P357 billion lost to corruption, crime yearly

Camille Diola - The Philippine Star

P12.6 trillion fueled criminal activities via smuggling

MANILA, Philippines — A study says the Philippine economy was cheated of $132.9 billion or more than P6 trillion in illicit money outflows in the past five decades, incurring losses of over P357 billion yearly on average.

Global Financial Integrity (GFI) released a report released on Tuesday that shows the staggering amount of illicit financial outflows including proceeds from crime, corruption and tax evasion from 1960 to 2011.

The Washington DC-based research organization said that the Philippines suffered from the losses that reduced domestic savings, drove the underground economy and facilitated crime and corruption.

"Illicit outflows drain billions of dollars from the official Philippine economy, money that could otherwise be used to help the nation’s economy grow," GFI Managing Director Tom Cardamone said in a statement.

The study, said to be the "most methodologically thorough analysis conducted by GFI to date," was authored by GFI Chief Economist Dev Kar and GFI Junior Economist Brian LeBlanc.

Kar, also an International Monetary Fund senior economist, explained that illicit outflows have grown over time, averaging only from 2 percent of the GDP in 1970s and 1980s to 5 percent of the GDP in the 1990s.

"Illicit outflows facilitate income tax and customs duties evasion ... Unless corrective actions are taken, the economic toll of these illicit flows will continue to grow," Kar said.

The researchers also found that 72 percent of the outflows were made by manipulating trade transactions or misinvoicing.

Over $277.6 billion or P12.6 trillion, moreover, was illegally transferred into the Philippines to fuel criminal activities and done through rampant smuggling.

Between 1990 and 2011 alone, the government has lost $23 billion or P1 trillion in tax revenues.

"The illicit inflow of capital and merchandise is perhaps even more insidious: it fuels crime, grows the underground economy, and costs the government billions of dollars each year in lost customs duties," Cardamone, an international crime expert, added.

Illicit money flowed in and out of the Philippines would total $410.5 billion or P18 trillion.

A fourth of goods' value unreported

The researchers explained how illicit inflows were done through trade misinvoicing, attributed to have allowed 96 percent of the transactions.

LeBlanc, Kar's co-author, said that the the problem of fraudulent invoices is "ubiquitous" in the country that 25 percent or one in four goods imported goes unreported to customs officials.

"Import under-invoicing is generally driven by a desire to reduce or eliminate the prices paid on customs duties and tariffs," Le Blanc said.

"As tariffs on international trade make up 22 percent of total taxes in the Philippines, such widespread under-invoicing has a severely damaging effect on government revenues," he explained.

The amount of illicit flows and resulting loss in taxes are even sizeable placed alongside the country's fiscal deficit.

Since 2000, an average of $1.46 billion in tax revenues yearly were consumed in wrongdoing.

"The US$3.85 billion in lost tax revenue in 2011 was more than twice the size of the fiscal deficit and equal to 95 percent of the total government expenditures on social benefits that year," Le Blanc said.

Conservative estimates

The researchers said that while the study was based on rigorous data analysis, the numbers may still be lower than the actual amounts.

"The estimates provided by our methodology are likely to be extremely conservative as they do not include trade misinvoicing in services, same-invoice trade misinvoicing, hawala transactions, and dealings conducted in bulk cash," Kar said.

"This means that the vast majority of the proceeds of abusive transfer pricing between arms of the same multinational corporation as well as much of the earnings from drug trafficking, human smuggling, and other criminal activities—which are often settled in cash—are not included in these estimates," he added.


Cardamone hopes that the study will be translated into concrete policy goals not only to curb illicit money flows but also to maximize resources spurring growth.

GFI said that Philippine officials should be more wary of transactions with known tax havens such as Hong Kong, Singapore and Dubai.

All Philippine banks should similarly be aware of those who really own and control accounts under them. This lack of knowledge leads to a lax in monitoring accounts for money laundering.

"Often banks do not know who owns or controls the accounts in their institution – they might have the name of an anonymous shell company, but they don't know the person controlling that shell company," GFI noted.

The Customs processes and enforcement should be cleaned up and boosted, GFI said.

The group suggests training of its officers, upgrading to software that detects misinvoices and publishing of data for public consumption.

Accompanying legislature can criminalize offenses related to money laundering by expanding the list to all other felonies, it said.

Enforcement of existing laws, moreover, is indispensable.

"The Government of the Philippines should strongly enforce all anti-money laundering laws that are already on the books," the watchdog said. - with Associated Press

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