OUP CORRECTED PROOF – FINAL, 25/01/20, SPi Estimating illicit financial flows OUP CORRECTED PROOF – FINAL, 25/01/20, SPi OUP CORRECTED PROOF – FINAL, 25/01/20, SPi Estimating illicit financial flows A critical guide to the data, methodologies and findings ALEX COBHAM AND PETR JANSKÝ JANUARY 2020 1 OUP CORRECTED PROOF – FINAL, 25/01/20, SPi 1 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Alex Cobham and Petr Janský 2020 The moral rights of the authors have been asserted First Edition published in 2020 Impression: 1 All rights reserved. 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Enquiries concerning reproduction outside the scope of this licence should be sent to the Rights Department, Oxford University Press, at the address above Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2019945448 ISBN 978–0–19–885441–8 Printed and bound in Great Britain by Clays Ltd, Elcograf S.p.A. Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work. OUP CORRECTED PROOF – FINAL, 25/01/20, SPi For our families OUP CORRECTED PROOF – FINAL, 25/01/20, SPi OUP CORRECTED PROOF – FINAL, 25/01/20, SPi Preface The last decade has seen growing concern over ‘illicit financial flows’ as a threat to human progress. This culminated in 2015 in the global agreement to set a target in the UN Sustainable Development Goals to reduce illicit flows. What was lacking then, and remains lacking as we write in 2019, is consensus on the indicators and measurement for this target. In this book, we survey the landscape, and aim to offer a critical review of the many methodologies and estimates for various aspects of illicit flows. We have had the privilege of being actively involved in this research agenda as it has developed, and also of participating in many of the international policy processes. By sharing the draft chapters online as we wrote them, we were able to obtain inputs from across the generous community of expert scholars. We have benefited from discussions, comments and collaboration from more people than we can name, including Charles Abugre, Dereje Alemayehu, Annette Alstadsæter, Owen Barder, Stephanie Blankenburg, David Bradbury, James Boyce, Peter Chowla, Michael Clemens, David Cobham, William Davis, Alex Erskine, Valpy FitzGerald, Maya Forstater, Daniel Haberly, Gamal Ibrahim, Charles Kenny, Mushtaq Khan, Alice Lépissier, Steve MacFeely, Jan Mareš, Mick Moore, Alvin Mosioma, Vera Mshana, Savior Mwambwa, Léonce Ndikumana, Miroslav Palanský, Sol Picciotto, Rakesh Rajani, Pooja Rangaprasad, Peter Reuter, Thomas Tørsløv, George Turner, Ludwig Wier, Harry Wood, Gabriel Zucman, as well as seminar and conference participants from Addis to Oslo and Lima to Jakarta by way of Beirut and New York, and the many expert colleagues at the Tax Justice Network, Global Alliance for Tax Justice, Financial Transparency Coalition, COFFERS project, Open Data for Tax Justice and the Independent Commission for the Reform of International Corporate Taxation (ICRICT). In addition, we are grateful to a number of organisations that have pro- vided financial support for elements of the underpinning research, as well as spaces and platforms for engagement and discussion. We would especially like to thank the United Nations Conference on Trade and Development (UNCTAD), the UN Economic Commission for Africa (ECA), the African Union/ECA High Level Panel on Illicit Financial Flows from Africa, the OUP CORRECTED PROOF – FINAL, 25/01/20, SPi viii Preface Tana High-Level Forum on Security in Africa, the Joffe Trust, Norad, the European Commission and the Ford Foundation. Research on illicit financial flows is now developing apace. This is a very welcome change after a long period of undue neglect; but it does have the disadvantage of making this book an attempt to hit a moving target. We have sought to ensure full coverage of current work, while recognising (and hop- ing!) that new data and new methodologies will continue to emerge. The common features of illicit financial flows are that they are deliberately hidden, made opaque to obscure their true role; and that they drain resources from states and/or make states less responsive to their peoples’ needs. As things stand, too much remains hidden for it to be possible even to judge whether any progress is being made on the SDG target to curtail illicit flows. In this book, we identify a set of the most promising channels to improve methodologies and data. We believe the very act of measuring illicit flows more accurately will con- tribute to reduce their level—just as failure to measure has allowed them to balloon. The failure thus far to translate the UN target into a measurable framework with global and national accountabilities is deeply disappointing. It is our hope that with a continuing international policy focus on reducing illicit flows, this book may contribute to more rapid progress. This should include substantial shifts in the international policy architecture, to ensure that countries at all income levels are fully included in the benefits of new standards of transparency and cooperation. We hope that academic and pol- icy researchers in the field may also benefit from this work, as we have bene- fited from theirs, and continue the process of strengthening understanding and analysis in this critical area. OUP CORRECTED PROOF – FINAL, 25/01/20, SPi Contents List of Figures xiii List of Tables xiv Introduction 1 PART 1 ILLICIT FINANCIAL FLOWS 1. History and overview of ‘IFF’ 7 1.1. Context and Motivation 7 1.2. Definitions 10 1.3. Impact 19 PART 2 ESTIMATES OF IFF SCALE 2. Trade Estimates 27 2.1. Country-level Trade Estimates: Mirror trade statistics 30 2.1.1. Overview 30 2.1.2. Data 31 2.1.3. Methodology 33 2.1.4. Results 43 2.1.5. Conclusions 45 2.2. Commodity-level Trade Estimates: Abnormal prices 46 2.2.1. Overview 46 2.2.2. Data 47 2.2.3. Methodology 47 2.2.4. Results 51 2.2.5. Conclusions 52 2.3. Transaction-level Trade Estimates: Research frontier 53 2.3.1. Overview 53 2.3.2. Data 54 2.3.3. Methodology 55 2.3.4. Results 57 2.3.5. Conclusions 58 2.4. Conclusions on Trade Estimates 59 OUP CORRECTED PROOF – FINAL, 25/01/20, SPi x Contents 3. Capital and Wealth Estimates 61 3.1. Capital Flight: Ndikumana and Boyce 62 3.1.1. Overview 62 3.1.2. Data 63 3.1.3. Methodology 63 3.1.4. Results 64 3.1.5. Conclusions 64 3.2. Capital Account Anomalies: Global Financial Integrity (GFI) 64 3.2.1. Overview 64 3.2.2. Data 65 3.2.3. Methodology 65 3.2.4. Results 67 3.2.5. Conclusions 68 3.3. Offshore Capital and Wealth: Henry’s Estimates 69 3.3.1. Overview 69 3.3.2. Data 70 3.3.3. Methodology 70 3.3.4. Results 72 3.3.5. Conclusions 73 3.4. Wealth in Tax Havens: Zucman’s, and Alstadsaeter, Johannesen, & Zucman’s Estimates 73 3.4.1. Overview 73 3.4.2. Data 74 3.4.3. Methodology 75 3.4.4. Results 77 3.4.5. Conclusions 78 3.5. Conclusions on Capital and Offshore Wealth 79 4. International Corporate Tax Avoidance 81 4.1. Empirical Findings on International Corporate Tax Avoidance 84 4.1.1. Overview 84 4.1.2. Data 84 4.1.3. Methodology 86 4.1.4. Results 88 4.1.5. United States 90 4.1.6. Europe 91 4.2. Estimates for the World, and Low- and Middle-income Countries in Particular 93 4.3. IMF’s Crivelli et al. (2016) 100 4.3.1. Overview 100 4.3.2. Data 101 4.3.3. Methodology 101 4.3.4. Results 102 4.3.5. Conclusions 103 OUP CORRECTED PROOF – FINAL, 25/01/20, SPi Contents xi 4.4. UNCTAD (2015) 103 4.4.1. Overview 103 4.4.2. Data 103 4.4.3. Methodology 104 4.4.4. Results 105 4.4.5. Conclusions 105 4.5. OECD (2015b) 106 4.5.1. Overview 106 4.5.2. Data 106 4.5.3. Methodology 106 4.5.4. Results 107 4.5.5. Conclusions 109 4.6. Profit Shifting of US Multinationals Worldwide (Clausing, 2016) 109 4.6.1. Overview 109 4.6.2. Data 110 4.6.3. Methodology 110 4.6.4. Results 112 4.6.5. Conclusions 112 4.7. Misalignment of Profits and Economic Activity of US Multinationals Worldwide (Cobham & Janský, 2019) 112 4.7.1.