Domestic Consequences of

Illicit Financial Flows

Olav LundstølCounsellor-Energy and Petroleum

Royal Norwegian Embassy in BrasiliaRio de Janeiro, 9 September 2014

IFF, Tax Havens and Development

• Secrecy jurisdictions/tax havens, illicit financial flows/capital flight and challenges of inequality in the western world and emerging economies• >50% of world trade through tax havens, 50% of all banking

assets held in offshore accounts, >30% of all FDI through offshore accounts, balance sheet of small island countries > 18 trillion USD or about 1/3 of world GDP (of this >12 trillion USD held by rich individuals (Shaxson, 2010)• Norway: Monterrey conference on financing for

development (2002), White paper (2009), multiple global, regional and national initiatives

Domestic Consequences:The Developed Economies• Economic inequality rising to pre WW1 levels in the developed world

and expected to continue, overall linked to unequal sharing of gains from increase in productivity between labour and capital (T Picketty)

• The management of the global financial crisis and the euro zone crisis have both contributed further to the increase in inequality in several respective countries and has de facto facilitated a transfer of wealth from the state and the majority of the population to the richest (R Skarstein, 2013 and V Norman 2012)

• The situation is even worse however because, T Picketty broadly leaves untreated: 1) the offshore economy that has increased to unprecedented historical levels in the last few decades, and 2) the increasing element of south-north net capital flows through offshore accounts (K Rogoff, 2014)

Domestic Consequences:The Emerging

Economies• Lost financing for development, through profitable private and public investments in a world with increasing inequality

• IFF from the developing world 500-1000 billion USD/yr, exceeds net legal capital inflow to the developing world and many times ODA

• Capital outflows increasing from several emerging economies with low savings and investment rates and high rates of resource extraction (GFI 2014 East Africa report on trade misinvoicing)

• Net effect of illicit financial flows on growth and poverty has been estimated to be of such magnitude that MDG1 could have been achieved for SSA as a whole (J Nkurunziza, 2014)

Domestic Consequences:What about Brazil?

• Estimated 520 billion USD of assets in secrecy jurisdictions (TJN 2013)

• The 7th highest cumulative IFF outflow among developing countries last decade (GFI 2013)

• Productivity challenge in overall economy, accompanied by low levels of savings and investments, in particular during last two decades, compared to benchmark countries (IMF, 2013)

• Infrastructure stock 17% of GDP (compared to 50-75% of GDP for benchmark countries) (Mckinsey, 2012)

• Investment in infrastructure 1.5% of GDP in 2013 (compared to 5.1% of GDP for developing countries)

• Estimates puts the overall infrastructure investment needed at 1.4 trillion R to bring Brazil up to the level of benchmark countries, about three times the current levels announced for the coming decades (Federal University of Rio, 2013)

• Economic recession in 2014 following low levels of growth in later years

• Estimated IFF about the same as investment in infrastructure in 2012

OutlookA. International

Risk: IFF and inequality on upward trend

Opportunity: High level political and tehnical attention (G8- three T’s, OECD, IMF, UN, BRICS)

Opportunity: Automatic Exchange of Information, Extended country by country reporting, Global Financial System Scrutiny

Needed: A new global and national approach to regulating and taxing international business

B. Brazil

Risk: Rapid increase in large infrastructure investments and pre-sal development

Opportunity: Implementation of new approaches to limit trade misinvoicing beyond the arm’s length principle

Opportunity: Increased focus on large financial and economic crimes through new legislation and special courts and innovative follow up an enforcment

Needed: Active participation, possibly through BRICS, to influence new rules and approach to regulating and taxing international business