Another report to add on to the GFI report on global illicit fund flows a year or so back:
KUALA LUMPUR, July 22 ― A colossal RM893 billion was siphoned out of Malaysia’s economy into tax havens abroad between 1970 and 2010, a London-based research has revealed, placing the country among the top 20 nation in the developing world labelled as “losers” of capital flight.
The sum is more than triple that of Malaysia’s national debt total, which amounted to RM257.2 billion in 2011, according to previous media reports.
In the study commissioned by Tax Justice Network (TJN), a London-based organisation of professionals including economists and tax consultants, Malaysia is now ranked 12th on the list, two rungs above Singapore’s RM533 billion outflow and three below Indonesia’s RM1 trillion.
According to researcher James Henry in UK’s The Guardian today, the “offshore economy” is large enough to leave a major impact on the estimates of inequality of wealth and income in any nation, as well as the estimates of national income and debt ratios.
This time, the number quoted is over a far longer period – the GFI report only covered the last ten years – and doesn’t include the very real losses through trade invoicing that GFI identified (and which I have verified).
I’m not going to diss the researcher here – reading his previous pieces and the accompanying appendices to this report, he’s done his homework and has by all accounts dedicated his life to rooting out the truth about hidden private wealth (for a more balanced view of the report, try this link).
The problem is that the methodology used in this report shares many similarities with GFI’s, at least with regard to identifying which outflows come from which countries. It’s essentially a residual calculation; enumerate the sources of funds, then the uses, and whatever you have left is purported to be “illicit” inflows or outflows.
The problem with that is that in the absence of capital controls, a very liberal approach to global capital flows, and the increasing popularity of floating exchange rate regimes (wherein international reserves do not automatically adjust to changes in the external position), it’s hard to justify labelling any unrecorded outflows automatically as “illicit”.
Tracking assets under management in offshore centres, as this paper does, is a novel and probably more accurate way of approaching the problem, but its difficult to assign ownership this way (i.e. you won’t know where it came from).
It’s also difficult to reconcile stocks with flows – even under the official balance of payments statistics, changes in “flows” doesn’t necessarily mean money actually crosses borders. If you take out a million then make an investment killing and quadruple that amount in a year, it all counts as flows even if only the initial million was an actual capital outflow.
Considering that the RM893 million actually “flowed” out over the course of 40 years, the likelihood that it’s all capital leaving the country is unlikely. Also (for those of you who’ve actually read through the press release and paper), the common mechanism of increased lending to a country which in turn results in increased “illicit” capital outflows appears to be absent in Malaysia’s case, which closes off one potential source of “official” corruption.
Not that I would argue that some portion of it isn’t actually a result of corruption, money laundering, or capital flight – I just don’t think the portion is all that big. It’s not just corrupt politicians and officials who use offshore tax havens such as the Cayman Islands or (gasp) Singapore – perfectly legitimate companies (including some of our GLCs and listed companies) looking for tax advantages do the same.
That argues for better transparency, not a witch hunt. Can I mention that Singapore is not far behind Malaysia in this report, and that Hong Kong is far higher (and both score considerably better on Transparency International’s Corruption Perception Index)?
And all this will detract from the substantial tax losses that Malaysia suffers from “creative” trade invoicing, which is very real and responsible for about half of Malaysia’s “illicit” capital flight over the last ten years. Any attempt at investigating and reappropriating ill-gotten gains hidden in bank accounts in offshore centres will require multilateral consensus and action and is likely to take considerable time and resources. While worth the effort, we could achieve greater and quicker tax gains by examining invoicing and transfer pricing practices closer to home.
Henry, James S., “The Price of Offshore Revisited”, Tax Justice Network, July 2012 (warning: PDF link)