draining development.pdf - Khazar University

The Practical Political Economy of Illicit Flows 475tal, but locate much of it overseas, do not have strong incentives tostrengthen property rights at home (for everyone). 20• Not only do people who control capital domestically have extraeconomicincentives to expatriate it (illicitly), but also the domesticinvestment climate suffers collateral damage. First, a certain fractionof legitimate, formal business tends to face unfairly and inefficientlyhigh tax burdens because much capital evades the tax net, especiallythrough transfer mispricing and extensive tax holidays (see elsewhereabove). Second, the knowledge that businesses are engaged in illicitcapital transfers reinforces public and political suspicion of capitalismand profit making and increases the political vulnerability of theprivate sector. A not unfamiliar figure in weak state parts of the globeis the head of state who routinely lambastes the private sector forgreed and failure to invest adequately in productive activities, yet regularlygrants large tax holidays to investors on grounds that are lessthan formal or transparent.ConclusionLet us imagine that the international community extends and moreactively uses the range of interlocking tools that it has been developing todeal with the nexus of problems implied by the term illicit capital flows,including capital flight, corruption, money laundering, tax avoidance,tax havens, and transfer mispricing. This action would take the form ofgreater international cooperation to identify and sanction transfer mispricing,further limiting the scope for the abuse of tax havens, easing andintroducing more automaticity into the exchange of information amongnational tax authorities, requiring banks to be more vigilant against illicitfunds and money laundering, expanding the scope of the ExtractiveIndustries Transparency Initiative, more vigorously extending and implementinglegislation that criminalizes acts of corruption overseas by citizensof and companies registered in the more economically influentialcountries, reforming international accounting standards, strengtheningmechanisms and laws to facilitate the recovery of stolen assets locatedoverseas, increasing watchfulness in relation to the financial affairs ofpolitically exposed persons, reinforcing the regulation or self-regulationof corporate service providers, and requiring larger transnational corpo-