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Corruption Costs Developing Nations $1 Trillion A Year

 By Ben Schiller

Shell companies, tax evasion, and a general lack of transparency are all responsible.

Though the developing world has made big strides in the last decade to reduce poverty and improve lives, there’s still one big problem that threatens the future: corruption. When billions of dollars are going missing from public budgets, governments are hobbled in their ability to improve healthcare and education, encourage investment, and spur economic growth.

A new report sizes up the problem and arrives at a pretty startling number: more than $1 trillion a year is lost to corruption, according to the ONE Campaign, an advocacy group co-founded by Bono. That’s the equivalent of annual profit of the world’s 86 largest public companies, and almost one third of the entire U.S. federal government budget.

The corruption comes in various forms, including embezzlement, bribery, money laundering, and tax evasion, but it’s all financial dealings that take place in the shadows and are enabled by a lack of transparency. “If specific policies are put in place to increase transparency and combat corruption in three key areas--financial secrecy, natural resource deals, and money laundering--these massive financial losses could be significantly reduced,” the report says. “This would bring a host of benefits to developing countries, including increasing foreign direct investment (FDI) and boosting gross domestic product (GDP) by as much as 0.6% annually.”

The report lays out some things countries could do with $1 trillion. For example, it estimates they could save 3.6 million lives a year by 2025, were that money to be invested in better healthcare. By 2030, the money could prevent 4.3 million child deaths, if it was invested in 43 low and middle-income nations, the authors write.

ONE’s report is designed to put pressure on governments ahead of the G20 meeting in Australia later this month. It calls for action in four areas:

Shell companies

Shell companies, which exist only on paper, are designed to funnel ill-received gains without revealing the identities of the people benefiting from the transactions. For example, when ex-Ukraine president Viktor Yanukovych left office, journalists found that his palace was owned one-third by a British shell company and two thirds by an Austrian bank. Previously, Yanukovych’s role as ultimate owner had been hidden. The report recommends G20 countries require beneficiaries to reveal themselves, much as you’re now forced, in most countries, to give your name when you open a bank account.

Publish what you pay

A big proportion of the funds that go missing from public budgets are siphoned off as part of natural resource deals. Oil-rich Nigeria is thought to have lost as much as $400 billion since the 1960s. The report urges the G20 to introduce “publish what you pay” laws requiring extractive companies to reveal the exact amounts they give to governments. That way, the money can be tracked. Corruption is often covered up through false accounting. A company pays a different amount than what appears in the budget, with officials pocketing the difference.

Tax evasion

One of the biggest reasons for the capacity gap between rich and poor countries is their ability to collect taxes. Rich countries generate 34.1% of their GDP from taxes, according to the O.E.C.D., while poor countries manage only 13%. A solution, the report says, is to introduce an “Automatic Information Exchange”--a system by which countries share taxpayer information for mutual benefit. An estimated $20 trillion in undeclared assets is currently held offshore (including in jurisdictions overseen by G20 members, like the U.K.)--a lot of potential tax money to access.

Open data

One of the easiest ways to reduce corruption is to improve access to public accounts. Seeing how money is being spent allows citizens, journalists, and watchdog groups to ask better questions. G8 countries already signed the “Open Data Charter” in 2013. The report calls on the other members of the G20 to follow that lead. They should “support efforts that increase the capacity and space for civil society in developing countries to demand and use information,” the report says.

The writer is a New York-based staff writer for Co.Exist, and also contributes to the FT and Yale e360. He used to edit a European management magazine, and worked as a reporter in San Francisco, Prague and Brussels 

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