 It's our great pleasure today to have Raymond Baker. He is the director of Global Financial Integrity and the author of Capitalism's Achilles' Heel, Dirty Money and How to Renew the Free Market System. He also is a senior fellow at the Center for International Policy in Washington, D.C., research and writing on linkages between corruption, money laundering and poverty. He has received numerous awards and grants, including an award in 1996 from the John D. and Catherine T. MacArthur Foundation for a project entitled Flight Capital, Poverty and Free Market Economics. He has testified often before legislative committees in the United States, Canada and the United Kingdom and has commented frequently on television and radio in the United States, Europe and Asia. So it's our great pleasure to have Raymond Baker. Thank you, Will, and I'm delighted to be here. Good afternoon, ladies and gentlemen. If I may, let me begin with a story. I lived 15 years in Nigeria from 1961 to 1976, and during that time I was building a group of companies. In the late 1960s, in the midst of the Nigerian Civil War, I put my eyes on a manufacturing company that I wanted to buy. This was a company owned by an expatriate family. It had been losing money ever since it was established five years earlier. The workers were discontent. The minority shareholders were upset. Yet I looked at this company and made the decision that I wanted to make an offer for it, and I offered 10 times book value to buy the company. Three years later, the Harvard Business School wrote a case study of this acquisition opportunity, and I had the pleasure of listening to the students discuss what a dog, what a turkey, anybody that would buy this must have been in the tropics too long. They absolutely trashed the idea of buying this company. After they voted, they took a vote and unanimously voted not to buy this company. I had the pleasure of coming to the front of the class and saying, not only did we buy it, but we paid off all of its debts in the first year and quite generous dividends to myself and minority shareholders for years thereafter. How did we do it? It must be a miracle. No, all we did was to buy imported raw materials at world market prices. The other family had been overpricing the imports of its raw materials, had been using trade mispricing to take money out of the country. The business had been losing for all of those years, whereas by simply buying at world market prices, we made money every year. And that was part of, and I knew what was going on, that was part of my education as to what we pay attention to at the present time. After 15 years in Nigeria, moved back to the States, spent another 20 years doing business around the developing world. I knew that after 35 years in business, what I was seeing was not what was being talked about. And I resolved to segue into the think tank world and address this subject matter. Wrote a book, and then we formed Global Financial Integrity, our organization. A UN official recently described the work of global financial integrity in these terms. He said it is the work of GFI to unpack the opaque. And that's a pretty good definition of what we try to do. We try to take hidden, difficult data and make sense out of it. Data that is available, but nevertheless not analyzed in the ways that we think it can be analyzed. We try to make sense out of the reality of unrecorded financial flows around the world. Our economics team is led by Dev Carr and Sarah Fretis. Our analytical work is based entirely on data that is filed by governments with the World Bank and the IMF. We do not pull numbers out of the air. We base our analysis on data that they have filed. So we often, when a government as frequently happens says, oh no, that can't be right, what you're talking about can't be correct, our response is it's your data that we are analyzing, data that you have filed with the World Bank and the IMF. We estimate that approximately $1 trillion a year of unrecorded illicit money streams out of developing countries and major emerging market countries into the Western world, roughly $1 trillion a year. In arriving at this, we use two methodologies or two sources of data. And both of these have been around for a long time. We didn't invent them. We were, however, the first one, the first organization to take these two methodologies and apply them to data for the whole of the developing world. One of these sources of data is balance of payments information, and the other is IMF Direction of Trade Statistics. And let me explain those in straightforward terms. Balance of payments data is basically an analysis of inputs and outputs for an economy. And where inputs and outputs don't match, something has happened. Some money has disappeared out of the country in an unrecorded manner. Because balance of payments data is basically an analysis of the total economy, and particularly the government's impact on the economy. When you see imbalances in balance of payments data, it tends to suggest corruption in the ranks of government officials. We use this balance of payments data in two forms. We use two models to analyze this. First is an analysis of broad capital flight. And next is an analysis of just that portion that is unrecorded. These are elements of the World Bank residual method, one of which analyzes broad capital flight, which includes some elements of legal and recorded capital flight, and then a more narrow analysis that looks only at the illicit unrecorded components of this. The second methodology that we use, the second source of data that we use, is IMF direction of trade statistics. The IMF compiles import and export information on all pairs of trading countries so that you can look and see how much Russia says it is doing in business with another country, and what the other country says it is doing as business with Russia. This data shows manipulations in the trade sector. Balance of payments data tends to give you data on corruption in government ranks. IMF direction of trade statistics gives you information on commercial manipulations. At this point, I want to explain the mispricing of trade as clearly as I can, because this is important in understanding what I will finally say about Russia. There are two ways to misprice trade. One is to misprice within the same invoice that is exchanged between buyers and sellers, and the other is to re-invoice the transaction through a third party. Let's be absolutely clear what we're talking about here. Suppose Will is in business in a foreign country and he wants to get money out of that country. How can he do it in a manner that is not clear, not obvious, not recorded? What he can do is to agree with a foreign supplier. Now, let's suppose this is a machinery manufacturer, just for sake of illustration. He can agree with the manufacturer of this piece of machinery that he wants to buy for his company. He can agree to misprice that transaction so they can negotiate hard with each other and come to a price of $1 million. And then Will can say, OK, we've agreed to a price of $1 million. But I don't want you to invoice it at $1 million. I want you to invoice it at $1.3 million. And when I pay you the $1.3 million, I want you to take the extra $300,000 and deposit it into my private bank account. That's one way of mispricing trade. The other way is for Will to say, OK, we've agreed on the price of $1 million. But I don't want you to invoice me. I want you to invoice my buying company in the Cayman Islands. So you send them the invoice for $1 million and they will handle it from there. They will mark it up to the $1.3 and send the invoice on to Will in his country. By either mechanism, Will is able to move $300,000 out of his country into another country. Now, IMF direction of trade statistics, which pays attention to the difference between what one country says is its export volume with another country will analyze only the reinvoicing of trade. It will not reveal the manipulation that occurs within the same invoice. I hope that's clear. The faking of the price within the same invoice does not show up in IMF data because it doesn't create a difference between the export price and the import price. The only way to create the difference between the export price and the import price is to reinvoice. Therefore, we know that IMF direction of trade statistics is extremely conservative when we use that data. There's another thing that is not included in IMF direction of trade statistics. And that is the trade in services. DOTS data, direction of trade statistics data, covers only merchandise trade, does a good job of analyzing merchandise trade. But there is no inclusion of services trade, intellectual property licenses, royalties, insurance contracts, management contracts, and so forth. That does not appear. That's another conservative aspect of the DOTS data that we use, the fact that it doesn't include services, which are now about 26% or 27% of global GDP. Nevertheless, we take these two methodologies and we apply them to particular countries, to regions, and we do a global analysis each year. For Russia, for the period 1994 to 2001, our broad capital flight measure derived from balance of payment statistics was $706 billion. The narrower balance of payments analysis produced a figure of $135 billion. The mispricing of trade revealed in IMF direction of trade statistics produced a figure of only $76 billion. You take that trade mispricing and add it to the broad capital flight and the hot money narrow methods, you get a range of $782 billion on the high end to $211 billion on the low end. We believe that these estimates are extremely conservative. And the reason is because trade mispricing is so underestimated in this analysis. And that will require a little bit of explanation. In the late 1980s, as businessmen in Russia were taking over state assets and exporting product principally to Europe, they arranged with European importers to pay them a kickback on their transactions. This is the same thing that the Nigerian company was doing that I purchased in the late 1960s. In the trade relationships, an arrangement was made to pay a kickback to put a deposit into a foreign bank account on behalf of one of the partners, one of the parties to the transaction. And Russians were doing this in the late 1980s. By the early 1990s and in the mid-1990s, Russian businessmen figured out we don't need to do this. We don't need to be dependent upon those guys to put a deposit into a bank account for us. We can set up our own buying entities principally in Europe and we can sell to ourselves. That is the exporting company and the importing company are the same. Russians did that beginning in the early 1990s and going on even up to the present time. Now, simultaneously with setting up their own buying operations in Europe, Russian oligarchs also set up their own private banks. In the 1980s, the Soviet Union had four banks that were quite reliable and respected on the global stage. By the middle of the 1990s, Russia itself had 2,600 banks, with every corporation establishing its own bank to handle its own trade documents and its own financing. That number has now dropped to about 860, was the last figure that I think I saw. But still, most corporations in Russia have their own pocket banks that are part of their corporate entities. Now, when you are the exporter and you are the importer and you are the banker, you can do anything with pricing that you want to do. And this is what has been happening over the past more than 15 years, as Russian companies have been taking enormous money out of the country. Russians did not invent any new ways of shifting illicit money across borders. They simply stepped into the mechanisms that had been created in other situations, be going all the way back to the 1950s, to move money across borders. What the Russian business people did was to combine those three things, export entity, import entity, and bank, combine those three more aggressively than any other country that I know of. I know of no other country that has done such a job of putting those three elements together for the purpose of sending money out of the country. Putin, in the last week or 10 days, estimated that there was a trillion dollars of money offshore from Russia. I think that's probably shy of reality. I suspect that it is a great deal more than that, because the Russians in particular have used the mispricing of trade within the same invoice, which does not show up in IMF direction of trade statistics to move hundreds of billions of dollars offshore. OK, can anything be done about this kind of phenomenon, or are we just simply dealing with the way the world works and we have to get used to it? Two thoughts before we get into what can possibly be done about this kind of situation. First of all, the goal of any effort to address this problem should be devoted to curtailing the problem, not trying to stop it altogether. Trying to stop it would require heavy-handed draconian measures, and we're not in favor of that. Curtailing it, however, can be done with some fairly straightforward steps. Second point, curtailing it is a two-way street. It is not just the responsibility of Russian authorities or foreign authorities. It is the combination of the two that has to be involved in addressing this kind of problem. The overarching answer to curtailing unrecorded cross-border flows is greater transparency, greater financial transparency nationally and globally, both in Russia and globally. OK, transparency is a nice word, but what does it mean? Let's go through some of the things that we advocate can be done to address this problem. The first step on the road toward trying to address this problem is what we call beneficial ownership. And what that means is that bankers and securities firms and others should know who are the natural flesh and blood people with whom you're doing business. This is not the case at the present time. Around the world, there are millions and millions of disguised entities where nobody knows who owns those entities except the company formation agent who put the entity together. And even in that case, sometimes the company formation agent does not know who are the natural persons because he's doing it on behalf of the Cayman Islands trust or subsidiary in a tax haven somewhere. Beneficial ownership, knowing with whom you're doing business, is the first step toward addressing the global problem. It's the first step toward addressing this problem for any particular nation. Russians have utilized disguised corporations as aggressively as others such that there are scores of hundreds, thousands of entities where nobody knows who owns the business. I've testified more than once. There is no argument in favor of not knowing with whom you are doing business. There is no argument in favor of that, in favor of not knowing with whom you are doing business. Step one, beneficial ownership. The second step that we recommend is automatic exchange of tax information. The European Union has had this for many years. The European Union figured out a long time ago that it couldn't be an economic union unless it exchanged tax information among its members. So the European Union has been doing this for 20 years now. In the United States, we recently passed FATCA legislation, by which the United States requires foreign banks to tell us what are the earnings on bank accounts that you have in your banks? What are the earnings of Americans on those accounts? Tell us. Tell the IRS. Of course, most of the jurisdictions that we've asked to do that require reciprocity. Require that we tell them who's earning money on their accounts. FATCA is growing. It has now been accepted as a satisfactory arrangement between a number of countries, and the United States is expanding this all the time. FATCA is a step in the direction of automatic exchange of tax information. A third step that we recommend is country by country reporting. What that means is that multinational corporations, be they American, Russian, British, French, whoever, would be required to report their results for each country, each jurisdiction where they are in business, each taxing jurisdiction where they are in business. This is not the case at the present time. Corporations can report their global results, and it becomes very difficult to break it down as to what business is done in one country or another country. Country by country reporting would change that and would require corporations to report their results for each country where they are in business. If you were to require country by country reporting right now, what you would find is many corporations reporting losses in countries all around the world and large profits in secrecy jurisdictions. For the Russians, they could report losses not only in Russia but in other countries where they have investments and huge profits in Cyprus, for example. Country by country reporting would change that dynamic and we think is a very crucial element in moving toward transparency. A fourth recommendation that we make is exchange in real time of trade pricing data. There is a growing availability of world market pricing information that can be accessed with a laptop computer or an iPad in the hands of a customs official or a ports authority official so that you can look at an invoice that on a transaction that is going out or coming into your country, you can look at that invoice, look at the harmonized code category that identifies what is the content of this shipment and there may be several harmonized codes on the same invoice, but you can immediately access data that gives you an idea of what is the world market price for that so that if you then find that the price of the shipment that you're looking at is much lower or much higher than that, you can ask the right questions as to what's going on here. In the case of Russia, oil went out of Russia for as low as $10 a metric ton in earlier years. This wouldn't be possible. It would be more difficult if the authorities who were looking at this had such data available to them and were able to see that the world market price at that time was $120 a metric ton. This was some years ago, but the ability to check prices quickly would be another step in the right direction. And then finally, we recommend the harmonization of anti-money laundering policies around the world. At the present time, reality is that different countries have different prohibitions against what constitutes money laundering. In the United States, for example, it remains legal to bring into this country from abroad proceeds that have generated, proceeds that have been generated from a number of kinds of criminal activities, including credit fraud and counterfeiting and contraband and environmental crimes and of course all forms of tax-evading money and so on. That can come legally into the United States. Other countries have other holes in their anti-money laundering legislation. What is needed is global harmonization of what we mean when we talk about money laundering. Russia is not unique in the loss of resources that are bleeding out of the country. This is a problem that affects the whole of the developing world and almost all emerging market economies as well. I will say that I think Russia has been negatively impacted by this phenomenon, perhaps as severely, almost as severely as any other country. If I were to pick out the country that has been most negatively impacted, it would be the Congo, but certainly Nigeria where I've had long experience has been hurt. Russia has been hurt. China has the largest outflow of illicit funds of any country in the world, but then the GDP of China is far bigger than either of the other examples. Russia has been extremely negatively impacted by this phenomenon. The question arises as to whether or not there is political will on the part of Russia to address this problem. Thank you. Thanks very much, Raymond. I wanna pick up on that last point then about the question of political will inside Russia. I mean, over the last six months there has been kind of more of a public response from the Putin administration dealing with this question of de-offshoreization and the question of how to get some of this money back to Russia, but over the last 20 years, has there really been any political will exerted to address this phenomenon, or has this simply been perceived as the way to do business and indeed the only way to do business because no one wanted to keep these assets on short? I think the latter part of your remarks is prevailing. I don't see the necessary political will to address this on the part of the Russian government, on the part of the elite. I think it's going to be very difficult to build a political will to address this problem. Yes, there's been some talk, particularly as we lead up to Russia's hosting the G20. Indeed, Russia has said transparency is one of the things that it wants to address in its hosting of the G20 conference. I would be very surprised if that went very far. We personally are placing our hopes on the following G20 meeting, which is in Australia. Australia has a superb effort in place to address illicit money, tax evasion, criminal flows and so forth, and we're putting a lot more focus on the possibility of working with the Australian G20 as opposed to the Russian G20. I don't see Russia addressing this problem. Louise, we're going to get a microphone to you, Louise. Louise Shelley, George Mason University. I think one of the problems that also needs to be addressed to prevent this illicit flows is the problem of corporate raiding within Russia because there has been such an insecurity of property rights and a combination of organized crime and corrupt officials seizing businesses, which from Yukos to the Magnitsky case to others, that many business people have no incentive to keep their money inside the country. And unless one addresses this massive vehicle of doing this, of corporate raiding, you cannot change the incentive structure. I would certainly agree with that. First time I was in Russia, I got into a taxi cab outside my hotel and I asked to be taken to an appointment and I was instead taken to the Radisson Hotel. Those who know Russia know that the Radisson Hotel was a central point for a lot of skullduggery that was going on in Russia. I had to talk my way out of there and get the taxi cab driver to take me where I was going. Yes, there's a lot of seizure of businesses, people you know or been involved in facing these kinds of problems. We'll go with Ethan and then I'm collecting hands, not to worry. Okay, Ethan and then we'll go towards the back. Ray, for more than I guess eight years or maybe longer, you have advocated something very important which is to make the acceptance of illegal tax, I mean tax evasion center, a predicate offense within the United States that there's a harmonization of predicate offenses committed abroad versus the United States for money laundering and Senator Levin has a bill on that. Who's stopping that from happening and I'm curious given the involvement of the banks whether you've approached the staff of Senator Elizabeth Warren, who seems to be a refreshing member of the US Senate who was willing to do battle with the SEC and regulators and asking questions which no one has been willing to ask in terms of the cooperation of US government officials with the financial community. In 1997 I interviewed a Swiss banker who said to me, until we recognize that you have to address the tax evading money before you can succeed in curtailing the drug money, that conversation happened to be about drug money, said there will be no progress in this agenda. One of the points that we try to make all the time is that the mechanisms for moving corrupt money, criminal money and commercially tax evading money are all the same. The same mechanisms are used to move all three kinds of illicit money. The key fallacy in global anti-money laundering efforts is this mistaken idea that we can fight the corrupt money and we can fight the criminal money while leaving the door open to the commercially tax evading money. This is not a formula for success. It hasn't worked. Money laundering has been growing. We've been on the anti-money laundering kick for 20 years now since the mid 1980s, a little longer than 20 years. Money laundering has been continuing to grow through that period. The flow of illicit financial resources has continued to flow through that period. You have to be willing to address all parts of the problem in order to succeed in curtailing significantly any part of the problem. Our legal staff is in touch with Elizabeth Warren's office and we would like to see some progress in this. The financial action task force in Paris is in favor of tax evasion being a predicate offense under anti-money laundering charges. That means being a violation of anti-money laundering provisions. This has not been widely adopted yet, but it certainly needs to be. You cannot solve the problem of the more, what we think are the more difficult forms of illicit money flowing and less you're willing to address all forms of illicit money flowing. I hope that makes sense. Thomas, then we're gonna work our way down here. My name's Thomas Grindley. How does Cyprus's relations with the European Union affect illicit financial flows? My impression was that the European Union has a good reputation. Is the European Union unable to control the problem? How significant is Cyprus in this game? Cyprus has functioned as the laundromat for years, handling illicit money coming out of Russia through the establishment of disguised entities, through ignoring its own anti-money laundering provisions through facilitating the flow of money. As you probably know, the EU is now exercised about this, is now concerned about this as Cyprus has found itself in some level of financial difficulty. It's turning to the EU for relief. And one of the suggestions that has come back is that well, why don't you just debit each of your Russian deposit accounts with X amount of money and you'll solve your financial problems. This may not be as far fetched as it sounds. There may be some pressures in that direction. This has been going on for a couple of decades with Cyprus. It is my understanding that currently some money is being taken out of Cyprus and taken to the Baltic countries. That to some extent Latvia, for example, is beginning to receive a good bit more of illicit money coming out of Russia and indeed being withdrawn from Cyprus as well. Hi, my name is Igor Logvinenko and I'm a PhD candidate in the government department at Cornell University and I study capital controls and capital flows in Russia. My dissertation is about this and I read the report and I'm a little bit confused by the message of your presentation and what the report actually says. Because if I look at your own data here, I see that the proportion of unrecorded flows has declined by about 30 to 40% since 2006. In 2050% of all unrecorded flows, of all outflows were unrecorded. Last year or 2011 was 10%. Similar numbers are reported by the Central Bank of Russia. Ernst and Young recently put out a report saying that capital flight out of Russia seems to be greatly exaggerated. And in your correlations in the report, you show that the size of the underground economy has actually declined in the data, you can see it. And the illicit capital flight has declined as well. That's why there's a correlation that you show in the report. So my worry is actually not so much the illicit outflows is that through sort of greater financial integration with the global economy through, it is now through the legal means that the rated assets of U-cost, that the various other state-owned corporations in Russia that they're able to take advantage of the global financial system through absolutely legal means. And it might be the reason why that there's such a great inflow of illicit funds into Russia. Because, specifically, people are too afraid. They're gonna be rated by the government. So I think the message seems to be that Russia is experiencing this great problem of illicit flows. Whereas I think it's the legalization of illicit flows. That's been the greater motif over the last five to seven years. Would you disagree with that? That's not a bad conclusion to come to with the exception of the amount of trade mispricing that is moving money out that is within the same invoice as I described. This is the reality of Russia. When you're the exporter and the importer, you don't need to re-invoice. When you're the exporter and the importer, you can manipulate prices within the same invoice and shift money abroad. And this is what has happened in Russia over the past not only five, six, eight years, but 10 years and more. And that does not show up in our data. There are some incredibly expensive gymnastics we could go through to get an estimate of that. But even that would be an estimate. It would not be a figure that's based on hard data. It's extremely difficult to determine the mispricing that takes place within the same invoice. And that's what the Russians have been doing to a great extent over the recent years. Yeah, the data does indicate that there may be, let me put it this way. The data indicates that based on what we see, there may be some decline in the flow of illicit or unrequited money. The data does not reveal what we don't see. And we think that that's extraordinarily high based on this three-part arrangement that I told you about exporter, importer, and bank being united in the movement of money abroad. Right here. Robert Kraus with Quartrex Energy International. Two questions. One, I'd like to understand a little bit better what the motivation of the Kluyev mob was in establishing an account at Credit Swiss purportedly to buy properties in Montenegro and Dubai. Of course, this is the case connected to Magnitsky and the fellow, the Russian who was providing information to the Swiss authorities was murdered in England back in November. So if the Kluyev mob has its own bank, why does it have to move money into Credit Swiss? And how much of this illegal money is being moved through the UBS's standard chartered Credit Swiss and other well-known institutions? The second question has to do with Putin. Now, in the late 90s, I understand that he got the prosecuted general relief for having divulged that the KGB had set up its own entity in Western Europe to move illegally money out of the country. If that's the case and the successors of the KGB are involved themselves in illegal transfers, what ever will would they have to curtail it? Your second question first, I agree with you. I don't know where the will to address this problem will come from. On your first question, what was the motivation of the mob? Let me give you a very global answer to that question. I've heard a lot of people explain the flow of illegal flight capital as being tax evasion is the first motivation or fear of inflation is another motivation or fear of confiscation is another motivation or what have you. I've observed around the world that the key motivation, the one that is still there when all of those other problems have been solved is the desire for the hidden accumulation of wealth. That's what this phenomenon is fundamentally about. It's about accumulating wealth in a hidden manner that cannot be easily detected. Will you raise the question about getting back some of that money to Russia? We have advised a number of governments around the world. It doesn't do any good to try to get the money back unless you have first of all established the mechanisms to discourage it from going right back out again. We've had numerous discussions with the government of India, for example, about this. India is very concerned about what it calls the black money problem abroad. We've advised high level Indian officials, you don't have any grounds for trying to get that money back if the same mechanisms exist for it to go out again. So I don't see the future of trying to recover Putin's trillion dollars that he said has been offshored until you first of all established mechanisms in Russia to discourage the outflow of that money. I don't see it happening. But one specific question was, why would the clear... Probably because it wanted to give an air of legitimacy to it that could be conveyed by Credit Suisse as opposed to its own bank, probably out of fear that its own bank might be required at some future time to reveal the level of its assets and holdings. I don't know the motivation of the specific situation that you're talking about, but most foreign banks unfortunately will handle suspect transactions if there is enough of legitimacy to be able to hang your hat on. I've had compliance officers at Swiss banks tell me, Raymond, you gotta understand what this anti-money laundering is all about. It's not about not taking the money. It's about plausible deniability when you're found with the money. That's what it's about. There must be some noise there somewhere. Right here. Thank you. My name is Yuri Akush. I am with the IMF Executive Board. I have one question and two short comments. The question is the following. We all know that global balance of payments data doesn't match, actually. That there is this line at the end which some people call trade with extraterrestrials. People don't report inputs which are normally text more heavily than experts. So experts are more than inputs globally. But there is another trend. The trade has been growing much faster than GDP globally. And to what extent this kind of growth of trade, do you have any estimates? Maybe pushed or explained by this tax evasion and this elicit money flows. And this extra complicated trade using offshore zones accounts and things like that. And two short comments. One on this motivation why money is taken out of Russia. I also tend to believe that that's not only fear of corporate trading. It's also fear of tax authorities, fear of unpredictable foreign exchange regulations, whatever. So it's much safer to have your own export earnings coming back through Cyprus as something like foreign credit or foreign direct investment or something. And the second comment. One should also think that for some countries, Indians maybe or Congolese or others may be worried about capital flight. But for some countries, at the current stage of macroeconomic development there, not perfect and not very flexible macroeconomic regulation, it makes sense to incentivize capital flight and Russia and China would be about those countries. Otherwise they may have domestic overheating with so much capital account, current account surplus. I'll comment on your first question. Trade growing faster than global GDP, that's absolutely correct. And it does facilitate elicit financial flows growing at a rate faster than global GDP. Let's take NAFTA here in the United States. When we established the North American Free Trade Association, we wanted to open up trade with Mexico in particular, also Canada and so forth. We didn't at the same time put in the kinds of arrangements that would have been needed to prevent massive amounts of flight capital going out of Russia, going out of Mexico. There has been massive outflow of money. Our report last year was on Russia, been massive amounts of money that have passed out of Russia, out of Mexico that have grown far faster than the trade flows have grown. So we don't globally have in place the kinds of mechanisms that can curtail these kinds of flows as trade grows. Trade has moved much faster than the regulation, than the global regulations have moved to oversee trade flows. I have a feeling that our economist Dev Carr either has a question or a comment, Dev. Comment? Good comment, because we have some questions there, but go ahead if this is on this point. Dev Carr, lead economist at GFI, former senior economist in the IMF. I just have just a few comments. The first observation I would make is that while trade has been growing faster than GDP, we find that the discrepancies due to trade mispricing is much larger than what statistical errors or errors in recording would suggest. The latter figure is around 1.9% of gross trade, whereas trade mispricing is much higher for some countries in the five to six percent of GDP range. That's one observation. Second observation is that we find that in countries where there is weak governance, along with the increase in trade, trade mispricing also increases, because it's a facet of weakness in overall regulatory quality and weaknesses in government effectiveness, which are dimensions of governance. The other factor I would mention is that in the case of Russia, we see that normal broad capital flight has been increasing after the liberalization and after the increasing financial integration as a result of globalization. So that could also encourage broader capital flight. But the illicit flows, yes, I see that it is a tendency to come down. Okay. There are a couple of people that have hands out for a long time. So those two in the very back, we're gonna take your questions together. So either or we start with back here and then we'll go to the person in the very back of the... Tom Timberg, consultant. Again, we've all been in your debt over the years because of the studies you've been making of these flows. I think that the point you made was your estimates are probably under estimates because they do not report totally black flows which I don't swear about Russia, but in many cases are quite large. Now, the totally black flows, or again, flows that in other words where you have obviously have to have some relationship with the recorded flows so we can assume that they're depending on enforcement procedures have some relations but they also have relations with counter flows, black inflows which incidentally are quite significant I gather in Russia as well. And I wondered if you'd comment a little bit about black inflows and perhaps also comment because I think you would want to make the point that it may be a good thing if they're outflows at their inflows but they are also not necessarily very positive phenomena. And we're gonna take that question and one more question in the back here before we... Hi, my name's Amy Hall and I work at Citigroup in compliance. I was wondering in your research, did you come across any types of countries, companies or industries that are more likely to be engaging in basically illegal cross-border transactions? Okay, any other questions out there? We'll take one more question here and then that'll be it. We'll have Raymond answer the three questions. Hi, Carol Colley with Eurasia Group. You raised the interesting question about the proliferation of Russian banks during the 90s and especially the creation of the pocket banks. And I think right now as you pointed out, there are about 900 banks, probably half of whom have less than five million dollars in capital reserves. So my question is what raising the capital reserve requirement addressed this issue, at least potentially, and also with consolidation of the banking sector also helped to reduce the capital outflows? Thank you. Okay, take those three questions. You're quite right that there are other things that our data does not include. Our data does not include drug smuggling, doesn't include human trafficking, doesn't include the cross-border movement of cash, doesn't include Huala-style transactions because none of this shows up in balance of payments figures. So there's a whole world out there that our data does not include. We did a report on Africa three years ago in which we, for the only time in our existence, we made a rough estimate. Suppose you took into consideration some of those things that are not included. What might it mean for Africa? And our conclusion was that it more than doubled the likely outflow from Africa. But again, we based our hard data strictly on what was available in balance of payments and IMF direction of trade statistics. Black inflows are critical, particularly in Russia. Lots of money coming back in. Most of it comes in as a foreign direct investment which looks very legitimate. I hope you understand this phenomenon of round-tripping. Round-tripping means illegal flight capital goes out of a country, and let's say it goes to Cyprus where it incorporates itself as a company, the St. Petersburg Investment Group or what have you, and then it comes back in to Russia as foreign direct investment. Of course, the purpose of making that inflow, FDI, is so that it can go out again in the form of dividends and interest and principle on debt and so forth. But this kind of round-tripping is very much a reality in Russia. A big part of illicit flows stems from the resource industries. And of course, that's Russia. That's oil, gas, diamonds, gold, tin, zinc, timber or what have you. It's quite easy to misprice in resource flows and that has been the biggest part of Russia's problems as nearly as we can tell. Raising capital reserve requirements would be helpful. The last governor of the central bank of Nigeria did that. He came, he's still the governor. He came into office. He's looked at these banks that were under-capitalized. They were almost pocket banks, that is to say many of them had been created to service one ministry to facilitate the flow of corruption out of those ministries. And his conclusion was, well, one of the ways to get rid of this is to force consolidation via increased capital requirements. So he did put increased capital requirements into place and that did reduce the number of banks. This would indeed help. Now, your point about a lot of those banks have resources of perhaps only five million or so. It doesn't matter when you're handling trade documents. It doesn't matter what your capitalization is. If you're doing the handling of trade and finance for the company of which you are a part, it doesn't matter what your capitalization is. You can still handle that documentation going back and forth and facilitate the outflow of money. We repeat what I said. Russia has done the finest job of anyone that we know of of combining those three aspects of moving illicit money, exporter, importer, and private bank. They've taken the cake on this. Well, it's always nice to know what Russia is first in. So I'd like to thank Raymond for a very interesting talk. Thank you for your questions and look forward to seeing you at future events.