Domestic Consequences of Illicit Financial Flows

1. Domestic Consequences of Illicit Financial Flows Olav Lundstøl Counsellor-Energy and Petroleum Royal Norwegian Embassy in Brasilia Rio de Janeiro, 9 September 2014

2. IFF, Tax Havens and Development • Secrecyjurisdictions/tax havens, illicitfinancialflows/capitalflightand challengesofinequality in the western world and emergingeconomies • >50% ofworld trade throughtax havens, 50% of all banking assets held in offshore accounts, >30% of all FDI through offshore accounts, balancesheetofsmallislandcountries > 18 trillion USD or about 1/3 ofworld GDP (ofthis >12 trillion USD held by richindividuals (Shaxson, 2010) • Norway: Monterrey conference on financing for development (2002), White paper (2009), multiple global, regional and national initiatives

3. Domestic Consequences:The Developed Economies • Economicinequality rising to pre WW1 levels in thedevelopedworld and expected to continue, overall linked to unequalsharingofgains from increase in productivitybetweenlabour and capital (T Picketty) • The management ofthe global financialcrisis and the euro zonecrisis have bothcontributedfurther to theincrease in inequality in severalrespectivecountries and has de facto facilitated a transfer ofwealth from thestate and themajorityofthepopulation to therichest (R Skarstein, 2013 and V Norman 2012) • The situation is even worse however because, T Picketty broadly leaves untreated: 1) the offshore economy that has increased to unprecedented historical levels in the last few decades, and 2) the increasing element of south-north net capital flows through offshore accounts (K Rogoff, 2014)

4. Domestic Consequences:The Emerging Economies • Lost financing for development, through profitable private and publicinvestments in a worldwithincreasinginequality • IFF from thedevelopingworld 500-1000 billion USD/yr, exceedsnet legal capitalinflow to thedevelopingworld and many times ODA • Capital outflowsincreasing from severalemergingeconomieswithlowsavings and investment rates and high rates ofresourceextraction (GFI 2014 East Africa report on trade misinvoicing) • Net effect of illicit financial flows on growthand poverty has been estimated to be of such magnitude that MDG1 could have been achieved for SSA as a whole (J Nkurunziza, 2014)

5. Domestic Consequences:What about Brazil? • Estimated 520 billion USD ofassets in secrecyjurisdictions (TJN 2013) • The 7th highestcumulative IFF outflowamongdevelopingcountries last decade (GFI 2013) • Productivity challenge in overall economy, accompanied by lowlevelsofsavings and investments, in particular during last twodecades, compared to benchmarkcountries (IMF, 2013) • Infrastructurestock 17% of GDP (compared to 50-75% of GDP for benchmarkcountries) (Mckinsey, 2012) • Investment in infrastructure 1.5% of GDP in 2013 (compared to 5.1% of GDP for developingcountries) • Estimatesputsthe overall infrastructureinvestmentneeded at 1.4 trillion R to bring Brazil up to thelevelofbenchmarkcountries, aboutthree times thecurrentlevelsannounced for thecomingdecades(Federal Universityof Rio, 2013) • Economicrecession in 2014 followinglowlevelsofgrowth in later years • Estimated IFF about the same as investment in infrastructure in 2012

6. Outlook A. International Risk: IFF and inequalityonupward trend Opportunity: High levelpolitical and tehnicalattention (G8- three T’s, OECD, IMF, UN, BRICS) Opportunity: Automatic Exchange of Information, Extended country by country reporting, Global Financial System Scrutiny Needed: A new global and nationalapproach to regulating and taxinginternational business B. Brazil Risk: Rapid increase in largeinfrastructureinvestments and pre-sal development Opportunity: Implementationofnewapproaches to limit trade misinvoicingbeyondthearm’slengthprinciple Opportunity: Increasedfocusonlargefinancial and economiccrimesthroughnewlegislation and specialcourts and innovative follow up an enforcment Needed: Active participation, possiblythrough BRICS, to influencenewrules and approach to regulating and taxinginternational business