NEW YORK (TrustLaw) –Illicit financial flows leaving Mexico rose sharply between 1970 and 2010, amounting to $872 billion and with deliberate trade mispricing constituting the lion’s share of this, says a report by Global Financial Integrity (GFI).
The result is costly for Mexico, averaging a loss of about 5.2 percent of its gross domestic product (GDP) per year between 1970 and 2010, GFI said in its report, “Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy,” released on Sunday.
These estimates on proceeds from crime, corruption and tax evasion were extremely conservative, the Washington D.C.-based think tank said, as it cannot track transactions settled in cash which tend to be things like drug trafficking and human trafficking.
In the last decade, illicit flows averaged 6.1 percent of Mexico’s GDP– a level also seen in the 1980s – up from 3.8 percent in the 1970s, it said.
One of the main causes for this loss is deliberate trade mispricing.
“For example, trade restrictions can provide the incentive to under-invoice imports in order to lower customs duties payable or exports can be over-priced in order to collect on export subsidies,” according to the report.
“Moreover, because illicit inflows are also unrecorded, the government cannot tax the funds nor use them for economic development,” it said.
The report estimates that trade mispricing represents about $643 billion of the $872 billion in illicit financial flows from Mexico.
Illicit outflows have increased sharply during the four decades reviewed by the report. “On average, they were $3 billion in the 1970s, $10.4 billion in the 1980s, $17.4 billion in the 1990s and $49.6 billion in the 2000s,” it said.
GFI described that percentage as “a massive amount of money” for a developing nation to lose.
“These illicit flows rob Mexico of much-needed funds to foster economic development, and they reduce the tax revenue the government needs to finance schools, hospitals, infrastructure, poverty alleviation and the fight against the drug cartels,” it said.
The report offers three policy measures to reduce trade mispricing, which accounted for 74 percent of illicit financial outflows over the four decades. They are:
* Require the use of computer software to detect export and import prices that are clearly out of line with international norms
* Require that the parties conducting a sale of goods or services in a cross-border transaction sign a statement in the commercial invoice certifying that no trade mispricing in an attempt to avoid duties or taxes has taken place and that the transaction is priced using the Organisation for Economic Co-operation and Development (OECD) arms-length principle
* Undertake additional measures to curb abusive transfer pricing
(Editing by Rebekah Curtis)