Post-2015 Consensus: IFF Perspective, Cardamone Kar

Perspective Paper

Summary 

GFI agrees with Cobham that the original targets proposed by the High Level Panel were undermined by framing them in dollars rather than percentage terms, that illicit flows are substantially larger than Overseas Development Aid and that they adversely affect economic growth, development outcomes, inequality and governance. However, in contrast to the challenge paper, we believe that the Open Working Group’s reframing of the original proposals both muddies the focus and detracts from the primary objective.

We also feel that Cobham’s proposals do not adequately advance the current state of play and therefore miss an opportunity to make significant progress. Although the proposed steps towards financial transparency are extremely important, they are already being addressed in numerous global fora and great progress has been made towards their implementation. Their inclusion in the post-2015 SDG targets could therefore be seen as redundant. 

Financial transparency is only one side of the coin and only limited progress can be made towards curtailing IFF without also making efforts in source countries to detect and interdict mis-invoiced trade. An appropriate SDG target would lead to developing country governments taking responsibility for addressing their part of the problem. 

We agree with Cobham that “. . . the [current] specific proposal is flawed – but this does not imply that it should be dropped. . . . “ Rather, it should be changed in two important ways. First it should stand alone rather than being linked to reductions in corruption and related issues; our data suggest that a very low percentage of illicit flows is due to corruption and is likely under 20% of the total. Second, more precise language is needed than that used in the current draft. Specifically, it should read: “reduce illicit financial flows related to trade mis-invoicing by 50%.” 

This concentrates on the largest part of the IFF problem (about 80% according to our data), de-politicizes the issue by eliminating any linkage to government corruption and provides a specific role for donor countries and agencies to build capacity in customs departments in developing countries. It would have numerous benefits, particularly as a development enabler. Including an SDG target on IFFs will generate revenue needed to help achieve the other likely SDG targets such as ending malnutrition and achieving universal health coverage.  

Given that about 80% of IFFs are due to trade mis-invoicing, we see a focused effort to modernize customs departments as the primary way to address this problem.  Based on estimates by the World Bank, we assess the costs at $2million per country, or a little more than $300 million for all developing nations. However, government tax revenue on the profits earned from international trade could equal about $8 billion, which is more than 26 times the cost.  It should also be understood that the cost is a one-off, while the benefits would continue to accumulate over time. The international community has taken action to address the demand side of the equation, and a target on mis-invoicing is a critical next step to address the supply side.