Georgia has seen illicit outflow of around USD 4 billion in the past 10 years, study suggests

18 April, 2011

Update: 27.04.2011 For media inquiries regarding the report referenced in this post, please contact Global Financial Integrity, +1 202 293 0740, Washington, DC. Georgia has seen an outflow of illicit money of USD 4.1 to 4.3 billion in the past ten years, according to the recently published report, Illicit Financial Flows from Developing Countries Report by Global Financial Integrity (GFI), a think tank based in Washington, D.C. The report claims that in 2008, almost USD 1.3 trillion of illegally earned or transferred money has escaped from poorer into richer countries. In order to estimate these illegal outflows, the researchers used two well-established economic models. Firstly, they checked the balances of payment reports (a country’s account sheets of its financial transactions with other countries). When a source of funds (such as increases in the net external indebtedness of the public sector) exceeds recorded use of funds, this reflects unrecorded outflows. Secondly, the authors sought to quantify the phenomenon of trade mispricing -- the intentional faking of trade invoices -- by comparing countries' reported exports to the rest of the world with what the rest of the world reports as having imported from a specific country. Similarly, the value of a country’s reported imports were compared to what the world reports as having exported to that country, to capture the degree of illicit inflows. As illicit financial flows are, by nature, not registered in any official way, these kinds of reports provide us with just a rough number. The GFI researchers believe that their estimates are still fairly conservative (low), since they do not include smuggling and asset swaps, to name a few. The report suggests that Georgia’s balance of payments has seen more inflows of illegal money than outflows, with the exception of the transition years 2002-2004. Its authors caution that this is not necessarily a good thing. Illicit flows are harmful in both directions. Outflows represent a near-permanent loss of scarce capital, inflows are driven by illicit activities such as smuggling to evade import duties or value-added tax (VAT) and can stimulate growth of the underground economy. Regarding the second parameter of trade mispricing, Georgia saw steady outflows of illegal capital. That means that importers of goods declare higher import value to Georgian customs than the value recorded by the exporting partner country. Similarly, Georgian exporters understate the value of goods actually exported and thus keep the balance of funds abroad. Such discrepancies in partner country trade data indicate the transfer of illicit capital abroad. The GFI researchers based their estimation of Georgia’s illegal outflows on the trade mispricing data. The authors estimate that illicit flows in the period 2000-2008 have amounted to USD 4.1 (conservative) to 4.3 (high-end estimate) billion. The results of this projection place Georgia somewhere between the 74th and the 87th place worldwide regarding illicit financial outflows, with an average annual amount between USD 456 million and 474 million. The five countries with the largest illicit outflows during 2000-2008 were China (a whopping $2.18 trillion), Russia ($427 billion), Mexico ($416 billon), Saudi Arabia ($302 billion) and Malaysia ($291 billion). Economies that are somewhat comparable in size to Georgia, such as Armenia and Moldova, have comparable rankings, with illicit financial flows of around USD 550 and 380 million respectively. Other countries that might provide a useful comparison, such as Azerbaijan and Romania, have a much bigger problem of illegal financial flows than Georgia, ranging from USD 2,298 to 4,490 million and USD 3,678 to 4,209 million, respectively.

Author: Sara De Sloover