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Russia's dirty money flows more than doubled since 2004-report

Source: Thomson Reuters Foundation - Tue, 12 Feb 2013 23:58 GMT
Author: Reuters
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* GFI says Russia's illicit flows 5th worst among emerging markets

* Dirty money feeds underground economy equivalent to 46 pct GDP

* Flows average $62 bln a year vs $27 bln in 1994-2003 period

* Russia's weak governance contributes to problem

By Stella Dawson

WASHINGTON, Feb 12 (TrustLaw) - The amount of dirty money flowing in and out of Russia has more than doubled over the past eight years, robbing the country of productive capital and driving a massive underground economy, a new report has found.

Global Financial Integrity, a Washington think tank that studies illicit money flows, estimates that an average of $61.72 billion in money earned from corruption, human trafficking, arms smuggling and other illegal activities has entered or left Russia each year since the start of 2004, a 228 percent increase from the ${esc.dollar}27.06 billion in illicit funds seen annually on average in the prior decade.

Still, Russia only ranks fifth among developing economies for total illegal money flows, far behind China, which GFI estimates has lost $3.79 trillion between 2000 and 2011.

China saw an estimated ${esc.dollar}764.27 billion in dirty money between 1994 and 2011, GFI said in its report "Russia: Illicit Financial Flows and the Role of the Underground Economy," released on Tuesday.

The dirty money feeds a massive underground economy, equivalent to 46 percent of Russia's national economic output and 3.5 times more than the average for other major industrialized nations in the Group of Eight.

The shadow economy fueled by illicit flows enriches a small business and criminal elite at the expense of the broader citizenry, and it flourishes because Russia's government institutions are weak, with corruption and accountability measures worsening, GFI said.

Raymond Baker, director of Global Financial Integrity, said the volume of illegal money illustrates and is interlinked with the broader challenges Russia faces.

"It is the governance deficit manifest in so many aspects of the Russian state that presents an enormous problem for the nation itself and for its economic and political relations with other nations," he said.

Russia uses trade mispricing - whereby imports are over-billed and exports underpriced - to hide 36 percent of illegal money flowing in and out of the country, according to Dev Kar, GFI's lead economist.

Unlike many countries, illegal flows of cash into Russia far outstripped the money leaving. Illicit inflows totaled $552.9 billion in the period since 1994 when records began until 2011, compared with only $211 billion leaving the country.

But this money remains below the official radar, escaping taxation and kept in the hands of a few, thereby limiting its economic benefit and contributing to widening inequality between rich and poor alike, said Kar.

The growth in illicit inflows has coincided with a surge in oil prices since 2003. Additionally, the numbers in the report could be underestimated.

Baker said that Russian businesses for years have aggressively used fake invoices generated by corporations that own the exporting company, the importing arm and the bank that handles the payments and the trade documents. This allows Russians to transfer hundreds of billions of dollars into and out of their country without an accurate record, he added.

(Reporting by Stella Dawson, Editing by G Crosse)

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