draining development.pdf - Khazar University

Introduction and Overview: The Dynamics of Illicit Flows 13rations that might be perpetrating the mispricing. Finally, he exploresthe possibility that the corporations might use secrecy jurisdictions(usually called tax havens) to assist in hiding these transactions fromview. In each case, Murphy finds that the hypothesis is plausible and that,as a consequence, losses of the estimated amount are also plausible,although not proven to exist as a result of this work. In addition, thechapter identifies the potentially important role of the Big Four firms ofaccountants with regard to this issue based on their significant presencein secrecy jurisdictions, their role as auditors of most of the world’s multinationalcorporations, and their important role in setting InternationalFinancial Reporting Standards.Volker Nitsch, an economist at Technische Universität Darmstadt, Germany,addresses a related issue in “Trade Mispricing and Illicit Flows”(chapter 10). A potential vehicle for the unrecorded movement of capitalout of a country is the falsification of invoices in international trade transactions.In contrast to transfer pricing, this involves transactions betweenformally unrelated parties. Exporters may understate the export revenueon their invoices (whether by giving low figures for the price or quantity),and importers may overstate import costs, while their trading partners areinstructed to deposit the balance for their benefit in a foreign account. Thechapter critically reviews empirical approaches to quantify the extent oftrade mispricing. Various reasons for discrepancies in bilateral trade statisticsare discussed, and incentives for faking trade invoices other than capitalflight are highlighted. Overall, the accuracy and reliability of estimatesof IFFs based on trade mispricing are questioned.Policy InterventionsAlex Cobham, an economist with Christian Aid, examines the role of taxhavens in “Tax Havens and Illicit Flows” (chapter 11). This chapter makesthree contributions. First, it provides a brief, critical survey of the stateof knowledge on the impact of havens on development. Second, it usesexisting data to extend that knowledge by examining the detail on bilateraltrade and financial flows between havens and developing countriesand identifying the exposure of developing countries of different types.Third, the chapter sets out a research agenda that would allow greatercertainty about the scale of the impact of tax havens on development.