A latest report from Global Financial Integrity (GFI) ranks Nepal 68 out of 145 economies in terms of average annual illicit financial flows— the cross-border movement of money that is illegally earned, transferred, or utilized— over 2003-2012. On an average, from Nepal, between 2003 and 2012, US$755 million was illegally earned, transferred, or utilized.
Illicit financial outflows has drastically reduced lately, largely due to lower import over-invoicing. In 2012, Nepal ranked 102 out of 151 economies, with illicit financial outflow equivalent to US$106 million. Here is an earlier blog post on previous reports. Illicit capital flows are detected by analyzing misinvoicing of external trade transactions and leakages from the balance of payments.
Cumulative illicit hot money outflows and trade misinvoicing were equivalent to US$228 million and US$7,254 million, respectively. Total illicit outflows between 2003 and 2012 was US$7,542 million. The largest illicit outflows came from trade misinvoicing (export over-invoicing and import over-invoicing). Import under-invoicing and export under-invoicing were not recorded. Over 2003-2012, cumulative import over-invoicing and export over-invoicing were US$7.254 billion and US$1.451 billion, respectively. This might be one of the reasons for the sudden slowdown in the growth of remittances in recent months of FY2015. Any downward trend in the growth of remittance inflows creates far reaching ripple effects across all sectors (real, fiscal, monetary and external).
Over-invoicing imports is common and is mostly attributed to high taxes (reduces corporate profits) and incentives to benefit from foreign exchange transaction in the black market. Over-invoicing exports is not that common and is mostly done to receive higher government subsidies (like in the case of cash incentives for exports).
In South Asia, India saw the largest illicit financial outflows, followed by Bangladesh, Pakistan, Sri Lanka, the Maldives, Bhutan, and Nepal. Overall, US$991.2 billion flowed illicitly out of developing and emerging economies in 2012.
| Illicit financial outflows (HMN+GER), US$ million | |||||
| Country | 2008 | 2009 | 2010 | 2011 | 2012 |
| Afghanistan | 0 | 0 | 0 | 0 | 0 |
| Bangladesh | 1,229 | 1,063 | 672 | 593 | 1,780 |
| Bhutan | 0 | 0 | 0 | 44 | 168 |
| India | 47,179 | 29,002 | 70,236 | 86,002 | 94,757 |
| Maldives | 55 | 38 | 62 | 69 | 185 |
| Nepal | 854 | 1,551 | 1,883 | 645 | 106 |
| Pakistan | 51 | 0 | 729 | 0 | 405 |
| Sri Lanka | 0 | 0 | 881 | 337 | 349 |
Illicit/unrecorded money moves across borders under the following three forms:
- Corrupt: Proceeds of bribery and theft by government officials
- Criminal: Proceeds of drug trading, human trafficking, counterfeiting, contraband, and myriad forms of additional activities
- Commercial: Proceeds arising from import and export transactions conducted so as to manipulate customs duties, VAT taxes, income taxes, excise taxes, or other sources of government revenues
Here is how GFI computes the illicit flows:
In analyzing illicit financial flows (IFFs), GFI utilizes sources of data and analytical methodologies that have been used by international institutions, governments, and economists for decades. Basically, these data sources and methodologies are providing information on gaps—gaps in balance of payments data and gaps in trade data. Where recorded sources and uses of funds in balance of payments data do not match, the difference is net errors and omissions, indicating an inflow or outflow that was not recorded. Where bilateral trade data does not match (after adjusting for freight and insurance in the data of the importing country) this indicates re-invoicing of transactions between export from one country and import into another country.
GFI recommends countries to:
- Comply with all of the Financial Action Task Force (FATF) Recommendations to combat money laundering and terrorist financing
- Require meaningful confirmation of beneficial ownership in all banking and securities accounts
- Automatic exchange of financial information
- Require multinational corporations to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis, as a means of detecting and deterring abusive tax avoidance practices
- Boost customs enforcement by equipping and training officers to better detect the intentional misinvoicing of trade transactions (it accounts for 77.8% of all illicit flows).
