Sri Mulyani Indrawati | Dirty money and development | Mint
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Business News/ Specials / 2014-the Year In Review/  Sri Mulyani Indrawati | Dirty money and development

Sri Mulyani Indrawati | Dirty money and development

Dirty moneyMNCs' undeclared profits, the proceeds of corruption, etc.can play a large role in ending poverty

The G-20 has recently begun to call for global action to ensure that bad deeds do not pay. And, at a recent meeting in Berlin, governments signed a deal to crack down on cross-border tax evasion. Photo: Kevin Lamarque/ReutersPremium
The G-20 has recently begun to call for global action to ensure that bad deeds do not pay. And, at a recent meeting in Berlin, governments signed a deal to crack down on cross-border tax evasion. Photo: Kevin Lamarque/Reuters

The world has made enormous progress in recent decades in the fight against poverty. But, as 2014 ended, one billion people—one in seven—still lived on less than $1.25 a day.

It will take a global effort to end poverty—and to find the resources to do so. At first glance, the price tag is staggering. We know that development aid will not be sufficient to end poverty. It will take private sector investment, taxes collected in developing countries, and other sources of finance to do the job.

The truth is that there is enough money in the world to get it done. One unexpected source of wealth that could play a large role is the world’s huge supply of dirty money: multinational companies’ undeclared profits, the proceeds of corruption, and the earnings of traffickers of drugs, weapons, and people—all of which is stashed away in offshore bank accounts, companies, and trusts.

Reliable numbers about the amount of dirty money around the world are difficult to come by. But according to an estimate by the non profit Global Financial Integrity group, $1 trillion vanishes from the developing world’s economies every year. That is money that is badly needed for development.

This is also roughly the amount needed to fill the vast infrastructure gap that is preventing the world from addressing critical developmental challenges—from rapid urbanization to climate change and job creation. Today, developing and emerging countries invest about $1 trillion a year in infrastructure. They need an additional $1 trillion a year to close the gap, a necessary step to ending extreme poverty by 2030.

But a lack of implementation and enforcement of anti-money laundering, tax transparency, and anti-corruption rules is shielding the perpetrators from prosecution. This ultimately prevents developing countries from stopping the outflow of money that is bleeding them of essential resources.

For the schoolchild in Port-au-Prince (Haiti), the new mother in Mogadishu (Somalia), or the farmer in Ocotepeque (Honduras), these losses have a real impact: overcrowded classrooms, non-existent health clinics, and inadequate water resources. People’s opportunities are being stolen from them.

Fortunately, the international community has woken up. An initiative of African finance ministers, chaired by former South African president Thabo Mbeki, is investigating the issue on the continent, where up to $1.4 trillion was lost to illicit outflows over the last three decades. Most recently, the G-20 has begun to call for global action to ensure that bad deeds do not pay. And, at a recent meeting in Berlin, governments signed a deal to crack down on cross-border tax evasion.

This is good news, particularly for the poor. But many hurdles remain, and now the world must focus on three critical issues.

First, developing countries must build effective institutions while enforcing good governance, transparency, and accountability. They must fight corruption, combat organized crime, and implement effective tax systems, which is even more critical in resource rich countries. Recent events in the Middle East and Ukraine demonstrate how the capture of state coffers by vested interests instigates conflict and undermines people’s trust in government.

But corruption, money laundering, and tax evasion are global problems, not just challenges for developing countries. Though weak national institutions and limited law enforcement capacity may make it easier to initiate illicit financial transfers, we need to acknowledge that dirty money often ends up in financial centres, which have become quasi-enablers. That is why addressing the issue requires international cooperation.

Second, regulations that identify the true owners of illicit funds need to be enforced. Once such assets are parked in opaque companies, they are often beyond the reach of tax authorities and investigators. Again and again, the true recipients or beneficial owners of companies and trusts are shielded from disclosure by laws and regulations that inadvertently protect criminals. This must stop.

Finally, a system for the automatic exchange of tax information among countries would limit the places where tax evaders and money launderers can easily hide their proceeds. Almost 90 countries have now committed to begin, as early as 2017, cross border data exchanges that would include information about account holders and certain details regarding their deposits and balances—information that could help authorities identify proceeds from corruption and illegal transactions through suspicious activity and spikes.

More action is needed in 2015 and beyond. At the World Bank, we are already working with our clients in developing countries to improve their governance systems, collect taxes, fight corruption, and recover stolen assets. Our work will benefit enormously from the current push for more international cooperation in curbing illicit financial flows.

Changing much cherished bank secrecy laws is worth the effort. Corruption, tax evasion, and the capture of natural resource revenues undermine the rule of law, weaken the social fabric, erode citizens’ trust in institutions, fuel conflict and insecurity, and hamper job creation. They are not just illegal, but also immoral, because they keep poor people poor. ©2015/Project Syndicate

Sri Mulyani Indrawati is managing director and chief operating officer of the World Bank and is a former minister of finance of Indonesia.

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Published: 01 Jan 2015, 12:03 AM IST
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