New | China is biggest exporter of illicit capital, says watchdog group

The South China Morning Post discusses the implications of the ICIJ leak with Clark Gascoigne, spokesperson for the Washington DC-based think tank Global Financial Integrity (GFI), which has been tracking global illicit money flows since 2006.

British Virgin Islands leaks

Patrick Boehler

Published: 10:45am, 22 Jan 2014

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On Wednesday, a group of investigative journalists released the initial results of an investigation into some 20,000 offshore bank accounts by people with addresses in Hong Kong and the mainland.

The South China Morning Post discussed the implications of the leak with Clark Gascoigne, spokesperson for the Washington DC-based think tank Global Financial Integrity (GFI), which has been tracking global illicit money flows since 2006.

What was your initial reaction to the report on the Chinese offshore accounts?

We are not surprised by the findings of the ICIJ investigation. Indeed, GFI estimates that more than US$1 trillion flowed illicitly out of China between 2002 and 2011, the most recent year for which reliable data is available.

While China is not unique in suffering from the consequences of illicit flows – we estimate that roughly US$6 trillion flowed out of the developing world between 2002 to 2011 – China is the biggest exporter of illicit capital, ahead of Russia (US$880.96 billion) and Mexico (US$461.86 billion).

What implications does offshore banking have on the Chinese economy?

Offshore tax haven secrecy and anonymous shell companies in places like the British Virgin Islands facilitate the illicit flow of money. As such, they have been shown to exacerbate inequality and corruption, two of the biggest challenges facing China today. Rising inequality is perhaps the most notable impact of offshore tax haven secrecy on China.

As the rich get richer through tax evasion and by using the world’s shadow financial system to shelter and multiply their illicit wealth, the middle class, the working class and the nation's poor suffer.

Much illicit money is round-tripped back into the country masquerading as foreign direct investment, where it is invested in real estate and other speculative [markets]. Real-estate prices skyrocket, pushing many people out of their homes, and the government is unable to collect tax revenues on the wealth.

Moreover, offshore tax haven secrecy facilitates corruption, raising the cost of doing business in China, slowing economic growth and increasing the likelihood that infrastructure projects will fail, as many bridge collapses have been linked to corruption.

How do you expect the Chinese government to react to Wednesday’s revelations?

The Chinese government has actually started to focus on the issue of corruption and illicit flows over the past couple of years.

As a member of the G20, it signed up to participate in the multilateral automatic exchange of tax information programme, which is very encouraging. That said, there is still much more that they should be doing. The Chinese government should move to create a public registry of corporate beneficial ownership information – as Britain recently announced it will do – and they should require that all Chinese banks identify the true owner of all accounts held in their financial institution.

There is simply no reason for not knowing with whom you are doing business. Moreover, China should expand its use of automatic cross-border exchange of tax information beyond the G20 to include non-G20 tax havens and developing nations. Much of these illicit flows are facilitated by opacity in the global financial system.

As the [Organisation for Economic Co-operation and Development] noted in a report in late December, many of the richest countries in the world are themselves failing to tackle illicit financial flows through trade mis-invoicing and other means – not for a lack of technical capability, but due to a failure of political will.

China has the ability to tackle this issue effectively, and there’s no reason why they can’t take the lead. After all, it’s developing and emerging economies like China that suffer the most from illicit financial flows.

Do you see the trend of an increase of offshore banking to continue?

Illicit financial flows out of developing countries, facilitated by tax haven secrecy and anonymous shell companies, are increasing at a troubling rate.

Our latest study finds that, globally, illicit outflows are increasing at an inflation-adjusted rate of more than 10 per cent per year. This significantly outpaces GDP growth and should give pause to policymakers in China and around the world.

Unless significant policy changes are undertaken by China and other world leaders, there is no reason to believe that illicit outflows of wealth from China or other developing nations will subside.

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