), a Washington-D.C. non-profit research and advocacy organization, published the alarming statistics that pegged illicit financial outflows from crime, corruption, and tax evasion at $132.9 billion, and illegal inflows through smuggling at $277.6 billion. At least $23Billion in tax revenue was lost since 1990 mainly by mis-invoicing trade transactions and customs fraud.

GFI said a record high of $25.8 billion came in illegally in 2011, up from $22.9 billion in 2010, marking consecutive years of elevated illicit inflows from $14.2 billion in 2009.

“There is a tremendous amount of money flowing illegally into and out of the Philippines,” said GFI Managing Director Tom Cardamone, an international financial crime expert. “Illicit outflows drain billions of dollars from the official Philippine economy, money that could otherwise be used to help the nation’s economy grow. At the same time, the illicit inflow of capital and merchandise is perhaps even more insidious: it fuels crime, grows the underground economy, and costs the government billions of dollars each year in lost customs duties.”

Illicit inflows and outflows

“Illicit outflows drain money from the domestic economy,  enable income tax and customs duties evasion, and deplete domestic savings,” said GFI’s chief economist, Dr. Dev Kar, formerly a Senior Economist at the International Monetary Fund. 

He noted that illicit outflows increased from 2% of GDP in the 70s and 80s, to 5% from 2000-2010. But illicit inflows put an even bigger strain on the economy because they flow into the underground rather than the official economy. 

GFI also released its annual assessment of money flowing illegally from developing countries and it is bleak. The global ”south” lost nearly $1.13 trillion in illicit financial outflows resulting from crime, corruption and tax evasion in 2011 (the most recent year for reliable data) – roughly 10 times the amount of money developing nations received in official development assistance.

Even scarier is the exponential growth of the problem. The US$946.7 billion in illicit outflows in 2011 is record breaking, up nearly 14 percent from the previous year. Over the decade analyzed in the report, average annual illicit outflows increased at a rate of 10% a year.

Dominant view

For decades, the dominant view in the richest nations was that illegal capital flight was a problem only of poor nations, whose corrupt governments and bad business environment caused capital to flee their economies. But the countries receiving illicit funds through offshore secrecy jurisdictions in US, Britain, and Australia are also to blame. 

Over the past half-century, Western nations developed tax havens, anonymous shell companies and various trade-based money-laundering techniques, to facilitate the outflow of capital from developing countries and into Western banks.

GFI listed estimates for countries classified by the IMF as developing and emerging economies as follows:

Illicit Financial Inflows, 2011:

  • Poland……………………US$38.03 billion***
  • Romania.………………..US$3.15 billion
  • Lithuania………………..US$2.56 billion
  • Bulgaria………………….US$2.08 billion
  • Latvia……………..………US$1.82 billion
  • Croatia……………………US$441 million
  • Total Illicit Financial Inflows, 2011: US$48.08 billion (***Poland ranked 3rd among all developing and emerging countries in illicit inflows)

Illicit Financial Outflows, 2011:

  • Poland……………………US$9.14 billion
  • Lithuania………………..US$4.27 billion
  • Latvia……………………..US$4.06 billion
  • Bulgaria………………….US$2.56 billion
  • Croatia……………………US$1.57 billion
  • Romania…………………US$1.12 billion 
  • Total Illicit Financial Outflows, 2011: US$20.80 billion 

Nothing in both GFI reports is surprising. Money laundering, capital flight and smuggling have been perennial problems of the country since the Marcos regime. 

Last year, agriculture leaders lamented that the Philippines has become known as “the smuggling capital of Asia.” They cited the P32 billion worth of rice, onions, meat and poultry products and P30 billion worth of petroleum products smuggled into the country in 2012. One insider disclosed that smuggled rice is being shipped from Cebu, Davao and Cagayan de Oro to Manila, and from Manila, it is brought to Bulacan and, subsequently transported to other provinces in Northern Luzon.

Detractors were quick to turn the issue into ammunition. Former Arroyo Cabinet Secretary, Roberto Tiglao wrote in his column, “Smuggling in the Philippines is at its worst under President Aquino’s administration, with the smuggled value averaging $19.6 billion annually, an explosion from the comparable figures of $3.1 billion and $3.8 billion yearly during the terms of Presidents Joseph Estrada and Gloria Macapagal-Arroyo, respectively. In Mr. Aquino’s first two years in office, the value of smuggling totaled $39.2 billion, more than the $35.6 billion during Arroyo’s nine years in office.”

But despite the rampant smuggling there remain some bright spots. The country’s agricultural output grew by a modest 1.10% in 2013, a development that the Department of Agriculture (DA) considers a “respectable performance” in spite of the calamities.

Agriculture Secretary Proceso J. Alcala said production gains were recorded in the livestock, poultry, and fisheries subsectors. The livestock subsector was the biggest gainer with a 10.67 percent increase. Poultry surged by 4.31%. The fisheries subsector posted an impressive 3.38% growth. 

John Steinbeck was quoted saying, “I have never smuggled anything in my life. Why, then, do I feel an uneasy sense of guilt on approaching a customs barrier?” 

I suspect that the emotion is not guilt, but disgust. –


Yoly Villanueva-Ong, the founder of Campaigns & Grey, is currently Group Chairperson for the Campaigns Group of companies. She writes weekly for Rappler.





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