Friday, April 13, 2018

How Industrialized West Enables Corruption in Developing World

Some have called London the "Money Laundering Capital of the World" where corrupt leaders from developing nations use looted wealth from their people to buy expensive real estate and other assets. Private individuals and businesses from poor nations also park money in the west and other off-shore tax havens to hide their incomes and assets from the tax authorities in their countries of residence.

The multi-trillion dollar massive net outflow of money from the poor to the rich countries has been documented by the US-based Global Financial Integrity (GFI). This flow of capital has been described as "aid in reverse". It has made big headlines in Pakistan and elsewhere since the release of the Panama Papers and the Paradise Leaks which revealed true owners of offshore assets held by anonymous shell companies. Bloomberg has reported that Pakistanis alone own as much as $150 billion worth of undeclared assets offshore.

Politicians Dominate Off-shore Company Owners in Panama Leaks
Aid in Reverse:

In 2012, the latest year for which data is available, developing countries received $1.3 trillion, including all aid, investments, worker remittances, and other income from abroad. In that same year some $3.3 trillion flowed out of them. In other words, developing countries sent $2 trillion more to the rest of the world than they received, according to the data compiled by the US-based Global Financial Integrity (GFI) and the Centre for Applied Research at the Norwegian School of Economics and reported by the UK's Guardian newspaper.

Laws in America and Europe allow the creation of anonymous shell companies. An anonymous shell company is a corporate entity that has disguised its ownership in order to operate without scrutiny from law enforcement or the public. These “phantom firms” can open bank accounts and wire money like any other company, making them a favorite tool for money launderers to hide their business and assets from authorities, according to the US-based Global Financial Integrity (GFI).

GFI estimates that developing countries have lost as much as $13.4 trillion through unrecorded capital flight since 1980. Bloomberg reports that Pakistanis own $150 billion worth of undeclared offshore assets, attributing this estimate to Syed Muhammad Shabbar Zaidi, a partner at Karachi-based A.F. Ferguson and Co. -- an affiliate of PricewaterhouseCoopers LLP.

Impact on Economic Growth:

There's a direct relationship between investment and GDP. Flight of capital reduces domestic investment and depresses economic growth in poor countries. Lower tax revenues also impact spending on education, health care and infrastructure, resulting in poor socioeconomic indicators.

In Pakistan, for example, it takes investment of about 4% of GDP to grow the economy by 1%. Lower levels of investments in the country has kept its GDP growth below par relative to the rest of South Asia.  Any reduction in the outflow of capital to offshore tax havens will help boost economic growth in Pakistan to close the gap with its neighbors, particularly Bangladesh and India whose economies are both growing 1-2% faster than Pakistan's.

Panama Papers Leak:

There is an entire industry made up of lawyers and accountants that offers its services to help hide illicit wealth. Mossack Fonseca, the law firm that made headlines with "Panama Leaks", is just one example of companies in this industry.

Mossack Fonseca's 11.5 million leaked internal files contained information on more than 214,000 offshore entities tied to 12 current or former heads of state, 140 politicians, including Pakistan's now ex Prime Minister Nawaz Sharif's family.  Icelandic Prime Minister resigned voluntarily and Pakistani Prime Minister was forced out by the country's Supreme Court.

The Panama list included showbiz and sports celebrities, lawyers, entrepreneurs,  businessmen, journalists and other occupations but it was heavily dominated by politicians.

War on Tax Evasion and Money Laundering: 

Organization of Economic Cooperation and Development (OECD), the club of world's rich industrialized nations, and some of its member states appear to be taking some steps to stem the global rising tide of tax evasion and money laundering.

OECD is promoting  enhanced co-operation between tax authorities through AEOI (Automatic Exchange Of Information) to bring national tax administrations in participating countries in line with the globalized economy.

Several countries, including the United Kingdom, are working on legislation forcing the disclosure of the ultimate beneficial owners of the properties held by anonymous shell companies. The new laws will establish publicly accessible registry of beneficial owners of real estate.

Tax Amnesty Schemes:

Developing countries are offering tax amnesty schemes to bring back the off-shore wealth to help their economies. Argentina and Indonesia did this recently.  Indonesia's tax amnesty in 2017 saw $330 billion worth of assets declared.   Pakistan is in trying to the do the same to help build its dollar reserves and expand its tax base.

Under Pakistan's announced tax amnesty, Pakistani citizens can declare previously undeclared foreign assets and still keep them abroad by paying 5% penalty for liquid assets and 3% penalty for real estate. Alternatively, they can declare and repatriate liquid assets to Pakistan by paying just 2% penalty.

The assets covered by the amnesty include "real estate, mortgaged assets, stock and shares, bank accounts, bullion, cash, jewels, paintings, accounts and loan receivables, beneficial ownership or beneficial interests or contribution in offshore entities and trusts."


Laws and practices in the West and other offshore tax havens encourage corruption in developing nations that results in net outflow of trillions from poor countries to the rich industrialized world, according to the US-based Global Financial Integrity (GFI). There are some efforts underway to stem this outflow. Pakistanis hold as much as $150 billion in undeclared assets overseas. The latest tax amnesty in Pakistan is an attempt to bring some of it back to the country, or at least collect 3-5% of it in the form of penalties.

Related Links:

Haq's Musings

South Asia Investor Review

Did Musharraf Steal Pakistani People's Money?

Pakistan Economy Hobbled By Underinvestment

Raymond Baker on Corruption in Pakistan

Nawaz Sharif Disqualified

Culture of Corruption in Pakistan

US Investigating Microsoft Bribery in Pakistan

Zardari's Corruption Probe in Switzerland

Politics of Patronage in Pakistan

Why is PIA Losing Money Amid Pakistan Aviation Boom?


Singh said...

Is it the West fault that much of the developing world is corrupt? Money, even corrupt money, chases returns, wherever it may be, either in the West or elsewhere.

Riaz Haq said...

Singh: "Is it the West fault that much of the developing world is corrupt? Money, even corrupt money, chases returns, wherever it may be, either in the West or elsewhere."

Aiding and abetting criminals from poor nations by helping them hide stolen assets is a crime in itself that the West is guilty of.

Ismael M. said...

This is unsurprising. Those in power will remain so at all cost and have no interest in the well being of the ordinary citizen. As long as the status quo is maintained, which the elites will go to any lengths to exploit and maintain, nothing will change.

It's so easy for Trump to increase the defence budget by a whopping $150 billion per year, but he cringes at programs that feeds pre-K kids for $2 billion per year.

Bush II increased the defence budget from $300 billion to $600 billion and we can see this country falling apart because of that disastrous policy. The same goes for all the dictators and autocrats around the world - they milk every avenue of revenue and then by properties around the world using these shell companies.

Ahmad F. said...

Why blame the West? The East is just as depraved and always was, centuries before the West arrived.

Corruption and exploitation and cruelty are innate to human nature.

You have to wonder why we are endowed with these attributes.

I guess it makes the game of life that much more interesting for someone to watch.

Riaz Haq said...

Ahmad: "Why blame the West?"

Because the West is complicit in the crimes of politicians in the 3rd world.

America and Europe help them in hiding stolen assets which is a crime in itself

Riaz Haq said...

Pakistan Seeks Up to $1 Billion From Expats as Reserves Dwindle
April 15, 2018, 11:48 PM PDT

Pakistan seeks manager for certificate sale due by June
South Asian nation foreign reserves falling fastest in Asia
Pakistan plans to raise as much as $1 billion from its diaspora in its latest effort to boost foreign-exchange reserves that have dropped close to the lowest in three years.

The government plans to launch an overseas certificate in U.S. dollars and rupees by June to raise between $500 million and $1 billion a year, Zafar Masud, director general of National Savings at the finance ministry, said by phone on Monday. Pakistan seeks bids for financial managers by April 30 for the transaction, he said.

“We were among the only few countries which didn’t have this product for expats,” said Masud. The sale will offer returns “better than what they’re getting in their home markets.”

Pakistan’s economy is facing headwinds before elections in July with foreign exchange reserves dropping at the fastest pace in Asia in the past year. The government also announced an amnesty offer this month that allows overseas Pakistanis to repatriate funds after paying a 2 percent cash tax. Islamabad decided not to issue international bonds after global rates spiked.

J. Khan said...

London is not only on top of the list in financial institution corruption but also top of the notch in other kinds of corruption. Since Tory government took over student unions are being suppressed so no one can raise the awareness. Apparently Tory government is trying to sell student loan to private entities. Some professional bodies are failing students in their final exams deliberately to make as much money out of them as possible before they graduate. List is endless in UK or west. No one cares about law or regulatory authorities in UK, why? because since Tory came to power they suspended legal aid for citizens, end result of that is that public and private sector is damn corrupt because they know ordinary citizen will not be able to sue them because of legal cost.

Recently it has been said in public media that in future if investigative bodies find out that any foreigner has any illegal money without proof of its origination. Then money will be taken away from that person to the British exchequer. I think its just a gimmick. Instead of saying that after investigation if money found to be illegal, UK will return the money to exchequer of that country where it belongs. UK wants to keep that money. If its implemented then its a double theft. Original looser's will be foreign countries and corrupts that will deposit that money in UK will only be collection agent for the sake of UK's benefit.

There is much more going on in UK, i think UK itself is corrupt from its very past and is also providing framework to others for the same. Majority of tax safe heavens fall under UK's control and they dont want to get rid of them because its beneficial for their economy.

Z Basha Jr said...

Riaz Sb, Did you manage to find more details of amnesty scheme? Is the risk worth taking in your opinion?

Riaz Haq said...

How to defeat Pakistan’s corrupt elite and return wealth to the people
The Pakistani opposition leader, Imran Khan, outlines his vision for change.

For PTI, it is not just “politics”: it is a commitment to building a welfare state where the rule of law, meritocracy and transparency are guaranteed to all of our citizens. Pakistan is a country with abundant natural resources and wealth that have been stolen by a corrupt and predatory elite. We are committed to bringing this stolen wealth back to be used for the welfare of our people.


The Pakistani state must be responsive to the people in an accountable and transparent manner, and the nation’s development must be on the basis of equality and inclusivity. Only then can Pakistan play a stabilising role in the region, resolving to seek peace with its neighbours through conflict resolution and co-operation. Our general election in July is critical for the future of my country.