Domestic Consequences of
Illicit Financial Flows
Olav Lundstøl
Counsellor-Energy and Petroleum
Royal Norwegian Embassy in Brasilia
Rio de Janeiro, 9 September 2014
IFF, Tax Havens and Development
• Secrecy jurisdictions/tax havens, illicit financial flows/capital
flight and challenges of inequality in the western world and
emerging economies
• >50% of world trade through tax havens, 50% of all banking
assets held in offshore accounts, >30% of all FDI through
offshore accounts, balance sheet of small island countries >
18 trillion USD or about 1/3 of world GDP (of this >12 trillion
USD held by rich individuals (Shaxson, 2010)
• Norway: Monterrey conference on financing for
development (2002), White paper (2009), multiple global,
regional and national initiatives
Domestic Consequences:
The Developed Economies
• Economic inequality rising to pre WW1 levels in the developed world
and expected to continue, overall linked to unequal sharing of gains
from increase in productivity between labour and capital (T Picketty)
• The management of the global financial crisis and the euro zone crisis
have both contributed further to the increase in inequality in several
respective countries and has de facto facilitated a transfer of wealth
from the state and the majority of the population to the richest (R
Skarstein, 2013 and V Norman 2012)
• The situation is even worse however because, T Picketty broadly leaves
untreated: 1) the offshore economy that has increased to
unprecedented historical levels in the last few decades, and 2) the
increasing element of south-north net capital flows through offshore
accounts (K Rogoff, 2014)
Domestic Consequences:
The Emerging Economies
• Lost financing for development, through profitable private and
public investments in a world with increasing inequality
• IFF from the developing world 500-1000 billion USD/yr, exceeds
net legal capital inflow to the developing world and many times
ODA
• Capital outflows increasing from several emerging economies
with low savings and investment rates and high rates of resource
extraction (GFI 2014 East Africa report on trade misinvoicing)
• Net effect of illicit financial flows on growth and poverty has been
estimated to be of such magnitude that MDG1 could have been
achieved for SSA as a whole (J Nkurunziza, 2014)
Domestic Consequences:
What about Brazil?
• Estimated 520 billion USD of assets in secrecy jurisdictions (TJN 2013)
• The 7th highest cumulative IFF outflow among developing countries last decade (GFI 2013)
• Productivity challenge in overall economy, accompanied by low levels of savings and
investments, in particular during last two decades, compared to benchmark countries
(IMF, 2013)
• Infrastructure stock 17% of GDP (compared to 50-75% of GDP for benchmark countries)
(Mckinsey, 2012)
• Investment in infrastructure 1.5% of GDP in 2013 (compared to 5.1% of GDP for
developing countries)
• Estimates puts the overall infrastructure investment needed at 1.4 trillion R to bring Brazil
up to the level of benchmark countries, about three times the current levels announced
for the coming decades (Federal University of Rio, 2013)
• Economic recession in 2014 following low levels of growth in later years
• Estimated IFF about the same as investment in infrastructure in 2012
Outlook
A. International
Risk: IFF and inequality on upward trend
Opportunity: High level political and tehnical attention (G8- three T’s, OECD, IMF, UN,
BRICS)
Opportunity: Automatic Exchange of Information, Extended country by country
reporting, Global Financial System Scrutiny
Needed: A new global and national approach to regulating and taxing international
business
B. Brazil
Risk: Rapid increase in large infrastructure investments and pre-sal development
Opportunity: Implementation of new approaches to limit trade misinvoicing beyond the
arm’s length principle
Opportunity: Increased focus on large financial and economic crimes through new
legislation and special courts and innovative follow up an enforcment
Needed: Active participation, possibly through BRICS, to influence new rules and
approach to regulating and taxing international business