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Dirty money cost China $3.8 trillion 2000-2011: report

WASHINGTON, Oct 25 (TrustLaw) - China has lost $3.79 trillion over the past decade in money smuggled out of the country, a massive amount that could weaken its economy and create instability, according to a new report.

And the outflow - much of it from corruption, crime or tax evasion - is accelerating. China lost $472 billion in 2011, equivalent to 8.3 percent of its gross domestic product, up from $204.7 billion in 2000, Global Financial Integrity, a research and advocacy group that campaigns to limit illegal flows, said in a report on Thursday.

"The magnitude of illicit money flowing out of China is astonishing," said GFI director Raymond Baker. "There is no other developing or emerging country that comes even close to suffering as much in illicit financial flows."

The lost funds between 2000 and 2011 significantly exceeded the amount of money flowing into China as foreign direct investment. The International Monetary Fund calculated FDI inflows at roughly $310 billion between 1998 and 2011.

Illicit capital flows rob a government of tax revenues and potential investment funds. Capital flight on this scale can be politically destabilizing by allowing the rich to get richer through tax evasion, GFI said.

China has a low level of tax collection given the size of its economy, according to the IMF. Beijing has recognized that corruption and bribery is a significant problem, an issue brought into sharp focus recently by the Bo Xilai scandal. The country has announced a major crackdown as it prepares for its once in a decade leadership transition.

GFI calculates how much money leaks out of a country unchecked by analyzing discrepancies in data filed with the IMF on import and export prices between trade partners and calculating discrepancies in a country's balance sheet.

The developing world overall lost $903 billion in illicit outflows in 2009, with China, Mexico, Russia and Saudi Arabia in that order showing the largest losses, it said.

Trade mispricing was the major method of smuggling money out of China, accounting for 86.2 percent of lost funds, the GFI report found. This scheme involves importers reporting inflated prices for goods or services purchased. The payments are transferred out and the excess amounts are deposited into overseas bank accounts.

Trade mispricing is most common for nuclear reactors, boilers, machinery and electrical equipment, the report said.

The bulk of the money ends up in tax havens - on average, 52.4 percent between 2005 and 2011. Much of this money eventually makes its way back to China as foreign direct investment for a double hit to the economy.

FDI benefits from special tax breaks and subsidies, essentially setting up an elaborate form of money laundering for Chinese businesses, GFI added.

(Reporting By Stella Dawson. Editing by Andre Grenon)

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