Clark: Illicit finances divert resources away from development
Opening Remarks by Helen Clark
Administrator of the United Nations Development Programme
Fourth United Nations Conference on the Least Developed Countries
Special event on Illicit Financial Flows:
Perspectives on Issues and Options for LDCs
Istanbul, 11 May 2011
It is a pleasure to address this special event on Illicit Financial Flows: Perspectives on Issues and Options for Least Developed Countries.
Let me first express thanks on behalf of UNDP to the Government of Turkey for hosting this important event.
Discussions about illicit financial flows need to be placed within the broader context of how to get enough sustainable funding for development.
Without doubt, quality and predictable ODA helps meet the MDGs, as does quality private investment. Innovative international financing for development can also play a role.
But, domestic resource mobilization is a critical –arguably the most critical– part of the equation.
For the MDGs to be achieved, not only do countries’ economies need to grow, but also revenue from that growth needs to be invested back into services and infrastructure.
Many forms of illicit financial flows divert scarce resources away from development. Those illicit flows include, but are not limited to, cross-border transfers of the proceeds of tax evasion, corruption, trade in contraband goods, and criminal activities such as drug trafficking and counterfeiting.
According to Global Financial Integrity, every year the developing world as a whole loses as much as US$1 trillion in illicit financial outflows. That is money which could otherwise be helping to get all children into school, helping all mothers give birth safely, and expanding access to basic healthcare, better nutrition, and clean water and sanitation for all.
The outcome document of last year’s MDG Summit recognized the severity of the problem of illicit financial flows. The international community committed to “implement measures to curtail illicit financial flows at all levels, enhancing disclosure practices, and promoting transparency in financial information”.
To strengthen our understanding of the problem, and to explore possible policy solutions for the LDCs, UNDP commissioned a discussion paper entitled “Illicit Financial Flows from the Least Developed Countries: 1990-2008”. It explores the scale and composition of illicit financial flows from the LDCs, and is being released here today.
The paper suggests that illicit financial flows from LDCs increased from as high as around$10 billion in 1990 to over $26 billion in 2008. The ratio of illicit outflows to GDP in LDCs averages almost five percent.
The analysis indicates that for every dollar received from ODA in LDCs, about sixty cents was offset by other resources leaving the countries illicitly in the period examined.
These results are indicative because the approaches to estimating illicit financial flows vary. Robust trade data is often not available and, by their very nature, such flows are extremely difficult to measure.
Debate over the precise numbers, however, should not overshadow the worrying reality that illicit financial flows undermine human development, especially in those countries where development funding is most sorely needed.
Illicit flows seriously impede LDCs’ efforts to raise resources for social and economic development. These flows are often absorbed into banks, tax havens, and offshore financial centres in developed countries.
The UNDP discussion paper outlines a number of ways in which LDCs could be supported to tackle illicit financial flows. I will mention four of them, and what UNDP can do and is doing in each area.
- First, trade mispricing –in which imports are overpriced and exports underpriced on customs documents– is estimated to account for over 65 percent of illicit financial flows from the LDCs.
Trade mispricing can be minimised through strengthening and reforming customs administrations. A modern customs service can play a key role in both trade facilitation and revenue collection, helping countries to take advantage of the opportunities presented by the global marketplace.
While UNDP is not a specialist agency in the area of customs, we do trade-related work, mainly under the auspices of the Aid for Trade initiative, including through its Enhanced Integrated Framework for the LDCs. This work includes helping to enhance countries’ competitiveness and ease supply side constraints.
In Lesotho, for example, we have helped to establish a mechanism for the government to share information on business regulation and customs requirements. We also work with the Maldives and Vanuatu governments and development partners to strengthen their customs services’ automated clearance processes.
The World Customs Organisation is keen to support MDG achievement through the modernization and improvement of customs services. I hope we can build more partnerships between WCO, development agencies, and programme countries in the future.
- Second, taxes provide the most sustainable source of financing for development. A goal for LDCs must be to move over time to self-sufficiency in development funding. It will be important for tax systems to be fair and not to overburden the poor.
In a number of countries, UNDP works to help develop the capacity of tax administrations. For example, in Laos we helped the government to align its fiscal policy with its poverty reduction objectives.
- Third, governments need to commit to tackling corruption in general, to put in place the legal institutions and regulatory mechanisms to do so, and to improve the enforcement of laws already on the books. Measures to reduce bribery and kickbacks also call for greater openness in bidding for and awarding government contracts.
Through its work to promote democratic governance, UNDP is supporting partner countries to enhance their anti-corruption capacities. Last year, more than a hundred UNDP country offices supported their host governments in this area. These efforts do help to make more resources available over time for education, health care, and other public investments.
- Fourth, the discussion paper recognizes that a skewed distribution of income which results in larger numbers of high net worth individuals gives incentives for the hidden accumulation of wealth, and drives illicit outflows.
Measures to ensure that economic growth is inclusive and benefits not just a privileged few, but all income groups –through better jobs, education, healthcare and other services– will help.
With its global presence established over many years, UNDP is well placed to support countries to exchange experiences and lessons learned on how best to improve domestic oversight and anti-corruption mechanisms.
The Special Unit on South-South Cooperation, housed in UNDP, was a partner in an innovative project on “South-South Sharing of Successful Tax Practices”. It was designed to enhance cooperation and knowledge sharing among developing countries on mobilizing domestic resources and ensuring that tax revenues are well spent. You will hear more about that initiative later today.
UNDP is also a member of the Leading Group, an alliance of more than fifty governments and international organizations, which has been exploring innovative financing for development. Part of this group’s brief is to look at ways in which international cooperation can be more effective in curtailing illicit capital flows.
Stemming illicit financial flows from LDCs requires not only action on the part of the governments concerned, but also the cooperation of many other stakeholders too.
UNDP looks forward to an open discussion on these issues today, and to forging new partnerships to fight illicit financial flows. Doing so is an important part of all our efforts to ensure sustainable human development for all.