Fuel for Crime, Corruption and Tax Evasion: US$68.9 Billion Flowed Illegally Into or Out of Emerging EU Economies

Fuel for Crime, Corruption and Tax Evasion: US$68.9 Billion Flowed Illegally Into or Out of Emerging EU Economies

 Nearly US$70 billion in illicit financial flows – the proceeds of crime, corruption, and tax evasion – flowed into or out of developing and emerging European Union member-states in 2011, according to newly released information from Global Financial Integrity (GFI).

In conjunction with its release of this data, GFI, a Washington, DC-based research and advocacy organization that studies and promotes policies to curtail illicit financial flows, urged members of the European Parliament to support the creation of public registries of corporate ownership information in the upcoming vote – to be held on February 13 – on key revisions to the European Union Anti-Money Laundering Directive (AMLD).   

“There is a tremendous amount of illicit capital flowing into and out of Eastern Europe, and anonymous shell companies are one of the main reasons why,” said GFI President Raymond Baker.  “British Prime Minister David Cameron set a new global standard last fall when he committed the United Kingdom to creating a public registry of the true, ultimate owners of all companies in the U.K.  It is now time for the full European Union to decide if it will rise to that standard.”

GFI’s research found that US$68.9 billion flowed illegally into and out of developing and emerging EU member-states in 2011.  The analysis, compiled by GFI Junior Economist Brian LeBlanc, revealed that Bulgaria, Croatia, Latvia, Lithuania, Poland, and Romania hemorrhaged US$20.8 billion in illicit financial outflows in 2011.  GFI further found that US$48.1 billion of capital and merchandise was illegally smuggled into these five countries in 2011, fueling crime and driving the underground economy.

“The scale of illicit capital and merchandise moving into and out of developing EU member states is devastating,” said LeBlanc, an economist at GFI. “We’re seeing an incredibly worrying acceleration in both illicit inflows and outflows. There is an urgent need to eliminate anonymous shell companies by establishing public registries of corporate ownership information.”

“Illicit financial flows increase the size of the underground economy, decrease tax revenues, facilitate corruption, and allow organized crime to flourish,” LeBlanc continued. “They are an important factor holding back economic growth in developing EU member states.”

Global Financial Integrity produces estimates of illicit financial flows for countries classified by the IMF as developing and emerging economies. The organization has not produced estimates of other EU member states.

GFI said that the country breakdowns of illicit flows for each of the six economies were:

Illicit Financial Inflows, 2011:

  1. Poland……………………US$38.03 billion***
  2. Romania.………………..US$3.15 billion
  3. Lithuania………………..US$2.56 billion
  4. Bulgaria………………….US$2.08 billion
  5. Latvia……………..………US$1.82 billion
  6. Croatia……………………US$441 million

*** Poland ranked 3rd among all developing and emerging countries in illicit inflows through import under-invoicing in 2011.

Total Illicit Financial Inflows, 2011: US$48.08 billion

Illicit Financial Outflows, 2011:

  1. Poland……………………US$9.14 billion
  2. Lithuania………………..US$4.27 billion
  3. Latvia……………………..US$4.06 billion
  4. Bulgaria………………….US$2.56 billion
  5. Croatia……………………US$1.57 billion
  6. Romania…………………US$1.12 billion

Total Illicit Financial Outflows, 2011: US$20.80 billion

GFI pointed out that throughout the European Union and around the world, corporations can be formed without disclosing who actually owns or controls them. According to GFI, criminals often exploit this ability to create anonymous shell companies – legal entities that are set up for the sole purpose of hiding the owner’s identity that do little or no legitimate business.  It observed that the U.S. Department of Justice has said that such “phantom firms” are the most widely used method for laundering the proceeds of crime, corruption, and tax evasion.

“Anonymous shell companies make it easier for criminals to move money across borders without a trace,” said Joshua Simmons, Policy Counsel at Global Financial Integrity, “They play an essential role in the money laundering process.”

GFI suggests that solving the phantom-firm problem requires identifying the “beneficial owner” of a company when it is formed. By also making this information available to the public, the EU would achieve the “gold standard” of transparency, enabling its citizens and other companies to always know with whom they are doing business and empowering civil society organizations, journalists, and investors to hold individuals accountable for their companies’ actions, according to the organization.

“We strongly encourage every MEP to take a strong step toward curbing money laundering and hampering crime by voting to require the creation of public registries of corporate ownership information when the European Parliament considers revisions to the AML Directive later this month,” added Simmons.

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