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Estimating the Magnitude of Capital Flight Due to Abnormal Pricing in International Trade: The Russia–USA case
Abstract
Governmental and international lending agencies, as well as private sector firms, who engage in international trade, have long been concerned with detecting and determining the magnitude of abnormal pricing in international trade. To detect such abnormal pricings, we present a framework analyzing millions of import/export transactions between the U.S. and Russia. The objectives of this study are to estimate the economic impact of over-invoiced/under-invoiced Russian imports/exports from/to the U.S. and to determine if capital movement/capital flight through trade is due to money laundering, tax evasion or some sort of portfolio consideration. Our results lead us to conclude that capital movement through trade in this case can be attributed to either money laundering and/or tax evasion.
... For example, income shifting from countries with a higher marginal tax rate to countries with a lower marginal tax rate is a commonly known reason for abnormal pricing (Eden, 1998;Samuelson, 1982;Halperin and Srinidhi, 1987;Harris and Sansing, 1998;Hines, 1997). Capital transfer is another factor influencing a firm's decision to set a specific level of transfer price in related party transactions (de Boyrie et al., 2005a). Sikka and Willmott (2010) examine extensively the transfer price practices used by multinational corporations and report a widespread use of transfer pricing to avoid taxes and to shift income in both developed and developing countries. ...
... Due to the abusive use of transfer price and a large impact on a country's tax revenue, a great deal of attention has been given to trade mispricing by both academics and regulators in recent years (Bhagwati, 1964;1974;de Boyrie et al., 2005ade Boyrie et al., , 2005bde Boyrie et al., 2007;Gulati, 1987;Pak, 2007;Zdanowicz et al., 1999)[4]. Largely invisible to the public eye and costly to detect (Sikka and Willmott, 2010), such abuse can be particularly damaging to exporting developing countries where capital flight adversely affects their potential for economic and social development. ...
... whether importer's price is abnormally high or low). Prior studies (Pak and Zdanowicz, 1994;Pak et al., 1997;de Boyrie et al., 2005a) have relied on the upper and lower quartile of monthly import/export price as a benchmark to measure the degree of abnormality of import/export price or partner-country method (Bhagwati, 1964(Bhagwati, , 1974. The use of the free market price is important in this study, as it allows us to measure more accurately how much each import price declared in the US Customs and Border Protection deviates from the market price or from the degree of under-or overpricing. ...
Purpose
– The purpose of this study is to examine the degree of trade mispricing in the US fresh banana trade with Latin American and Caribbean countries using a new alternative measure in estimating arm’s length price.
Design/methodology/approach
– A key feature of the research design is that we use the actual free market price of commodity (e.g. fresh banana price) as a benchmark for arm’s length price rather than relying on interquartile range, which is known to be problematic.
Findings
– The paper finds that when the degree of mispricing is measured by two widely used methods, interquartile price filter and partner-country methods, we find little evidence of undervaluation or overvaluation of US banana import. However, when we use the free-market price of fresh banana as a benchmark for arm’s length price, first adopted in this study, the average undervalued amount of trade compared to the total banana import declared value by the US importers is on average 54 per cent during the period between 2000 and 2009.
Originality/value
– This study suggests a new simple measure in estimating arm’s length traction price in studying trade mispricing.
... Numerous studies on trade misinvoicing have focused on the issue of capital flight which have only included undervalued exports and overvalued imports within the four potential components of misinvoicing, thus ignoring the issue of illicit financial inflows (see for instance de Boyrie et al., 2005b). ...
... In addition, it should be noted that trade-based money laundering is one of the most used practice for moving illicit capitals and reintegrating them into the formal economy (FATF, 2006). Although assessments made by de Boyrie et al. (2005aBoyrie et al. ( , 2005bBoyrie et al. ( , 2007 and Zdanowicz (2007) seem to be overestimated, they do provide an interesting view on the magnitude of illegal money moved by commodity transactions. According to Berger and Nitsch (2008), as well as Shaar (2017), high levels of corruption can also explain discrepancies in trade data. ...
This paper aims to explore the extent of trade misinvoicing among OECD countries and to determine trends and patterns over the period 2006-2016. Following the standard approach developed by Morgenstern (1950), four categories of misreported bilateral transactions are estimated to highlight two channels used to shift illicit financial flows. The study is reinforced by an analysis in terms of bilateral intensity indices proposed by Kojima (1964) and modified by Kunimoto (1977) to identify strong bilateral relations for selected OECD countries in terms of misinvoicing practices. Some interesting findings can be pointed out: (i) estimated values of intra-OECD misinvoicing trade indicate that accumulated amounts have reached more than 12 trillion US dollars over the period mostly through illicit financial inflows, although illicit outflows tend to increase during the last years; (ii) significant amounts of illicit financial flows occur between the most advanced countries despite the quality of their statistical recording services; (iii) arguing against explanation based on tax evasion and capital flight, it is shown that countries with high GDP per capita are both senders and recipients of IFFs, while lower GDP per capita countries are also receivers of illicit inflows; (iv) the share of misreported imports in countries´ total imports is larger than for total exports, which seems to indicate that imports are the principal vehicle facilitating bilateral misinvoicing trade; and (v) geographical proximity appears to be an important factor in determining the channel used and the direction of illicit financial flows as well as in describing intense relations relative to bilateral misinvoicing trade.
... The fiscal regime in Russia before the government's domestic debt default in 1998 did not favour local economic and entrepreneurial development, as the Russian tax system aimed primarily at the maximization of short-term tax revenues by setting high corporate and private tax rates. Despite the government's efforts to implement controlling mechanisms limiting capital flight from Russia, many Russian firms implemented sophisticated tax evasion schemes based, for instance, on abnormal pricing of international trade transactions (de Boyrie et al., 2005), and in some cases drawing on the tax saving possibilities offered by tax havens (Luong and Weinthal, 2004). ...
... Some firms regarded the economic and political stability of host markets and fiscal advantages as an important motivating factor, and, therefore, as important characteristics that influenced their foreign market selection. The default, devaluation of the rouble and the perceived expropriation threats of 1998 could all have contributed to the capital flight from Russia (de Boyrie et al., 2005). A recent study by Chernykh (2011) on the State's acquisition of controlling stakes in Russian listed and unlisted firms signalled the high probability that formerly privatized and domestically owned firms in strategically important sectors would be renationalized. ...
Purpose
The purpose of this paper is to address the internationalization of Russian multinationals by critically challenging existing assumptions about “springboard” foreign market selection by emerging market firms.
Design/methodology/approach
The authors studied foreign market selection decisions for 497 international merger and acquisition (M&A) and joint venture (JV) deals completed by Russian multinational enterprises (MNEs) between 1997 and 2009. The statistical model tests the impact of the geographic, political and economic distances of the host country from Russia on Russian MNEs' foreign market selection decisions.
Findings
Contrary to existing assumptions, the host country's geographic closeness to Russia, and its being an ex‐USSR republic or a tax haven, positively affected the country's probability of attracting an M&A or JV deal by a Russian MNE, while the similar level of economic development did not significantly influence the MNEs' foreign market selection decisions. The patterns of significance among the explanatory variables vary for Russian MNEs operating in the natural resources industries.
Research limitations/implications
Further studies may extend the observation period, enlarge the database with Greenfield and export deals by Russian MNEs, and add cross‐country cultural distances to the explanatory variables.
Practical implications
Russian managers should consider the “distances” that might influence firms' foreign investment decisions. This paper also allows host country governments willing to formulate policies aimed at the attraction of Russian outward foreign direct investments to obtain a better understanding of Russian MNEs' international strategies.
Originality/value
One of the few quantitative studies on the topic, this research suggests that Russian MNEs choose their own means of foreign market selection, combining gradual and leapfrog approaches to internationalization.
... Presence of CF indicates falling resident's confidence in an economy (Eryar, 2005). There are several methods of estimating CF found in international finance literature, namely, the World Bank Residual measure (1985), the Hot money measure by Cuddington (1986), measuring the stock of unreported assets also called Dooley's approach (Dooley, 1986(Dooley, , 1988 and trade mis-invoicing method (De Boyrie et al., 2005). Cuddington (1986) measures CF as the sum of the net errors and omissions in the balance of payments accounts and non-bank private sector's short-term foreign assets (Chang et al., 1997), whereas Dooley's method focuses on calculating the unrecorded income generated from domestically owned foreign assets stock (Claessens et al., 1993). ...
Purpose
The purpose of this study is to focus on the impact of environmental factors on capital flight from BRICS countries. This study proposes modelling the different natural resource rents including coal, oil, gas, mineral and forests with capital flight outlining how the resource extraction cause corruption and rent seeking leading to outflow of resident capital.
Design/methodology/approach
World Bank residual method is used for estimation of capital flight followed by dynamic common correlated effect (DCCE) approach developed by Chudik and Pesaran (2015) for empirical analysis. To ensure the reliability and robustness of results, this study constructs a Natural Resource Rent Index (NRRI) using principal component analysis (PCA) of various resource rents including coal, oil, gas, mineral and forests.
Findings
The econometric analysis reveals that natural resource rents significantly contribute to resident capital outflows from BRICS countries. Furthermore, this study finds that increased government involvement in resource extraction significantly reduces capital flight.
Practical implications
The findings of this study emphasize the necessity of proactive policy measures to mitigate capital flight from BRICS countries, particularly through enhanced government engagement in resource management.
Originality/value
This study fills literature gap by identifying how environmental factors fuel capital flight in BRICS economies.
... Price filter analysis emerged as an alternative method and relies on a single country's transaction-level trade data to identify a unit price range of normally priced transactions for a specific good over a given time period. Many studies have used the price filter methodology, analysing millions of import and export transactions to estimate the extent of trade mispricing (e.g. de Boyrie, Pak and Zdanowicz, 2005;Cathey, Hong and Pak, 2017;Pak, Zanakis and Zdanowicz, 2003;Hong, Pak and Pak, 2014). A weakness of price filter analysis is that 'normal price ranges' do not adequately account for product heterogeneity. ...
... The results suggest that the legislation was introduced for legitimacy reasons in response to internal pressures within the country as well as external influences where the government needed to be seen to act. To date, there remains a dearth of studies drawing on insights from key stakeholders at a time when new tax evasion legislation was introduced; instead, a lot of research in the area focuses on studying the incidence of tax evasion (The World Bank, 2015), the mechanisms whereby tax payers attempt to illegally avoid paying their taxes (De Boyrie et al., 2005) and the reasons for evading tax (Besley et al., 2014). The current paper contributes to the literature by examining a government's decision to tackle the issue of tax evasion using legislation; the process behind the introduction of such legislation is studied. ...
On 26 April 2016, Thailand introduced new tax evasion legislation which was enacted by Parliament in April 2017. The Act amended previous anti-money laundering legislation, transferred prosecution of serious tax evasion cases from the Revenue Department to an anti-money laundering unit and permitted the seizure of an accused’s assets once criminal proceedings had been initiated. Drawing on institutional theory, our study examines why this legislation was introduced. It focusses on the formal institutions and legitimacy. Specifically, it reports on 35 interviews with a range of stakeholders to ascertain their views about the reasons behind this legal change. The results suggest that external and internal legitimacy concerns acted as catalysts for the change. These results have practical implications for those investigating the issue of tax evasion and policy implications for those examining whether legislation will impact the incidence of tax evasion within a country.
... Since the IQR is calculated endogenously using the observed distribution of export prices, this method directly assumes the presence of under and over-valuation in the trade statistics. However, it provides useful insights from a risk analysis perspective by identifying exporters and trade partners who consistently appear in the extreme tails of the products' observed price distribution (Zdanowicz et al., 1999;Pak et al., 2003;De Boyrie et al., 2005;Hong and Pak, 2017). For our analysis, we introduce a methodological innovation compared to previous studies by calculating the interquartile range of unit prices (USD per kilogram) for each product using a rolling window of the previous 365 days. ...
Mispricing of international trade in natural resources contributes to significant tax base erosion from developing countries but is difficult to measure using aggregate trade statistics. In this paper, we apply a novel approach motivated by legal rules for trade and transfer mispricing to estimate abnormal pricing in gold and cocoa exports from Ghana, i.e. exports valued outside an assumed arm's length price range that indicates fair market values. Using daily frequency, transaction-level data from Ghana Customs, our results indicate abnormally undervalued exports of gold and cocoa from Ghana equalled USD 8.8 billion in constant prices (base year 2011) or USD 4.1 billion in current prices between 2011 and 17. Approximately 11% of gold doré exports, 1% of cocoa bean exports and 7.2% of cocoa paste exports appear abnormally undervalued. The implied corporate tax base erosion equals USD 2.2 billion in constant prices (base year 2011) corresponding to an average annual decrease of 0.3% in Ghana's tax-to-GDP ratio.
... Against the backdrop of media coverage and increasing public concern, corporate tax avoidance is a topic gaining increasing academic attention. Until recently much of the research had a quantitative approach, focussing on statutory corporate income tax rates, seeking to identify profit shifting (Finér & Ylönen, 2017) (for example Barterlsman & Beetsma, 2003;De Boyrie et al., 2005;Hines & Rice, 1994;Huizing & Laeven, 2008). However, recently there have been studies using a qualitative approach (for example Anesa et al., 2019). ...
Transfer pricing for tax purposes has long been contentious, but recent political and public concerns about tax avoidance have energised critiques of current rules and debates about proposals for change. Transfer pricing tax rules are underpinned by the arm’s length principle and we consider how the common understanding of this principle has developed and changed, as criticism of it has grown and there have been increasing calls for change. In this qualitative study we draw on Bourdieusian concepts: we focus on the views of senior transfer pricing professionals relating to the UK and the US and consider how their views and transfer pricing practices have changed over a period of field disruption. This is important because calls for transformation of the field need to be cognizant of the extent to which existing practices are firmly embedded and thereby resilient to change. We find that over the period of our longitudinal study the senior transfer pricing professionals show a degree of adaptability to the use of the arm’s length principle, which continues to dominate.
... The method is applied to trade between Russia and the US by Boyrie et al. (2005). They assume that imports into Russia that are priced above the 75 percentile of the price distribution for the relevant product category and exports out of Russia priced below the 25 percentile reflect mispriced trade. ...
... Most of the studies take a micro view of the main drivers that may underlie deliberate misreporting. De Boyrie et al. (2005) concentrate on potential price misreporting: holding discrepancies between international prices and prices applied in bilateral trade between Russia and the US in the early nineties as signals of illegal trade conducive to capital flight, they explain such discrepancies by adopting a portfolio approach, including interest and inflation rate differentials and exchange rate volatility as potential determinants. Patnaik et al. (2012) add to this lot political and economic stability and exchange rate volatility. ...
... Indeed; most of the studies that rely upon detailed trade data focus on the United States and western European countries. Within this class of methods, the abnormal pricing method used by Boyrie et al. (2005a) to study illicit flows between Russia and the US exploits information on prices and quantities at the transactional level in order to estimate an exchange-price distribution for different product categories. Subsequently, the authors assume that price anomalies are, in fact, evidence of tampering with capital leaks. ...
The chapter outlines the flow network approach (FNA), an innovative method for estimating illicit financial flows (IFFs). The FNA is specifically designed to estimate inward and outward IFFs related to the transnational trafficking of illicit goods. FNA also allows for the overall estimation of the gross value added related to transnational trafficking, from whence it becomes potentially possible to estimate money laundering-related IFFs. The resulting estimate permits the linking of IFFs to their predicate offenses, overcomes double counting issues, and enables cross-national and longitudinal comparisons. Moreover, it increases our understanding of illicit industries by giving us an insight into their economic scope. The chapter exploits the trafficking of cocaine as an illustrative example, but FNA can be applied to any other form of trafficking.
... Indeed; most of the studies that rely upon detailed trade data focus on the United States and western European countries. Within this class of methods, the abnormal pricing method used by Boyrie et al. (2005a) to study illicit flows between Russia and the US exploits information on prices and quantities at the transactional level in order to estimate an exchange-price distribution for different product categories. Subsequently, the authors assume that price anomalies are, in fact, evidence of tampering with capital leaks. ...
The chapter describes the main approaches for estimating illicit financial flows (IFFs) in extant literature. In particular, it considers the underlying ideas and the data required for the estimation, along with outlining the manifold limitations of the respective methods. The semantic and conceptual difficulties involved in interpreting IFFs, allied with the broadness of the definition itself, are echoed in its operationalization and the design of the methods used to estimate it. Overall, there is a clear lacuna in the literature with respect to accurate scales and patterns of IFFs. All the proposed methods suffer from several limitations, some of which appear to be insurmountable. The chapter suggests that the development of reliable synthetic indicators of IFFs requires breaking IFFs down into their constituent components.
... Most of the studies take a micro view of the main drivers that may underlie deliberate misreporting. De Boyrie et al. (2005) concentrate on potential price misreporting: holding discrepancies between international prices and prices applied in bilateral trade between Russia and the US in the early nineties as signals of illegal trade conducive to capital flight, they explain such discrepancies by adopting a portfolio approach, including interest and inflation rate differentials and exchange rate volatility as potential determinants. Patnaik et al. (2012) add to this lot political and economic stability and exchange rate volatility. ...
Misreporting tricks of different sort applied to the transfer of goods between different
countries are typically exploited by criminals worldwide for money laundering ends. The main
international anti-money laundering organisations started paying attention to this phenomenon,
dubbed “Trade-Based Money Laundering” (TBML), a long time ago, but the failure to develop
appropriate analytical tools has reportedly dogged preventive actions. Nonetheless, literature
has widely advocated the possibility that the analysis of inconsistencies in mirrored bilateral
trade data could provide some help. By building on previous contributions in the field, this
work sets up a model factoring in the main structural determinants of discrepancies between
mirrored data concerning Italy’s 2010 to 2013 external trade at a highly detailed (6-digit) level
of goods classification for each partner country. Point estimates of freight costs are used to net
each observation of the corresponding cif/fob discrepancy. The regression estimates are then
deployed in order to compute TBML risk indicators at a country/(4-digit) product level. Based
on the indicators rankings of countries and product lines can be compiled, which may be used
for a risk-driven search of potential illegal commercial transactions.
... In addition to these approaches based mostly on macroeconomic data, some early estimates used international trade data to approximate the scale of trade mispricing and illicit financial flows. Academic studies have used trade data, ideally at transaction level (Clausing, 2003;De Boyrie, Pak, & Zdanowicz, 2005a, 2005bZdanowicz, 2009), to broadly support the view that tax is a motivation for trade pricing decisions. More recent research using very detailed trade data has employed more reliable methodologies, but is largely limited in geographical coverage, as is the case of Davies, Martin, Parenti, and Toubal (2015) and Vicard (2015) using detailed French firm-level trade data. ...
International corporate tax avoidance by multinational enterprises likely lowers the Czech Republic’s corporate income tax revenue, but it is not clear by how much. To clarify this I first review existing estimates of the revenue losses of international corporate tax avoidance to government revenue worldwide. I then discuss revenue estimates relevant for the Czech Republic and develop a few new, albeit only illustrative, ones. None of the existing research focused on the Czech Republic nor did the six recent international studies I examine provide reliable estimates for the Czech Republic. The extrapolations from these studies result in a revenue loss of a quite wide range with a median of 10% of current corporate income tax revenues. The other newly prepared estimates, based on firm-level and aggregate data, are of similar magnitude. I conclude with a discussion of these rough estimates as well as questions for further research and policy recommendations.
... The above-discussed challenges in tax data collection, including estimates of tax abuse as well as the systematic inconsistencies in global financial and trade statistics, seem to manifest in our analysis (Altstaedsaeter et al, 2017, Piketty, 2015, Fuest and Riedel, 2009. Another limitation of the tax abuse data available is that measurements assume that tax evasion and avoidance is the primary motivation for capital outflow, failing to adequately account for economic and political uncertainty, fiscal deficits, financial repression, devaluation and the threat of expropriation (Boyrie et al, 2005in Fuest, Riedel 2009)factors we could not account for in our analysis. ...
Global tax abuse is one of the key obstacles to sustainable development. Each year more than USD one trillion are lost to cross border tax abuse and stored away in tax havens. We establish that tax abuse accumulates capital, makes tax systems more regressive and diminishes government revenues. Tax abuse consequently indirectly increases economic inequality and relative poverty and reduces social expenditure affecting both dimensions of economic and social rights fulfillment: the ability of people to claim their rights in the market place or through the provision of entitlements. We test our theory in a cross-sectional study and find empirical evidence for several of the factors in our theory. Both revenue generation and expenditure of fiscal policy are subject to the obligations to progressively realize economic and social human rights by using the maximum of available resources. We confirm that Mozambique has respect, protect and fulfill obligations to refrain from granting extensive tax exemptions, prevent tax avoidance and prosecute tax evasion. State parties hosting and controlling multinational corporations committing tax abuse abroad have similar extraterritorial obligations. Tax havens and secrecy jurisdictions deliberately undermine the sovereignty of other states in domestic resource mobilization for rights fulfillment.
... These practices to evade duties and tariffs on small-scale transnational trade blend in with practices of tradebased money laundering to skew trade data. When that trade data is analysed at the aggregate level the discrepancy is identified as money laundering regardless for other purposes, potentially on a massive scale [66,67]. Yet it would be incorrect to identify the fraudulent behaviour involved in tariff evasion with the use of trade transactions to legitimise ill-gotten gains from other business activity, such as the transport and sale of illegal drugs [68]. ...
The list of predicate crimes for the Recommendations of the Financial Action Task Force (FATF) has evolved and grown over its twenty-five year existence. The evolution of this list reflects shifting concerns among the central actors in the organisation, as well as representing a response to any ‘displacement’ activity undertaken by those seeking to avoid these forms of governance. When the scope for cooperation and compliance with the FATF Forty Recommendations was extended beyond the organisation’s membership this governance regime encountered business sectors and financial practices not readily amenable to its objectives. This paper considers the causes and consequences for the situation, as developing economy states attempt to comply with the global governance expectations of the FATF when a significant portion of the domestic economy operates ‘informally’. A frame of reference is provided, with a definition for the informal economy and the concept of displacement as used in research on criminal activity. The focus here is with the nature of the cash economy operating beyond the scope of financial surveillance with implications for the comprehensive effectiveness of the global financial governance regime. The context of informal financial practice and its separation from the regulatory structures of the state leads to a conclusion that global financial governance is limited in practice to the domain of the formal economy.
... The most common and basic pricing schemes involve the sale of goods at an inflated or deflated price through over-invoicing or underinvoicing the goods sold. Frequently these techniques are utilized to avoid currency restrictions and to facilitate capital flight (de Boyrie, Pak, & Zdanowicz, 2005, 2005b. For example, parent company X situated in the United States sells 100 tractors to a subsidiary in Ecuador. ...
This paper examines the state corporate tax implications of abnormal transfer-pricing by U.S. companies involved in international trade. The state corporate tax cost of improperly priced imports and exports is estimated through analysis of every import and export transaction for the years 2005 through 2009 using the interquartile range methodology provided in regulations to Internal Revenue Code Section 482. Calculation of the interquartile range using the entire population of international transactions addresses interpretive issues related to abnormal prices that occur with the smaller samples normally used in such analyses. A policy recommendation is made for improving tax compliance through more rigorous state involvement in transfer pricing enforcement and greater formal collaboration with the Internal Revenue Service with respect to transfer pricing.
... The price-filter method in Pak and Zdanowicz (1994) assumes the upper and lower quartile prices for each commodity as a range of fair market value in estimating the amount of misinvoicing in each trade record from the detailed U.S. merchandise trade statistics. The method was used in de Boyrie et al. (2005aBoyrie et al. ( , 2005b and . The price-filter method requires a detailed transaction level trade data of a country for which the misinvoicing is to be estimated. ...
Trade misinvoicing, an important channel of illicit financial flows, is frequently estimated by the partner-country trade data comparison method. However, this method relies on a critical but incorrect assumption that the trade statistics in partner countries exhibit no misinvoicing. This study proves that the assumption of no misinvoicing in partner countries cannot be supported, raising serious doubts about the reliability of the method and a possibility that inappropriate policy decisions may be made based on the erroneous estimates of trade misinvoicing. We introduce an alternative method to estimate trade misinvoicing which does not rely on the trade statistics of partner countries.
... Entre ellas: actividades de los centros financieros off-shore (incluyendo los paraísos fiscales); transacciones vinculadas a lavado de dinero (Ziegler, 1990) y precios de transferencia como mecanismo de desplazamiento de dinero imponible en el país de origen a otra economía a efectos de reducir cargas tributarias (De Boyrie et al, 2005). ...
Las economías latinoamericanas encuentran en el desempeño de las cuentas externas el principal condicionante para transitar procesos de desarrollo sostenido. El fenómeno de escasez sistemática de divisas ha sido abordado a partir de estudios en torno a la cuenta corriente de la balanza de pagos, quedando relegado el análisis en relación al rol desempeñado por la cuenta capital. Durante la última década, se ha verificado un nuevo canal de egreso de divisas, vinculado a la remisión de rentas de inversión. En efecto, la formación de activos externos por parte de residentes representó una de las causas centrales para explicar la fuga de capitales en Argentina en dicho período. En tal sentido, el presente trabajo, a través de un análisis exhaustivo de la literatura especializada, pretende echar luz en primer lugar respecto de la validez empírica de los postulados de la teoría tradicional y su aplicación a las decisiones de inversión a nivel internacional –Paridad No Cubierta de Tasa de Interés (UIP)–, tanto para economías desarrolladas como en vías de desarrollo; para, posteriormente, discutir en términos teóricos la relevancia de la UIP en tanto herramienta para incidir sobre las decisiones de inversión internacional a nivel micro, y los movimientos de capitales a nivel macroeconómico, en particular en un contexto en el cual la dolarización ha vuelto a ubicarse en el centro de los debates económicos en la Argentina actual.
... Entre tales operatorias, pueden mencionarse: actividades de los centros financieros offshore (que incluyen los denominados paraísos fiscales); transacciones vinculadas a lavado de dinero (Ziegler, 1990) y precios de transferencia como mecanismo de desplazamiento de dinero imponible en el país de origen a otra economía a efectos de reducir cargas tributarias (De Boyrie et al, 2005). ...
... The distinction between them is not always clear. Furthermore, of course, there are motivations other than tax behind shifting income abroad such as, as discussed by De Boyrie et al. (2005) or Fuest and Riedel (2012), the threat of expropriation or confiscation of private property, economic and political uncertainty, fiscal deficits, financial repression, or devaluation. higher social cost in poor countries; the institutions are weaker and therefore more vulnerable in poor countries. ...
Over the recent years illicit financial flows have attracted increasing attention from researchers and policy makers because of their negative effects on poor countries. In 2013 the mostly rich countries’ OECD acknowledged illicit flows as an issue of “central importance”. Since 2003, the Center for Global Development has been publishing the Commitment to Development Index (CDI) which ranks rich countries on their policies which affect poor countries. This paper rationalizes the inclusion of indicators of policies affecting illicit financial flows in the CDI, in addition to the previously included policies of aid, trade, migration, environment, security, technology and investment. It provides a survey of existing approaches to measuring illicit financial flows, discusses possible metrics which could be included in the CDI, evaluates how such indicators might be incorporated into the CDI, and proposes changes to current CDI indicators. The qualitative indicators of the Financial Secrecy Index emerge as the best contribution to the newly renamed and updated finance component of the CDI.
... A termite not identified by Tanzi but one of increasing concern arises from the growing importance of intra-firm trade among components of transnational corporations: according to one estimate, one-third of total world trade in the late 1990s. This creates multiple opportunities for corporations to reduce their tax liabilities through transfer pricing (Zdanowicz et al., 1999;de Boyrie et al., 2004;Ramos, 2007, pp. 9-10). ...
... Other studies have focused on the losses caused by MNCs' tax evasion and avoidance through profit-shifting strategies. Much of the existing research exploring the impact of tax evasion and avoidance by MNCs on developing countries uses trade price data, including research conducted by De Boyrie et al. (2005), Tax Justice Network (2007), Hogg et al. (2008), and by Global Financial Integrity, such as Kar and Freitas (2012). Research based on trade price data usually explores trade mispricing, which includes transactions between both related and unrelated parties. ...
This article contributes to the debate on how tax avoidance and evasion can hamper development efforts by investigating the link between profit-shifting out of developing countries and tax havens. Analysis of more than 1500 multinational corporations (MNCs) operating in India shows that in 2010 those MNCs with links to tax havens reported lower profits and paid less in taxes per unit of asset than MNCs with no such links. This confirms the notion that when corporations have links to tax havens they enjoy higher incentives, because of the low tax rates, and opportunities to shift income because of the secrecy provisions tax havens offer.
... 120 According to Maria de Boyrie, Simon Pak and Peter Zdanowicz such flows can 'erode a country's tax base, increase public deficit, reduce domestic investment and destabilize financial markets'. 121 Recognising this, countries at risk of capital flight impose tight foreign exchange controls as a means of retaining national wealth. These controls are commonly avoided by use of the trade system, with the literature documenting trade-based capital transfers since at least the post-war years, if not earlier. ...
Concerted global effort has made the financial system an increasingly hostile and risky environment in which to launder illicit funds. As a result, offenders are increasingly turning to money laundering typologies that operate outside the financial system – primarily, trade-based money laundering. Despite this, enforcement agencies are ill-equipped to systematically detect and prevent trade-based financial crime. This paper makes several observations. The first is that, while little has been done to prevent trade-based financial crime, there is also little evidence of its ill effect. Further, there has been little consideration as to whether systematic monitoring of the trade system would be cost-effective, relative to the number of offenders detected and the harm prevented. Without such analysis, it is almost impossible to reach a measured and balanced view on appropriate policy settings. The second is that, even if monitoring were to be implemented, the analytical methodologies that are currently used have major flaws. They not only rely on data that is often of poor quality, but may also be worryingly easy to circumvent. This too raises serious questions about the effectiveness of the proposed policy responses to trade-based money laundering. The difficulties associated with data monitoring also raise the spectre of a significant increase in the number of physical, and therefore costly, inspections of trade goods.
A major source of illicit financial flows (IFFs) out of developing countries accrues from the under-invoicing of commodity exports. This erodes the tax base of resource-rich developing countries, and hence their capacity to mobilise domestic resources for development. The Sustainable Development Goals (SDGs), adopted in 2015, specifically call on states to reduce IFFs and enhance domestic resource mobilisation. Yet a weak capacity to assess the magnitude and drivers of the phenomenon has limited the ability of developing countries to effectively curb IFFs. This has been compounded by a lack of consensus over IFF definitions together with poor data and weak methods. Drawing on six years of interdisciplinary research into commodity trade–related IFFs, this chapter examines novel data sources and recent methodological advances that researchers and regulators can draw upon to better capture and eventually reduce IFFs. It situates such advances within the fast-expanding literature on domestic resource mobilisation, taxation and IFFs, focusing on three major channels; namely, trade mispricing, abusive transfer pricing and tax evasion through wealth offshoring. The chapter concludes by discussing the scope for improved data collection and evidence generation. This, together with global taxation reform, can greatly contribute to effectively enhancing domestic resource mobilisation in developing countries.
This paper outlines a methodology for identifying trade transactions where undervaluation or over-valuation is highly suspected. As a first step, the methodology identifies trade transactions with an abnormal unit price. Secondly, it identifies trade transactions with values different from those noted in the records of trading partners. Finally, it presents the trade transactions that were commonly selected from the previous steps. The logic underlying the methodology is that if a trade transaction has an abnormal unit price as well as irreconcilable differences in the trade value ascribed by the trading partner, it would be reasonable to suspect under-valuation or over-valuation in the transaction. In a simulation using actual customs data, this methodology proved effective in detecting fraudulent imports. Of the imports suspected of under-valuation using this methodology, 18 per cent had been penalised and obliged to pay fines, more taxes or duties following customs interventions. This figure is much higher than the share of illicit imports in the test data (4.5%) and the targeting accuracy of the physical inspection of the country (12%). When this methodology was verified using only the imports that had been selected for physical inspection, the targeting accuracy increased to 36 per cent. The result suggests that this methodology could contribute to enhancing the targeting accuracy of existing Customs risk management tools.
International trade misinvoicing may facilitate tax avoidance, duty avoidance, money laundering, and capital transfer. It is critical for regulators to estimate the scope of trade misinvoicing correctly. This study examines three related methods of estimating trade misinvoicing: the price-filter method (PFM), the partner-country method (PCM), and a modified partner-country method (mPCM). This paper concludes that the PCM fails to estimate trade misinvoicing correctly unless all partner countries are proven to have no misinvoicing. The mPCM estimates correctly but is too costly to be practical. Only the PFM estimates trade misinvoicing correctly and efficiently.
This research analyzes the effects imports have on the collection of import tar-
iffs in Mexico, in a sample of 49 customs and three subsamples. For this analysis,
Hausman-Taylor and Amemiya-MaCurdy estimators were applied. Results indi-
cate that import operations and the value of imports are significant and positive
in each case. The Strategic Bonded Warehouses are significant and positive in the
whole panel, but not conclusive in the subsamples; the number of employees is
significant in each case; the relationships in the whole panel, maritime, and border
customs are negative, while for inland customs, they are positive.
This article identifies, based on reported trade data between India and its 19 trading partners, the major commodities exhibiting mis-invoicing during 2000–2018, the extent of mis-invoicing, major trade partners and the associated ports of trade in India. The computed differences in the trade values are too large to be explained by accounting or classification errors, presenting strong evidence of mis-invoicing; however, only a small percentage of commodities account for bulk of mis-invoicing consistently over the years. There is also evidence of the same commodities exhibiting under-invoicing (UI) in trade with some countries and over-invoicing (OI) in trade with others. The tariff rates seem to influence the type of import mis-invoicing—OI being mainly in commodities with higher tariff and UI in commodities with lower tariff. The article contributes to the existing literature by identifying the specific commodities with their 6-digit HS codes, and commodity groups prone to mis-invoicing, which can provide a robust framework for further investigation of transaction level data that may help pinpoint the parties involved in mis-invoicing and associated illicit flows. The findings of the article provide inputs for policies to mitigate the impact of illicit financial flows through trade mis-invoicing.
JEL Classification: F13, F14, C32, H26
This chapter provides a short presentation regarding the history of the “transfer pricing” concept, starting from the moment that triggered the shaping of the transfer pricing notion and continuing with the appearance of the first transfer pricing regulations, including also a short presentation regarding the involvement of the Organization for Economic Co-operation and Development (“OECD”) in the transfer pricing field. Furthermore, based on the literature reviewed, the chapter includes some concerns in relation to the transfer pricing concept. In this respect, there are presented previous studies on transfer pricing regulations, but also studies related to the transfer pricing manipulation phenomenon. There are identified researches where the transfer pricing regulations are compared at the level of various countries in order to evaluate the strictness of the regulations from those countries. Researches presented in relation to the transfer pricing manipulation are divided on three pillars: definition of the transfer pricing manipulation concept; identification of the transfer pricing manipulation phenomenon impact at global level; identification of ways to prevent this phenomenon.
“What are your firm’s internationalization goals?” is the opening question of this book. An immediate answer may be that we go abroad to increase our revenues and profitability, but the matter is far more complex. We begin this chapter with the research evidence that an increase in international revenues does not necessarily bring an increase in profits. In fact, a firm’s motives for internationalizing may well go beyond short-term profitability objectives to include business diversification and risk management needs, geopolitical influence in the home country, or building a long-lasting competitive advantage by gaining access to globally located resources, skills, technologies and markets. To account for this, we propose an international strategy control panel, similar to the controls in an airplane cockpit, that allows you to maintain a comprehensive overview of your firm’s internationalization progress but also to focus your attention on one indicator at a time. Among internationalization goals, we draw your attention to an ambitious definition of your firm in global markets at full scale: the opportunity to eliminate internal and external constraints on reaching the full scalability of your business model.
Money laundering has become an international challenge and now it is a multidisciplinary topic. The amount of global money laundering has been estimated about 2-5 percent of the world Gross Domestic Product. Criminals have misused the financial liberalization policies advocated by the International Monetary Fund for laundering criminal proceeds. The author points out that regulations and laws on financial sector, however, could considerably control the money laundering and as a result, launderers gradually move to the trade sector. In author's opinion, international trade is subject to range of vulnerabilities and risks today owing to exploiting trade simplification proceedings. Therefore, the author highlights the importance of being aware of these risks. By surveying diverse techniques and approaches to the problem in the literature, this study, therefore, examined the threats associated with trade facilitation that can be exploited by money launderers. The author also tried to find suitable anti-money laundering policies which cannot impede the expectations of trade facilitation. In the study, the author used general scientific methods: analysis, synthesis, comparison, generalization. Developed mathematical tools are described in the study as instruments to trace anomalies in trade transactions. The author's major recommendations are make use of such analytical tools by establishing a permanent unit to frequently analyze the trade data so as to detect illicit transactions. The author also reveals some shortcomings pertaining to anti-money laundering policies in fighting trade-based money laundering. Basically, staff attached to the customs, tax authorities and law enforcing agencies have relatively low knowledge on trade-based money laundering compared to their knowledge on other means of money laundering. In conclusion, the author states that frequent analyses of trade data and sharing of information and knowledge with other local and foreign agents seems to be more effective policies in controlling trade-related money laundering.
This article summarizes the arguments and counter-arguments within the framework of scientific discussion on the estimation of the volume of tax gaps in the economy in the context of the foreign economic activity of the country as one of the tools for minimizing tax liabilities. Systematizing these scientific developments on the definite problem has shown that among scientists there is no consensus on the role of tax gaps in the economy and their interrelation with foreign economic activity of the country, which significantly updates the need for further empirical research in this area, aimed at determining the volume of tax gaps by the export-import activity and their influence on indicators of economic development of the country. The research is based on the use of the modified Grubel-Lloyd formula (which allows determining the index of asynchronous export-import activity in the retrospective dynamics) and indicators of the level of asynchronous export-import activity by the partner countries. The study subject is the countries with the highest (Georgia), medium (Turkey, Cyprus, Solomon Islands) and the lowest (Japan, Austria, United States) levels of economy shadowing, which allows taking a more thorough and objective decision on the effect of asynchronous export and import activity on the volume of tax gaps in the economy, and its dependence on the level of shadowing in the country for 2013-2017. The paper presents the results of the empirical analysis of the volume gap of foreign economic activity on the example of Ukraine and its trading partners, which has shown that the highest index of asynchrony is peculiar to countries with average levels of shadowing – Cyprus, Solomon Islands, and the lowest – with the participation of countries with low level of shadowing. At the same time, it has been determined that one of the highest asynchronous indexes is observed with the participation of offshore countries. The study empirically confirms and theoretically proves that the foreign economic component plays a significant role in the processes of economic development of the country, and the number of hidden tax payments, due to these transactions, occupy about 1% of the country's GDP (gross domestic product). The results of the research may be useful for the relevant executive authorities in developing measures to prevent income shadowing in the context of export-import operations.
Misreporting tricks of different sort applied to the transfer of goods between different countries are typically exploited by criminals worldwide for money laundering ends. The main international anti‐money laundering organisations started paying attention to this phenomenon, dubbed “Trade‐Based Money Laundering” (TBML), a long time ago, but the failure to develop appropriate analytical tools has reportedly dogged preventive actions. Nonetheless, literature has widely advocated the possibility that the analysis of inconsistencies in mirrored bilateral trade data could provide some help. By building on previous contributions in the field, this work sets up a model factoring in the main structural determinants of discrepancies between mirrored data concerning Italy's 2010 to 2013 external trade at a highly detailed (6‐digit) level of goods classification for each partner country. Point estimates of freight costs are used to net each observation of the corresponding cif/fob discrepancy. The regression estimates are then deployed in order to compute TBML risk indicators at a country/(4‐digit) product level. Based on the indicators rankings of countries and product lines can be compiled, which may be used for a risk‐driven search of potential illegal commercial transactions. This article is protected by copyright. All rights reserved.
It is often said that globalization is just a new form of war between nations; an economic war. It is also a tax war; fiscal policies are a central point of the competition for territories’ attractiveness (ROUGÉ et CHOPOV 2016). But the global tax war is not only another form of interstates conflict; it is also a brand new kind of war between global firms and state to share the burden of civil society. The aim of this paper is to clarify what is at stake in this war to be able to fight it.
Purpose
– The purpose of this paper is to describe a platform of interconnected international shell companies operated through Baltic banks, used for trade-based money laundering (TBML) across Russia, Ukraine and other post-Soviet states.
Design/methodology/approach
– This is a case study that draws extensively on the results of journalist investigations and court cases to describe one example of a money-laundering platform.
Findings
– Platforms of international shell companies operated through Baltic banks play a key role in TBML for the post-Soviet countries. They are created for systematic laundering of revenues from tax evasion, tax fraud, corruption and criminality across the post-Soviet space, and also globally.
Research limitations/implications
– This study implies that TBML for the post-Soviet space is a specialized industry, hosted by collaborating banks centered in the Baltic states, in conjunction with mass use of international shell companies.
Practical implications
– This study implies that analysis of suspicious transactions cannot remain on the level of single companies but has to take into account the interconnected payment patterns produced by such a platform.
Originality/value
– Provides the first study of a trade-based money-laundering platform operating in the post-Soviet space.
This paper assesses the role of Switzerland, as the leading hub for global commodities trading, in terms of the patterns of prices received by original exporting countries and subsequently by Switzerland and other jurisdictions. We find support for the hypotheses that (i) the average prices for commodity exports from developing countries to Switzerland are lower than those to other jurisdictions; and that (ii) Switzerland declares higher (re-)export prices for those commodities than do other jurisdictions. This pattern implies a potential capital loss for commodity exporting developing countries, and we provide a range of estimates of that loss – each of which suggests the scale is substantial (the most conservative is around $8 billion a year) and that the issue merits greater research and policy attention. An important first step would be a Swiss commitment to meet international norms of trade transparency.
Turkish businessmen, politicians and most academicians tend to see foreign direct investment (FDI) as a remedy for the chronic lack of capital accumulation in Turkey. The meagre FDI inflows which followed the Customs Union Agreement with the European Union, in 1995, created a deep disappointment among these people. Efforts to attract foreign capital have intensified since 2005 and inflows have soared. However, the greater part of the increase is the result of the Turkish government's privatization programme of publicly owned companies, and the acquisition of private firms by large multinational companies, rather than greenfield investments. This research investigates FDI inflows to Turkey and tries to estimate the transfer of profits.
Purpose
– The paper aims to highlight the relationship between money laundering and banking confidentiality in offshore financial centres – particularly following the recent publicity and BBC expose surrounding the criminal use of offshore financial centres. It proposes that there has long been concern over the illegitimate uses of offshore financial centres and that the continuing exploitation of them by criminals is, in part, attributed to the West's use of these financial hotspots. The paper outlines the previous attempts by global regulatory bodies to curb money laundering in offshore financial centres and explores some of the reasons for the continuation of money laundering in offshore financial centres.
Design/methodology/approach
– The paper was compiled by accessing and analysing primary and secondary data which is publicly available. The analysed data were complemented by the author's new theory of the West's collusion with offshore financial centres as a possible reason for the superficial commitment to anti‐money laundering laws and guidelines.
Findings
– The findings in the paper conclude that even though there have been global efforts to combat money laundering in offshore financial centres, there is little commitment from the offshore financial centres themselves, and the West, to effectively implement anti‐money laundering regulations.
Originality/value
– This paper fulfils a gap in the literature by exploring the relationship between the West and offshore financial centres – more specifically the West's continued use of these centres acts as an incentive to avoid relaxing tight banking confidentiality laws. Further research in this area is needed to assess the full impact of the West's relationship with offshore financial centres.
This manuscript presents an ethical decision making model (EDMM) for transfer pricing (TP). The EDMM has been theoretically and empirically supported in the strategic management, marketing, and ethics literatures, but never applied in a TP context. The model is embedded into the realities and risks presented in TP literature to reveal shortcomings in the ethical reasoning styles of multinational enterprise (MNE) managers. One shortcoming reveals that TP programs have been managed with an overly dominant focus on cost/benefit-based reasoning (teleological), which seeks to minimize effective global tax rates and/or to avoid or effectively manage the risk of tax audits. Another shortcoming reveals that only partial consideration has been made of rule-based reasoning (deontological), which should not only attend to TP laws and regulation but to foundational values, moral laws and corporate responsibilities. These shortcomings have, in part, left low tax countries in a compromised position, voicing strong concerns over the socio-economic impacts that MNE activities are having on their country and culture, officially labeling the strategic use of TP as a 'restrictive business practice' (RBP), and calling for higher levels of corporate stewardship. The EDMM is thus brought into the TP arena and positioned as a tool for MNE managers to use when determining an appropriate and ethical TP.
In the second half of 2008, two events occurred that are, individually and together, highly significant for the future of global health. First, in August 2008 the World Health Organization (WHO)’s Commission on Social Determinants of Health (CSDH) released its final report (Commission on Social Determinants of Health, 2008; for a brief summary, see Marmot and Friel, 2008; Marmot et al., 2008). The 19-member Commission, established in 2005, began its extraordinary report with the observation that: ‘Social injustice is killing people on a grand scale’. The concepts of health equity and socioeconomic gradients in health were central to the Commission’s unequivocally normative analysis. Health equity was defined with reference to the absence of systematic differences in health that are avoidable by reasonable action … and the Commission considered most such differences to be avoidable and therefore inequitable (Commission on Social Determinants of Health, 2007, p. 1). Socioeconomic gradients in health are disparities in health outcomes related to various indicators of social (dis)advantage; such gradients are ubiquitous, not only between countries but also within them. The Commission’s perspective on such gradients is worth quoting at length:
This paper investigates capital flight from Thailand to the US through trade misinvoicing during the period from 1990 to 2005. The evidence indicates that capital flight from Thailand to the US, valued over US$16,189 million, had been done through under-invoicing exports to the US rather than over-invoicing imports from the US. The major incentive for the movement of capital is investment, followed by political events in Thailand, and the most significant determinants of capital flight are the US T-bill rate, the deposit rate in Thailand, and the degree of overvaluation of the Thai Baht. Interestingly, the 1997 Asian economic crisis did not play a significant role in the capital movement through trade.
The authors developed a large corpus of keyboard behavior based on temporary workers employed in a simulated office environment. Analysis of this corpus using stylometric techniques shows good accuracy in distinguishing users. This article is part of a special issue on security.
This paper is a reply to a comment by John Hasseldine and Gregory Morris on the “Smoke and Mirrors: Corporate Social Responsibility and Tax Avoidance” paper published in Accounting Forum 2010: 34(3/4): 153–168. The original paper drew attention to the gap between corporate talk of social responsibility and actual practices, which promote tax avoidance/evasion. Instead of critiquing the Smoke and Mirrors paper, Hasseldine and Morris raise a number of random and often unrelated issues, including interpretation of law, tax statistics, regulation of tax agents, the role of accountants, policies of the state and the human rights of corporations, just to mention a few. This paper responds in kind and argues that many of their comments are ill informed.
Transfer pricing has tended to remain an under researched area in Bangladesh. The objective of this paper is to raise awareness about the issues and to propose a basis for adoption of a transfer pricing regime in Bangladesh. The present study is an attempt to review the relevant international experience, current global regulations and literatures, and provide the rationale for design and implementation of the necessary fiscal reforms related to transfer pricing. Based on this analysis, the paper has attempted to put forward a comprehensive legal and administrative framework which can be used as a guideline to the policymakers to address the issue of transfer pricing in the context of Bangladesh.
Government authorities, international lending agencies, and private sector firms try to detect abnormal pricing in international trade. Abnormal prices in international trade may indicate capital flight, import-duty fraud, income-tax evasion, or money laundering. We developed a framework for filtering all annual trades between two countries, which includes thousands of harmonized commodity codes and millions of import-export transactions. It produces a prioritized list of commodities traded at potentially abnormal prices and can help auditors to identify such items ranked according to likelihood of abnormal pricing. We estimated the economic impact of overinvoiced imports to Greece from the United States and underinvoiced exports from Greece to the United States. These transactions shift as much as 5.5 billion out of Greece to all other countries or about four percent of the GDP of Greece), lowering the level of taxable income and the tax liability of firms operating in Greece, thus increasing the public deficit and reducing domestic investments. The treasury of Greece is losing an estimated 2 billion revenues annually from worldwide trade shifted income. By auditing only the top 25 income-shifting items with the US (identified through a pricing filter), the Greek treasury could capture about 3/4 of the income shifted from exports and over 1/2 of the income shifted from all imports.
The export of capital, legally and illegally, is a major problem for many developing countries. The following study analyses
the causes and nature of the flight of capital and estimates its scale in 34 countries.
It is shown that the interest differential due to political risk, given the prospect of future capital controls, depends essentially on the gross stocks of debt outstanding against different governments and the distribution of world wealth among residents of different political jurisdictions. A simple model of portfolio behavior is used to explain the differential between Euromark rates and interest rates within Germany in the presence of controls on capital flows into Germany between 1970 and 1974. The explanation separates the interest differential into the effective tax imposed by existing controls and a political risk premium associated with prospective controls.
The paper addresses the problem of defining and assessing the scale of capital flight from Russia and of briefly reviewing
the channels through which capital, both of legal and illegal origin, illegally leaves Russia. It then highlights the determinants
of Russian capital flight, as the traditional view of a reaction to divergences among real domestic and foreign returns and
to economic and political risks proves inadequate. More important factors are linked to specific features of the transition
process under way, that is macroeconomic instability and variability of government policies, weak protection of property rights
and savings, a fragile banking system limiting access to investment finance, high and unevenly enforced taxes, a large share
of unofficial activities, and considerable levels of corruption.
This paper will argue that the basic reason for the 2 flight of capital from Russia over the last few years is the neglect, during the transition, of property rights issues, and in particular of the property rights environment necessary to ensure adequate corporate governance and the resulting "incomplete" ownership structure typical of the Russian firm. This neglect has been common in the analysis of transition. Despite all of the work in the new institutional economics on property rights and despite the (admittedly crude) evidence of Wallis and North (1986) that about one-half of GNP is spent on "transactions services", theorists of the transition typically write as if, once freed from the government, enterprise managers will automatically be motivated to maximize profits, and markets will spontaneously arise to coordinate production. The emphasis during the transition was to remove enterprises from government control, that is, to privatize companies. The basic rationale for this was set out in Privatizing Russia (1995) and in other publications by the privatization team and advisers to it. In this and other publications, the focus was on the contrast between political control and control by private owners. Little emphasis was paid to the question of how to design appropriate institutions to ensure the transferability of ownership and how to discipline managers so that they would manage corporations in such a way as to breed investor confidence. The result has been a form of capitalism aptly dubbed "Weird Russian Capitalism" by Cottrell (1997) in which managers are entrenched in power in the enterprises in a way that they never were under the old central planning system, and it is not obvious how the system can ever be changed to breed investor confidence. Under the...
This chapter presents a statistical analysis of capital flight from less developed countries (LDCs). Unlike with the imports of LDCs, a significant part of the export sector is usually free from very large subsidies and taxes and the export duties on traditional exports are usually well-balanced by subsidies on nontraditional exports. Hence, no pronounced effect of trade tax and subsidy policies need be expected to affect the trade declarations in the direction of either net overinvoicing or net underinvoicing of exports. Altogether 7 LDCs show a percentage excess of imports over exports, on exports, of over 10% for total trade, with 6 more LDCs having a positive (but less than 10%) excess and 15 LDCs having a negative excess figure. Imports are c.i.f. and exports are f.o.b., and this discrepancy may be taken at an average figure of 10% on f.o.b. value; 7 LDCs with excess on top of 10% are clear overinvoicers whereas all the rest are not, while those having negative figures are probably clear underinvoicer. However, if imports are overinvoiced (underinvoiced), the importer must sell (buy) in the black market an amount of foreign exchange equal to the difference between the correct and the faked price on the invoice. Hence, two critical variables in his decision will clearly be the duty and the black market premium on foreign exchange. The asymmetry of conduit behavior for capital flight, in the exports and imports of LDCs is, on the other hand, a conclusion of great interest to policymakers in these countries.
Manuel Pastor is an Assistant Professor of Economics at Occi-dental College in Los Angeles. He has published in the./~l/i-il~~/ (?f Ikrvlopnent Ecomnzics. Khrld Lk~elopmc~~t, the Jmr)~c~l (!/ //I(oI--anwricarz Studies and World ALfairs, and Latin A mel-ica~z /~w~spcc~-tirvs. His books include The International ,2kmetay1 Flrlzd ill Lrrti?l America and Crisis in Central America: Regional L>jwar?1ic's a?~rl 1 : 5 Poliq~ in the IO8Os (co-edited with Nora Hamilton, Linda Fuller, and Jeff Frieden). He has travelled extensively in Latin America under the auspices of the Fulbright Commission, and currentI!. holds a Gug-genheim Fellowship and a Kellogg Fellowship.
Detailed analysis of the statistics of merchandise trade between Brazil and the United States reveals extensive underpricing of exports and overpricing of imports, which has the effect of transferring large amounts of money out of Brazil and into the United States. Previous studies called attention to this possibility without being able to demonstrate convincingly the extent and amount of the practice. This paper reports the results of a systematic investigation of U.S. customs data at its most disaggregate level to document the amount of capital flows which may be hidden in commodity trade. Using deviations from average prices within commodity classes to identify abnormal prices produces conservative estimates of the amount of capital flight from Brazil to the United States of between 4 billion in 1995 alone, which would be between 10%-20% of total commodity trade between the countries in that year. Some suggestions are developed for using the results to more closely monitor international transactions in order to reduce this amount.
Empirical tests incorporating measures of capital flight from developing countries that are substantially different from those used in existing studies suggest that capital flight can be explained by differences in risk perceived by residents and nonresidents in holding claims on residents of the countries studied. To the extent that capital flight reflects differences among holders in expected yields on claims on residents of capital-flight countries, it may not be related to conventional determinants of net capital movements such as yield differentials between countries.
Capital flight from developing countries has begun to receive a great deal of attention in recent years. At the same time that many of these countries were borrowing heavily in the international capital markets, private residents were accumulating foreign assets. Indeed, some observers have argued that the building up of gross external debt by developing countries financed private capital flight rather than productive investment. The data available for the major debtor countries in general tend to support this hypothesis. The customary approaches to analyzing debt-related issues are unable, however, to explain the phenomenon of an economic agent simultaneously engaging in foreign borrowing, either directly or through the government, investing at home, and investing abroad. Explaining this type of behavior requires introducing uncertainty or risk into the picture and, furthermore, arguing that the domestic and external environments are characterized by different sources of risk. This paper attempts to do precisely that, using the idea of an "expropriation risk" attached to domestic investment in developing countries--a risk considered to be relatively small in industrial countries. This concept of expropriation risk can include nationalization, bankruptcy, or, for that matter, any event that has as its result the investor's losing both assets and liabilities. This expropriation risk factor enables one to work with a standard intertemporal optimizing model and to derive formally the conditions under which an investor in a developing country will acquire external debt and invest both at home and abroad. The main conclusion of this study is that the higher are the risks associated with domestic investment in developing countries, the more likely is capital flight. The results of the analysis suggest that residents of developing countries, aware of the relative risks, chose to invest their domestic savings abroad and used foreign financing for domestic investments. In addition, because foreign debt was perceived to carry an implicit government guarantee, the investor was assured that, if the domestic enterprise went bankrupt or was expropriated, the foreign lender's claim would be assumed by the state. Given this scenario, the domestic investor was behaving in a perfectly rational fashion, and subsequent events in general proved the investor's assumptions to be correct. The prevention of capital flight, therefore, would require a change in existing incentives--through adoption of sound macroeconomic policies and, perhaps more important, the developing of legal and institutional frameworks and the use of structural micro-oriented measures--to reduce the relatively higher risks faced by investors in developing countries. /// L'évasion de capitaux hors des pays en développement est un phénomène auquel on s'intéresse vivement depuis quelques années. Dans beaucoup de ces pays, des emprunts massifs sur les marchés de capitaux internationaux se sont accompagnés d'une accumulation d'avoirs intérieurs par les résidents privés. Certains observateurs soutiennent même que la dette extérieure brute accumulée par les pays en développement a financé un exode des capitaux privés plutôt que l'investissement productif. Les données disponibles pour les grands pays débiteurs tendent en général à confirmer cette hypothèse. Les méthodes utilisées traditionnellement pour analyser les questions se rattachant à la dette ne permettent pas cependant d'expliquer comment un agent économique peut simultanément emprunter à l'extérieur, directement ou par l'intermédiaire de l'Etat, et investir dans son pays et à l'étranger. Pour comprendre ce comportement, il faut faire intervenir un élément d'incertitude ou de risque dans l'exposé et, qui plus est, affirmer que des risques d'origines diverses caractérisent le milieu tant intérieur qu'extérieur. C'est précisément ce que s'efforcent de faire les auteurs du présent document en évoquant l'idée d'un "risque d'expropriation" qui menace l'investissement dans les pays en développement, risque jugé assez faible dans les pays industrialisés. Ce risque est un concept qui peut recouvrir la nationalisation, la faillite ou, dans ce contexte, tout événement qui entraîne pour l'investisseur la perte tant de ses avoirs que de ses engagements. C'est un facteur qui permet d'utiliser un modèle type d'optimisation dans le temps afin d'établir sous une forme mathématique les conditions dans lesquelles un agent économique d'un pays en développement s'endette à l'extérieur et investit à la fois dans son pays et à l'étranger. La principale conclusion qui se dégage de cette étude est que l'évasion des capitaux est en général proportionnelle aux risques dont est assorti l'investissement intérieur dans les pays en développement. Selon les résultats de l'analyse, les résidents des pays en développement, conscients des risques relatifs, choisissent d'investir leur épargne intérieure à l'étranger et de financer les investissements intérieurs avec des concours extérieurs. En outre, estimant que, par définition, la dette extérieure comporte implicitement la garantie de l'Etat, l'investisseur est convaincu que, si l'entreprise intérieure fait faillite ou est expropriée, l'Etat prendra en charge la créance qu'il détient à titre de prêteur extérieur. Dans ces conditions, l'investisseur intérieur se comporte de façon parfaitement rationnelle et les événements ultérieurs confirment en général ses prévisions. En conséquence, pour empêcher la fuite des capitaux, il faut modifier les incitations en vigueur -- par l'adoption d'une politique macroéconomique saine -- et, ce qui est peut-être plus important, élaborer un cadre juridique et institutionnel, ainsi que des mesures structurelles de nature microéconomique, permettant de réduire les risques assez élevés auxquels sont confrontés les investisseurs dans les pays en développement. /// En los últimos años ha comenzado a concederse mucha atención al tema de la fuga de capitales desde los paÃses en desarrollo. Al tiempo que muchos de estos paÃses acudÃan a cuantiosos préstamos en los mercados internacionales de capital, los residentes privados acumulaban activos externos. Es más: algunos observadores han sostenido que, en los paÃses en desarrollo, el incremento de la deuda externa bruta sirvió para financiar la fuga de capitales y no las inversiones productivas. En general, los datos de que se dispone en relación con los principales paÃses deudores confirman esa tesis. No obstante, los enfoques tradicionales que se emplean para analizar cuestiones relacionadas con la deuda no permiten explicar el hecho de que un agente económico obtenga crédito en el exterior --directamente o por intermedio del Estado-- y al mismo tiempo invierta en el paÃs y en el exterior. Para explicar un proceder de ese género es necesario introducir en el análisis el factor incertidumbre o riesgo y, además, admitir que las fuentes de riesgo de las condiciones económicas internas y externas son distintas. Ese es precisamente el enfoque del presente trabajo. Para ello se acude a la noción de "riesgo de expropiación", que se aplica a las inversiones internas en los paÃses en desarrollo, pues se considera que ese tipo de riesgo es relativamente exiguo en los paÃses industriales. El riesgo de expropiación puede consistir en nacionalizaciones, quiebras o, en general, cualquier factor que haga que el inversor pierda tanto activos como pasivos. La utilización de ese factor permite trabajar con un patrón uniforme intertemporal de optimización y derivar formalmente las condiciones que llevan a que el inversor de un paÃs en desarrollo adquiera deuda externa e invierta tanto en su paÃs como en el exterior. La principal conclusión de este estudio es que cuanto mayores sean los riesgos que ofrezcan las inversiones directas en los paÃses en desarrollo tanto más probable será la fuga de capitales. De los resultados del análisis se desprende que los residentes de los paÃses en desarrollo, conscientes del riesgo relativo existente, han optado por invertir su ahorro interno en el exterior y emplear el financiamiento externo para la inversión en el propio paÃs. Además, como se percibe que la deuda externa lleva consigo una garantÃa estatal implÃcita, el inversor adquiere la certeza de que, si la empresa nacional quiebra o es expropiada, el Estado se hará cargo de la deuda ante el acreedor extranjero. Dado ese marco hipotético, el inversor local se ha comportado de modo totalmente racional, conclusión que la evolución posterior ha parecido confirmar. Por lo tanto, para evitar la fuga de capitales es preciso modificar los incentivos actuales, adoptando medidas macroeconómicas adecuadas y, lo que reviste quizá más importancia, ofreciendo un marco jurÃdico e institucional y medidas estructurales de orientación microeconómica que reduzcan el riesgo relativamente mayor que corren los inversores de los paÃses en desarrollo.)
This is the twenty-first in the annual series assessing major development issues. This report acknowledges that knowledge, not capital, is the key to sustained economic growth and improvements in human well-being. It distinguishes between two sorts of knowledge: knowledge about technology, called technical knowledge or simply know-how, and knowledge about attributes, that is, knowledge about products, processes, or institutions. The report focuses on the relationship between the unequal distribution in know-how (knowledge gaps) across and within countries and the difficulties posed by having incomplete knowledge of attributes (information problems). In the first of three parts, the report discusses the importance of knowledge to development, and the risks and opportunities that the information revolution poses for developing countries. It then examines three critical steps that developing countries must take to narrow knowledge gaps: acquiring knowledge, absorbing knowledge, and communicating knowledge. Part 2 discusses the nature and extent of information problems, specific information problems, and three areas where information problems are most severe, namely in financial information, in environmental research, and in listening to the poor. Part 3 summarizes what knowledge and information requirements mean for developing government and international institution policies.
2 CD-ROM: 1978-1999 and 1978-2010 (Archives: ask a librarian / En archives: demander au Centre de documentation)
The objective of this research is to determine the impact of Switzerland's money laundering law on the movement of money through false invoicing in international trade. This study evaluates every reported import and export transaction between the USA and Switzerland during the period 1995-2000. The study indicates that there were significant changes in the degree of abnormal international trade pricing subsequent to the enactment of Switzerland's antimoney laundering law. The study supports the view that individuals and companies will find substitute techniques and channels to launder money when central banking authorities enact legislation that only focuses on financial institutions.
This paper derives four alternative measures of "hot money" outflows of capital from Latin America's three major debtors-Argentina, Brazil, and Mexico. These measures are based on two sources of quarterly data from 1977 to 1986: (i) the balance of payments statistics and (ii) changes in the U.S. bank deposits of non-banking entities in the debtor countries. The portfolio adjustment model then is used to specify the factors influencing capital flight. These factors are grouped into two types. The push factors relate to characteristics of the so-called source countries for capital flight and include the interest and inflation rates, the degree of currency overvaluation, and the environmental risks embodied in both frequent regime changes and the onset of the 1982 debt crisis. The pull factors include the interest and inflation rates in the host country, the United States. The principal findings of the paper show that the push factors alone are significant in explaining capital outflows from Argentina and Brazil. For Mexico, by contrast, the push factors as well as the pull factors are found to be relevant in explaining the behavior of flight capital, as measured by changes in the deposits of Mexican non-bank entities in the U.S. banking system. Copyright 1989 Western Economic Association International.
The paper investigates the sources of debt and debt difficulties for a group of Latin American countries. It is argued that external shocks -- oil, interest rates, world recession and the fall in real commodity prices -- cannot account by themselves for the problems. Budget deficits that accommodate terms of trade deterioration and disequilibrium exchange rates are central to a complete explanation. The paper documents that in Chile an extreme currency overvaluation led to a massive shift into imported consumer durables while in Argentina overvaluation in conjunction with financial instability led to large-scale capital flight. In the case of Brazil the budget deficit is the explanation for the growth in external indebtedness.The difference in the experience of the three countries reflects the difference in their openness to the world economy.
Methods measuring capital flight unfortunately yield a too wide band of estimates. A striking example is provided by estimates of capital flight from Russia. This study introduces unit-values analysis as a new and, hopefully, more robust tool in order to estimate trade-related capital flight. Trade-related capital flight prevails when capital account convertibility is strongly limited, as in the case of Russia. Unit values analysis aims at detecting the underpricing of exports and the overpricing of imports as the major flight channel. Using a multilateral translog price index we test for systematic deviations in EU export prices to Russia compared with exports to Bulgaria, the Czech Republic, Hungary, Poland and Romania. As benchmark we selected exports to France. We limit our calculations to six-digit and four-digit chapters in 70–89 of the Combined Nomenclature (manufactured goods). We find no systematic deviation in calculated prices and conclude that underpricing of EU exports to Russia (Russian imports from EU) does not play a dominant role for capital flight through manufactured goods. We extended the test to EU imports of oil and oil products (chapter 27) and found evidence for the underpricing of Russian deliveries, mainly in the chapter 2710 (petroleum oil, not crude).
Despite the incresing importance of foreign direct investment for developing countries, little attention has been given to its financial effects in general or its relation to capital flight in particular. It has been found that 31 to 40 percent of the private external borrowing guaranteed by developing-country governments leaves as capital flight.
This paper documents the scale of capital flight from Russia, compares it with that observed in other countries, and reviews policy options. The evidence from other countries suggests that capital flight can be reversed once reforms take hold. The paper argues that capital flight from Russia can only be curbed through a medium-term reform strategy aimed at improving governance and macroeconomic performance, and strengthening the banking system. Capital controls result in costly distortions and should gradually be phased out as part of that medium-term strategy. Copyright Blackwell Publishers Ltd 2001.
This paper focuses on capital flight from Latin America during the 1970s and 1980s. After estimating the extent of such flight, I suggest that capital flight imposes growth costs, erodes the tax base, and worsens income distribution. I then use regression analysis to investigate the causes of capital flight as well as the role of capital controls and IMF programs in slowing flight. I conclude by criticizing the current policy approach to the capital flight problem and suggesting some new directions.
This paper offers a definitive distinction between capital flight and capital outflows. It unifies and synthesises the capital flight concept as used in both theoretical and empirical work and shows that various definitions have two common elements. These are: (1) capital flight is a subset of capital outflows from developing countries by its residents; (2) these outflows must be motivated by risks and uncertainties that are peculiar to developing countries. The former points to the counter-intuitive nature of these outflows. The latter gives these counterintuitive outflows' explanation. We then propose an econometric method to measure this concept, and illustrate its use by applying it to Korea. Copyright Blackwell Publishers Ltd 2002.
This paper uses trading partners' data comparisons at three different levels of refinement to verify whether the elimination of an over-valued exchange rate, which itself has been claimed to lead to over-valuation of imports, affects the valuation practice of importers. The advantages of correcting the import and export data of trading partners for eventual discrepancies in the volume of these trade flows is highlighted. Data for Turkey, Pakistan and The Netherlands are used. Turkey devalued in 1970, while Pakistan devalued in 1972. Data availability and the large discrepancy between reported exports to and imports from The Netherlands suggested the analysis of the data for this country.
Post-socialist states, such as Russia, that borrow heavily abroad have added new features to experience with capital flight. Our research agenda has tried to measure the scale and explain the mechanisms underlying capital flight from Russia, as well as define its causes and consequences. A group of Russian and Canadian researches from the Institute of Economics of the Russian Academy of Sciences (RAS) and the University of Western Ontario, Canada, initiated a joint research project to investigate these issues. Massive capital flight from Russia first began right after the start of the economic transformation in the early 1990s, and is still continuing nowadays against the background of prolonged recession and growing external debt. This created a threat of economic instability in the country, and also enhanced the risk of default. Canada does not face a similar problem: there is no capital flight and it has thus far been precluded by Canada's robust banking system, mature national markets and balanced public finance. To a certain extent Canadian experience could give helpful insights for Russian policymakers. The joint project lasted from March 1997 to September 1998, and the Russian and Canadian economists involved undertook cooperative international research. Along with theoretical issues (what is and how to measure capital flight) and analysis of the Russian situation during 1992-97 (causes, patterns, and effects of capital flight), project participants prepared recommendations for the Russian authorities as to how to prevent capital flight and to stimulate capital repatriation. Participants have also actively promoted discussions, meetings with business communities, held press interviews in Russia and Canada as well as organised press conferences at the beginning and the end of the research project. During the project, participants had had contact with CIDA, the Moscow office of the World Bank, managers of Russian Government Departments (External Economic Relations and Custom Inspection), Canadian Government Departments and private business (Finance Ministry, Bank of Canada, CIBC, CDIC, Ukraine Corporation). Russian discussions included representatives of the Security Council of RF, the Ministry of Finance, the Bank of Russia, and experts from the Russian Academy of Sciences. The participants have prepared eleven reports (the Russian side presented six reports and the Canadian side five reports) as well as published papers in Voprosy Ekonomiki, Bankovskie Uslugi (in Russian) and The World Economy (in English). The group of Canadian economists headed by Professor John Whalley included Professors Uzi Segal, Ron Wintrobe, Dan Vincent and Terry Sicular among others. The Russian group included Professors Boris Milner, Vyacheslav Senchagov and Dr Natalia Smorodinskaya from the Institute of Economics of RAS and Professor Lidia Krasavina from the Financial Academy of the Russian Government. Academician Leonid Abalkin, Director of the Institute of Economics of RAS headed the Russian group. The project was sponsored by the UCGF Trust Fund - a partnership of the University of Calgary and the Gorbachev Fund. This is a report on a two year project which has sought to quantify and better understand the mechanisms underlying capital flight from Russia. The project was concluded in the spring/early summer of 1998, all before the onset of the recent dramatic events in Russia following the announced devaluation of late August. The report does not make recommendations aimed directly at the current situation, although the phenomena we identify are contributing factors to the intensification of present difficulties. As such, our report should be read as background to, and not prescription on, the current situation.
this paper I explore some such issues. I begin below with a brief discussion of definitions and an evaluation of available statistics
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