Thank you, Mr. Chairman.
I'm delighted to have an opportunity to appear again before the Standing Committee on Foreign Affairs and International Development. I have for many years greatly admired the work of CIDA and the objectives embodied in CIDA's pursuit of development. We are delighted to have CIDA in the task force on financial integrity and economic development, which we direct.
I'm also pleased to be here with Christopher Lawton, who is an intern at GFI and a graduate student here in Washington. He previously worked in the Canadian government for several years and will be returning there in June.
If I may, Mr. Chairman, I'd like to begin with a story.
I lived for 15 years in Nigeria, buying companies and building a group. In the late 1960s, in the midst of the Nigerian civil war, I had my eyes on a company that I wanted to purchase. It was a company that was owned by an expatriate family. It was a company that had been losing money every year for five years. I offered ten times the book value to buy that company.
Harvard Business School students later studying the case voted unanimously that this was a bad acquisition: I shouldn't buy the company; it was a dog. I had the pleasure of coming down to the front of the class afterwards and saying that not only did we buy it, but we paid off all of its debts in the first year and generous dividends to ourselves for years thereafter.
How did that happen? We purchased raw materials at world market prices. The previous owners of the business had been inflating the cost of their imported raw materials in order to take their profits out of Nigeria. We bought our raw materials at world market prices, earned our profits in Nigeria, and paid taxes on them. Ever since that experience, and many other similar experiences, I've been fascinated by the harm that is done to the capitalist system and to the process of development by the mechanisms through which we shift money across borders.
Now, I don't want anyone to think that I am anti-business. On the contrary, I believe in the free market system. I believe in free trade, free currency convertibility, and free movement of capital. I do add a proviso to that: provided it's legal. It is the illegal components of these financial flows that have fascinated me for many years.
After 35 years in international business, I segued into the think tank community of the Brookings Institution, wrote a book on this subject matter, and then formed Global Financial Integrity. In GFI, we analyze illicit money flowing across borders—illicit financial flows. Our estimate is that approximately $1 trillion a year comes out of developing countries and moves into the richer countries. This money moves through three different means. Some of it is corrupt, that is, it is the proceeds of bribery and theft by government officials. Some is criminal—the proceeds of drug trafficking, racketeering, counterfeiting, and so forth—and some of it is commercial tax evasion.
Many people, particularly in the western press, think this problem is all about corruption in those countries over there. In our analysis, in the cross-border flow of illicit money, the corrupt component is about 3% of the global total. The criminal component is about 30% to 35% of the global total. The commercial tax-evading component, in which we are certainly involved, is about 60% to 65% of the global total.
Now, this reality needs to be taken into consideration when we think about the role of multinational corporations in developing countries. This reality is a key element in our thinking about policy coherence. Policy coherence, of course, is a term that has been around for some years, and what it suggests is that we need to be consistent in the way we promote the activities of our multinational corporations and the way that interfaces with other parts of the policies of governments.
In order to progress policy coherence, I would like to suggest two steps that perhaps impinge upon the hearing we are involved in today.
First, we would urge that extractive industries publish their contracts with developing countries. Whether this can be done retroactively for contracts that are already in place would be problematic, but it certainly is possible to do it with new contracts. With such publication we can avoid a great many of the problems we experience, with strains between multinational corporations and developing countries.
I'll give you an example. There was a copper contract in Zambia under which Zambia received only 3% of the world market price in royalties. A very brave individual named Eva Joly went to Zambia and worked with Zambian officials to declare this contract void, because it was so one-sided. It was such an egregious contract that the contract was upset and renegotiated, and the Zambian government got a much higher percentage.
The second thing we would like to suggest that is relevant to today's hearings is greater transparency in the accounting by multinational corporations for their sales, profits, and taxes paid in developing countries. This really goes beyond the current publish-what-you-pay movement, which is aimed at extractive industries publishing what they pay to governments in royalties, fees, taxes, and so forth.
When we talk about country-by-country reporting, we're talking about something we think should be relevant to all corporations functioning in the developing world. By country-by-country reporting we mean reporting, in each jurisdiction, your sales, profits, and taxes paid. If this were to be required right now, what we would find are many corporations reporting losses or break-even points or very modest profits in a great many developing countries where they operate and at the same time reporting large profits in tax-haven entities where they don't operate. How does this happen? How do you report losses or extremely minimal profits where you have heavy investments and considerable staff and at the same time report high profits in places where you have no facilities and no staff? Of course, it is by taking advantage of the mechanisms available for moving money out of developing countries that this can be accomplished.
Those are just two of the steps that we think can be taken, not only by Canada but by other countries, to improve the relationships of multinational corporations in working with developing countries.
In Global Financial Integrity we are currently undertaking a three-year study, together with a Norwegian research institute and three institutes in the global south—one in Brazil, one in Nigeria, and one in India. We are seeking to analyze the whole of the external equation for economic development for poorer countries. That includes total money into developing countries, total money out of developing countries, and what's left over for developing countries, taking into consideration all licit and illicit flows, such as foreign direct investment, portfolio investment, remittances, hawala transactions, and more. We are seeking to come up with an estimate of the total external equation for development.
Our preliminary data indicates that we will be able to demonstrate quite credibly that the developing world is a creditor to the rest of the world and that there is in fact a net transfer from the developing world to the richer world. This case has already been made quite convincingly concerning Africa. We believe that we will be able to demonstrate it for the developing world as a whole.
This presents the 21st century with a rather large problem: the necessity to curtail illicit money flowing out of developing countries. These illicit funds do not present us with the way to build a secure and growing global market. Our ultimate objective must be to set the conditions for growth and prosperity for all of the world's people.
Thank you, Mr. Chairman.