The Brazilian economy lost at least US$401.6 billion in illicit financial outflows from 1960 to 2012. These outflows represent the proceeds of crime, corruption, and tax evasion, and have serious negative consequences for Brazil. Outflows were found to drain resources from the Brazilian economy, to drive the underground economy, and to exacerbate inequality.What I find curious with this and other GFI studies is that most outflows are attributed to trade misinvoicing. That is, the value of imports or exports is misreported by under- or over-invoicing their value. Through this channel money flows overseas since it is a way to work around foreign exchange and capital controls:
Furthermore, the report found that illicit outflows are growing. Annual average illicit outflows increased from US$310 million in the 1960s to US$14.7 billion in the first decade of the twenty first century before jumping to US$33.7 billion over the last three years of the study, 2010-2012. On average, Brazil’s illicit outflows are equivalent to 1.5% of the country’s official GDP.
Trade misinvoicing is the major conduit of illicit financial flows from Brazil. The report reveals that the vast majority of Brazil’s illicit outflows—92.7%, or US$372.3 billion of the US$401.6 billion in total outflows—were channeled through the misinvoicing of trade transactions. The remaining US$29.4 billion in the illicit outflows detected by GFI occurred via hot money outflows, such as unrecorded wire transfers.What I am more convinced of is that inequality relates to the amount of these capital outflows:
We also examined the link between economic growth, income inequality, and capital flight. While the lack of an unbroken series on the Gini coefficient prevented its inclusion in our model, regression analysis with a shorter time period (1970-2011) showed that worsening income inequality also seems to drive capital flight, although the relationship is only significant at the 90 percent level [marginal significance]. A possible explanation is that rising income inequality implies a larger number of high net worthAs large as these outflows already are, note that others which are not so easy to capture may increase the sums involved:
individuals (HNWIs). It is the HNWIs rather than the common man that can finance capital flight and take advantage of the world’s shadow financial system to shelter wealth.
Economic sources and methods cannot capture illicit financial flows in a comprehensive manner. The difficulty arises from the fact that we are in part trying to capture financial flows generated from purely illegal activities such as drug trafficking, bribery and kickbacks related to corruption, and arms or human smuggling, which are typically designed to evade detection by regulatory authorities and law enforcement. Such activities are often settled in cash, so that the parties to the illegal transaction cannot be traced. Hence, gap analysis of officially recorded data has inherent limitations in capturing illegal transactions.