$410B illegal money in and out of PH

by Jon Carlos Rodriguez, ABS-CBNnews.com

Posted at Feb 04 2014 12:17 AM | Updated as of Feb 04 2014 07:28 PM

MANILA – Illicit financial flows into and out of the Philippines reached $410.5 billion in a 52-year period, a study by US-based research group Global Financial Integrity (GFI) showed.

The study, titled “Illicit Financial Flows to and from the Philippines: A Study in Dynamic Simulation, 1960-2011,” showed that illicit financial outflows from the Philippines reached $132.9 billion, while illicit inflows amounted to $277.6 billion.

International financial crime expert and GFI managing director Tom Cardamone said the outflow and inflow of illegal money “drain billions of dollars from the official Philippine economy.”

Cardamone said the money could have been “used to help the nation’s economy grow.”

“At the same time, the illicit inflow of capital and merchandise is perhaps even more insidious: it fuels crime, grows the underground economy, and costs the government billions of dollars each year in lost customs duties,” he added.

Illicit outflows refer to capital that is illegally earned, transferred, or utilized and cover all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in contravention of applicable capital controls and regulatory frameworks.

The study said transactions involving illegal money are completed mostly through the misinvoicing of trade, rather than unrecorded wire transfers.

Roughly 96 percent of illicit inflow over the years, or $267.8 billion, was done via trade misinvoicing while about 72 percent of illicit outflow, or $92.5 billion, was accomplished also through trade misinvoicing.

The study also revealed that most of the illicit inflows due to trade misinvoicing was the result of under-invoicing imports.

It showed that over the past decade, 25 percent of the value of all goods imported into the Philippines, or $1 out of every $4, goes unreported to customs officials.

The under-invoicing of import goods has cost the government losses of at least $19.3 billion since 1990 in tax revenue, according to the study.

It also found that combined with the $3.7 billion in tax revenue lost through export under-invoicing, the government has lost at least $23 billion in customs revenue due to trade misinvoicing since 1990.

“Since 2000, illicit financial flows have cheated the Philippine government of, on average, at least $1.46 billion in tax revenue each year. To put this in perspective, the $3.85 billion in lost tax revenue in 2011 was more than twice the size of the fiscal deficit and equal to 95 percent of the total government expenditures on social benefits that year,” said the report’s co-author and GFI Junior Economist Brian LeBlanc.

GFI has provided recommendations to the Aquino administration to solve the problem of illicit flows of money:

• Transactions involving tax haven jurisdictions like Hong Kong, Singapore, and Dubai should be treated with the highest level of scrutiny by customs, tax, and law enforcement officials;

• The Government of the Philippines should require that all banks in the Philippines know the true, human, "beneficial" owner of any account opened in their financial institution. Often banks do not know who owns or controls the accounts in their institution – they might have the name of an anonymous shell company, but they don't know the person controlling that shell company. Hence, the banks cannot monitor the accounts for money laundering. Requiring knowledge of the beneficial owner is a simple step that would significantly help curtail the problem;

• The Philippine government should significantly clean up and boost its customs enforcement, by training its officers to better detect intentional misinvoicing of trade transactions. Software exists that can assist governments in detecting invoices that fall outside the normal range of prices for a particular good. The Philippines could make use of such software to catch individuals deliberately misinvoicing their trade transactions to launder money. The government made significant progress on this front in January, when it launched a new portal at data.gov.ph, which publishes detailed trade, customs, and revenue data. GFI urges the government to continue making progress on this front;

• The Philippines should expand its list of crimes considered predicate offenses for money laundering to include all felonies. Anti-money laundering legislation adopted last year expanded the list of predicate criminal offenses for money laundering to include bribery, fraud forgeries, terrorism and terrorist financing activities, and misuse of public funds. This was a laudable measure, but it still falls short of making sure that the proceeds of all criminal felonies are considered underlying crimes for money laundering; and

• The Government of the Philippines should strongly enforce all anti-money laundering laws that are already on the books.

GFI also recommends that the Philippines use its diplomatic influence bilaterally and in global forums such as the United Nations to increase transparency in the international financial system and restrict the illicit flow of money.

A separate GFI study in 2012 showed that the Philippines was the sixth largest exporter of illicit capital from the developing world from 2001 to 2010.

To view a larger version of the infographic, click here.