EXCLUSIVE Crime, corruption and tax evasion - the hemorrhaging of billions of ringgit in dirty money from Malaysia, one of the world's top countries in illicit capital flight, continues unabated.

RM173.84 billion (US$54.18 billion) was siphoned out of Malaysia in 2011, said Washington-based financial watchdog Global Financial Integrity (GFI) in its latest annual report which tracks capital flight.

NONEHaving catapulted into second position last year where close to RM200 billion of dirty money was siphoned out of Malaysia in 2010, putting the country second only to Asian economic powerhouse China in global capital flight, the country is ranked no 4 in this year's GFI report.

GFI has yet to obtain data for 2012 and 2013, but these will be included in future reports.

For 2011, Malaysia is behind giants Russia (US$191.14 billion), China (US$151.35 billion) and India (US$84.93 billion). Still, the level of illicit cash flowing out of Malaysia is second highest in the past decade.

This is despite Bank Negara Malaysia (BNM) having set up a task force in 2010 to implement measures to put a plug on the illicit funds leaving the country.

However, BNM has taken pains to stress that the estimates by GFI are essentially ‘unrecorded financial flows', which are not necessarily synonymous with ‘illicit financial flows'.

bank negara 270307The central bank also pointed out that, among others, the data do not take into account of goods that are exported via re-export hubs.

"After taking into account Malaysia's trade that is exported via Singapore and Hong Kong (re-export hubs), the estimate of trade mispricing between Malaysia and its top 10 trading partners were reduced significantly by about 70 percent," BNM said in a statement in March.

"Since the estimates in the report of trade mispricing do not take into consideration such discrepancies in trade statistics, the estimates of illicit flows are overstated."

The 'Hong Kong effect'

GFI chief economist Dev Kar, who authored the 2013 GFI report with junior economist Brian LeBlanc, said the financial watchdog had taken cognisant of the re-exporting issue and this was addressed in its latest report.

World’s top 10 in illicit outflows 2011"We adjusted for the ‘Hong Kong effect' in estimating trade misinvoicing by Malaysian traders. Essentially, the revised methodology involves taking account of disaggregated re-exports data published by the Hong Kong Census and Statistics Department that breaks down re-exports to and from Hong Kong by destination and source countries, including Malaysia," Kar told Malaysiakini.

"Because such a detailed breakdown of re-exports data are not published by Singapore, a similar adjustment of Malaysian exports and imports involving Singapore could not be made.
"However, please note that the adjustment involving Singapore would be far smaller (due to the fact that Hong Kong eclipses Singapore as a trade entrepot, i.e., the volume of re-exports) and are unlikely to impact the misinvoicing estimates significantly."
BNM has also argued that the entire errors and omissions (E&O) figure cannot be attributable to illicit activities, as it also includes genuine statistical errors from the compilation of statistics of external trade and cross-border financial transactions.

NONEKar (left) said BNM was correct that the net errors and omissions (NEOs) reflect both statistical errors and unrecorded capital flows.

"Economists have for decades used the NEOs as a proxy for illegal capital flight provided two conditions are met - (i) they are persistently negative and (ii) they are sizable.

"Both these conditions are met in the case of Malaysia whose reported balance of payments statistics are basically reliable (due to the fact that they average around 2 percent of total trade).

"We therefore feel that persistently negative NEOs under conditions of overall statistical reliability, provides prima facie evidence of illegal capital flight."

Kar nevertheless commented Malaysia's central bank for the formation of the task force following publications of GFI reports.

"At a minimum, such governmental actions convey to the public that it is serious in addressing governance issues and that it will take action against corruption wherever such actions are warranted."

Tax haven secrecy


GFI's latest report released today - ‘Illicit Financial Flows from Developing Countries: 2002-2011' - is its 2013 annual update on the amount of illicit capital flowing out of developing economies, and it is the first of GFI's reports to include data for 2011.

"Anonymous shell companies, tax haven secrecy, and trade-based money laundering techniques drained nearly a trillion dollars from the world's poorest in 2011, at a time when rich and poor nations alike are struggling to spur economic growth," said GFI president Raymond Baker.
"While global momentum has been building over the past year to curtail this problem, more must be done. This study should serve as a wake-up call to world leaders: the time to act is now."

The report incorporated for the first time trade data on re-exports from Hong Kong and the first to integrate bilateral trade data for those countries which report it - making this report the most accurate analysis of illicit financial outflows produced by GFI to date.

"We're constantly striving to improve the accuracy of our estimates. We determined that by omitting data from the use of Hong Kong as a trade intermediary, the previous methodology - which was accepted by most economists studying trade misinvoicing - had the potential to overstate illicit outflows from many Asian countries," said Kar.

gfi illicit outflows hong kong reexports chartCorrecting for this ‘Hong Kong effect' sharply reduces the share of outflows from Asia.

"Nevertheless, Asia still has the largest share of illicit flows among the regions, and six of the top 15 exporters of illicit capital are Asian countries (China, Malaysia, India, Indonesia, Thailand, and the Philippines)," said Kar.

"The estimates provided by our new methodology are still 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," added Kar, who served as a senior economist at the International Monetary Fund (IMF) before joining GFI in January 2008.

"This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities, which are often settled in cash, are not included in these estimates."

Financial transparency

The US$946.7 billion of illicit outflows lost in 2011 is a 13.7 percent increase from 2010 - which saw developing countries hemorrhage US$832.4 billion - and a dramatic increase from 2002, when illicit outflows totaled just US$270.3 billion.

The GFI study estimates the developing world lost a total of US$5.9 trillion over the decade spanning 2002 through 2011.

"It's extremely troubling to note just how fast illicit flows are growing," said Kar.

World’s top 10 in illicit outflows 2002-11"Over the past decade, illicit outflows from developing countries increased by 10.2 percent each year in real terms - significantly outpacing GDP growth. This underscores the urgency with which policymakers should address illicit financial flows."

Meanwhile, Baker hailed the effort by some countries to increase the transparency in the international financial system as a means to curtail the illicit flow of money.

"Much progress has also been made in targeting anonymous shell companies over the past year, with the United Kingdom announcing in October that they would be creating the world's first central public registry of corporate beneficial ownership information," he said.

"(British Prime Minister) David Cameron should be commended for his courage, but the rest of the world must now move to follow suit - making public registries of beneficial ownership information the global standard."

Cameron was spurred to action following a global investigation coordinated by Washington-based International Confederation of Investigative Journalists (ICIJ) in April this year, which included a team from Malaysiakini.