Capital Flight Working Project

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    GOVERNANCE AND ILLICIT FINANCIAL FLOWS*
    (AERC, 2014-09-01) Ayogu, Melvin D; Gbadebo-Smith, Folarin
    Insofar that it corrodes governance, engendering opportunistic crimes, grand corruption lies at the core of the problem of illicit financial flows. We identify at least two likely antagonistic circles in the illicit flow process—a virtuous circle and a vicious circle—both rooted in one common factor, namely, the strategic complementarity between corruption and governance. Also, we consider the scope of global governance architecture in encouraging banks to “do the crime, pay the fine, and do no time.” Given this structure, the observed, rampant impudence of banks’ participation in illicit financial flows is understandable and society would not be shocked should global mega-banks increasingly resemble a police establishment run by ex-convicts. Curbing illicit flows in such a circumstance would be daunting. Therefore, civil society must live up to its civic responsibilities by displacing the vicious cycle first through creating the right incentives for politicians to identify negatively with illicit financial flows.
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    ILLICIT FINANCIAL FLOWS AND STOLEN ASSETS VALUE RECOVERY
    (AERC, 2014-09-01) Ayogu, Melvin D; Agbor, Julius
    Value recovery of stolen assets is both an enforcement of anti-money laundering laws and a potent weapon against corruption. When obtainable, it represents society’s credible commitment to ensure that “crimes do not pay.” We explore these linkages by reviewing international experiences on the implementation of value recovery. Lessons suggest country-level studies that are more likely to strengthen local initiatives, leading to regional strategies capable of improving negotiations for assistance and cooperation at the global level.
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    MACROECONOMIC IMPACT OF CAPITAL FLIGHT IN SUB-SAHARAN AFRICA
    (AERC, 2016-09) Weeks, John
    This paper assesses the impact of capital flight on growth in thirty-one sub-Saharan African countries. It first considers the “macro fundamentals” hypothesis that capital flight would be lower in a country whose government adhered to “sound” macroeconomic policies. Analytical considerations fail to support this hypothesis. Second, it develops a growth estimating equation derived from the Harrod-Domar framework. The growth estimations support the conclusion that capital flight had a major impact on growth over the last three decades, 1980–2010. The negative impact was greatest for the petroleum-exporting countries and those affected by internal conflict, but it was also substantial for the other countries, with a few exceptions.
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    NATURAL RESOURCES AND CAPITAL FLIGHT: A ROLE FOR POLICY
    (AERC, 2014-09) Arezki, Rabah; -Graziosi, Gregoire Rota; Senbet, Lemma W.
    This paper investigates the relationship between natural resources and capital flight in the form of tax avoidance from multinational corporations. In particular, it focuses on the spillover effects in terms of tax revenue mobilization and stock market development from the thin capitalization rule, a policy instrument aimed at limiting firm tax avoidance through setting limits on a firm’s foreign indebtedness. We exploit the plausibly exogenous within-country variations of data on oil discoveries for a panel of 117 countries during the period 1970–2012. We find evidence that oil discoveries significantly enhance both tax revenue mobilization and stock market development, but only when a thin capitalization rule is in place. We argue that these findings can be explained through the limiting role of a thin capitalization rule in multinational companies’ use of financial transactions among their affiliates or tax havens to transfer part of the profit. The thin capitalization rule may thus not only help limit the erosion of the domestic tax base but may also entice multinational corporations to resort to using and developing the domestic financial system.
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    TAX EVASION AND CAPITAL FLIGHT IN AFRICA
    (AERC, 2014-09) Kedir, Abbi M.
    Expanding the tax base raises government revenue and is essential for sustainable poverty reduction in African countries. With volatile ODA, FDI, loans, and remittances, domestic resource mobilization via taxes remains a vital source of revenue for African governments. Fighting tax evasion is a significant part of this drive to increase government revenue and reduce vulnerability to shocks, including the sudden depletion of official development aid. Capital flight, tax evasion, and tax avoidance are significant developmental problems that require urgent attention. This paper highlights key issues in relation to tax evasion and capital flight via tax havens. It provides an econometric analysis of factors associated with tax evasion using data from three rounds of Afrobarometer Surveys. Policy implications are discussed.