The Tax Justice Network has said in response to my post last week that I was right to question the World Bank's apparent reluctance to conduct its own research into the impact of tax evasion, one of the many components of illicit cross-border capital flows, on developing countries. The TJN also suggested that the World Bank (whose website proclaims that it is "working for a world free of poverty") has, along with others, "utterly ignored" what the TJN calls an astonishing information gap.
Just now the bank appears, understandably, to be focusing on the immediate impact of the current financial crisis. But capital flight is hardly a new problem. And as the OECD secretary general said last month, while tax may not have been a major cause of the financial crisis, tackling tax havens – which facilitate evasion – is part of the solution. He told ministers:
Tax may not have been one of the main causes of the crisis but I do believe it should be an integrated part of the long-term solution. We cannot expect tax payers to fund the bailing out of failed financial institutions and at the same time allow these institutions to facilitate offshore non-compliance by using tax havens.
Raymond Baker claimed in 2005 that the World Bank's "failure to ask the right questions" marked its "most glaring shortcoming" as an institution. He challenged the bank to undertake a thorough research study, drawing on its own extensive resources and those available from the IMF, the UN, the WTO, the OECD and its member countries, the EU and the Bank for International Settlements. The primary aim of the study would be to estimate the total amount of criminal, corrupt, and commercial dirty money, "in all its various forms, including tax-evading money", coming illicitly out of developing and transitional economies (see below regarding his own estimates).
But Richard Murphy's response to my post was to suggest that now is the time to focus on solutions, given that the World Bank has declined to do the study that Norway offered to finance:
Even if we were 50% out and had doubled the right figure the result would still be revenues lost that exceeds the global aid budget and the cost of the Millennium Development Goals. In that case isn't it time to stop worrying about greater precision, which will always to some degree be spuriously accurate, and instead we need to focus on solutions, now. Isn't this where the research money needs to go now?
I am inclined to agree, given the present circumstances. Ben Craddock commented:
I think that the only real way to appreciate the magnitude of illicit capital flight, tax evasion and embezzlement is to bring down the secrecy provisions first and then investigate.
I don't think the TJN should give up trying to get the World Bank to do a study at some stage in the not too distant future.
But there is an urgent need for governments to act together effectively to lift the veil of secrecy that has enabled tax havens to flourish.
Let me make one thing clear in response to Ben Craddock's "straw man" comment – it's a valid point. I am no advocate of tax haven secrecy and I recognise the risk flagged by the TJN:
Why not measure all this? Why on earth not? Don't take our word for it. Measure it, and publish! With one proviso: make sure your methodology and your data sources are transparent - for you can be sure there will be malign interests out there very happy to see a new set of fiddled numbers out there to support their cases.
The estimates
Baker's own summary at pages 172-173 of Capitalism's Achilles Heel provided a "low-end" estimate of $539bn (rounded down to $500bn, the figure quoted last week in the TJN blog) for what he called "cross-border flows of global dirty money" coming out of developing and transitional economies. He estimated the global total at $1 trillion.
This $539bn comprised (i) "commercial" dirty money of $350bn (including mispricing between unrelated parties $100bn, abusive transfer pricing between related companies $100bn and fake transactions $150bn), (ii) and $189bn of "criminal and corrupt" dirty money (including drugs, counterfeit goods and smuggling).
The $160bn figure in Christian Aid's report earlier this year was the charity's estimate of corporation tax lost to developing countries due to two of these activities, namely mispricing and abusive transfer pricing. In arriving at this figure, Christian Aid used Baker's 2005 estimate that seven per cent of trade volumes "is illicit capital movement".
