Measuring illicit financial flowsfrom commercial and tax-related practices

Alex Cobham, Petr Jansky

June 20, 2018, GenevaUNCTAD, UNECA, UNODC

Introduction Trade Capital and wealth Profit shifting

Source: United Nations

Introduction Trade Capital and wealth Profit shifting

The questions

I Many motivations, a few ways to estimate themI What is the scale of illicit financial flows?I What are the best ways to measure or estimate them?

Introduction Trade Capital and wealth Profit shifting

The structure

1. Trade2. Capital and wealth3. Profit

Introduction Trade Capital and wealth Profit shifting

Source: The Economist

Introduction Trade Capital and wealth Profit shifting

Trade

I Mispriced or misquantified trade (in goods)I Either between related or unrelated business partnersI Pioneering and research frontier estimates

Introduction Trade Capital and wealth Profit shifting

Trade - pioneering

I Country- and product-level (aggregate) dataI IMF’s Direction of Trade Statistics, UN’s ComtradeI Excellent country coverageI Trade mirror statistics and abnormal pricesI Combined with capital: Global Financial Integrity and

Ndikumana and BoyceI Abnormal prices - Pak and ZdanowiczI Criticism of methodology, assumptionsI Pioneering studies highlight the importance

Introduction Trade Capital and wealth Profit shifting

Trade - research frontier

I Transaction-level data (customs), recent andconvincing

I Difference between actual and comparable pricesI Limited country coverage and comparabilityI US, UK, France, Denmark, South AfricaI

Introduction Trade Capital and wealth Profit shifting

Trade - useful for the indicator?

I Coverage vs. credibility: both with Comtrade?I The real research frontier?

Introduction Trade Capital and wealth Profit shifting

Source: Global Financial Integrity

Introduction Trade Capital and wealth Profit shifting

Capital and wealth

I Capital account (rather than current account - trade)I Offshore wealth - undeclared wealth in tax havens

Introduction Trade Capital and wealth Profit shifting

Capital flight and capital accountanomalies

I IMF’s balance of payments dataI Net errors and omissions - the Hot Money ‘Narrow’

methodI Global Financial IntegrityI Difference between capital inflows and outflows - the

World Bank Residual methodI Ndikumana & Boyce (sub-Saharan African countries)I Henry (offshore wealth)I Criticism: Differences = anomalies = illicitI This might be suitable for some countries, e.g. Russia

Introduction Trade Capital and wealth Profit shifting

Wealth in tax havens

I Henry and other earlier estimates, stocks and flowsI Undeclared wealth held in tax havensI Zucman and Alstadsaeter, Johannesen, & ZucmanI IMF’s balance of payments - global offshore wealthI Other data: Swiss central bank and BIS - allocationI Good: use of data, methodology, country coverageI Still, these are estimates, not measurements

Introduction Trade Capital and wealth Profit shifting

Capital and wealth - useful for theindicator?

I The estimates’ logic useful, the data not so muchI What other data could be used?

Introduction Trade Capital and wealth Profit shifting

Source: Cobham and Jansky (2018)

Introduction Trade Capital and wealth Profit shifting

Profit shifting

I Profit shifting by multinational enterprises to taxhavens - international corporate tax avoidance

I One-country detailed estimates, e.g. Dowd, Landefeld,Moore (2017) or Guvenen et al. (2017) for the US

I An increasing number of estimates for many countriesI 9 such studies differ in methodology, data and results

Introduction Trade Capital and wealth Profit shifting

Reference USD bn Data Country-level

IMF’s Crivelli et al. (2016) 600 Revenue NoCobham & Jansky (2018) 500 Revenue YesUNCTAD (2015) 200 FDI NoJansky & Palansky (2017) 80+ FDI YesJohansson et al. (2017), OECD 100-240 Orbis NoClausing (2016) 280+ FDI YesCobham & Jansky (2017) 133+ FDI YesIMF (2014) 180 National ac. YesTørsløv, Wier, & Zucman (2018) 230 Other Yes

Introduction Trade Capital and wealth Profit shifting

Profit shifting

I Profit shifting leads to annual revenue losses of100-600 billion USD

I The first six estimates based on regression analysisI The latter three estimates - straightforward

methodologies and official statistical data

Introduction Trade Capital and wealth Profit shifting

What all the estimates have in common

I Illicit financial flows are real and measurableI Estimates of varying quality, availability and coverageI Overlaps and double-counting not easily identifiedI Need for more credible measurements and better dataI Our proposals

Introduction Trade Capital and wealth Profit shifting

Contact:Alex Cobham

alex@taxjustice.net

Petr Janskyjansky.peta@gmail.com

Appendix References

References