Calculating Illicit Financial Flows to and from Indonesia: a Trade Data Analysis, 2001–2014

Diposting pada: 02 Nov 2016

Illicit Financial Flows (IFF), a term that is broadly defined as funds or money, capital, funds or assets “received, transferred or used illegally” cross state borders has been a contested topic within the international community due to the magnitude of its size compare to a country’s economy. Sluggish global economic growth, in the developed and developing countries alike has led countries to search for more revenues for financing development for their citizens such as for health and education, energy and other social expenditures that are at risk of being reduced. In the Third International Conference on Financing for Development Action Agenda in Addis Ababa in July 2015, all nations have adopted and pledged themselves to double the effort to substantially decrease the illicit financial flows in 2030. Curbing IFF is also a target under Goal 16 of the Sustainable Development Goals (SDGs).

The Global Financial Integrity (GFI), a prominent DC-based think tank, regularly issue global and country reports on IFF since 2005. In this study, Perkumpulan Prakarsa adopts the methodology developed by the GFI to calculate Indonesian IFF between the periods of 2001-2014. The objectives of the study is to find out the values of illicit funds that flow into and out from Indonesia, to find out which countriesare the main destination and the source of the IFF in Indonesia and to calculate and identify the determinant factors and impact of the IFF in Indonesia. The GFI’s IFF method is used by summing up the Gross Excluding Reversals (GER) that indicates trade mispricing between trading nations and adding up calculation errors in Balance of Payments (BoP), which is reflected in the Net Error Omission(NEO). From these calculations, the GER Export, GER Import, IFF inflow and outflow are obtained. Further, to analyze the determinant factors of IFF and its impacts, we use econometric equations (Granger Causalityand Vector Auto Regression or VAR) to get the information on causality between variables. For the impact, we only use the illicit financial outflow (GER Outflow data), which is clearly harmful. Since econometric calculations demand larger amount of data, we use monthly dataset that are only accessible from the period of 2006.

This study finds that during the period of 2001-2014, the value of illicit financial inflow is always bigger than illicit financial outflow. The total accumulated funds inflow is USD 628.9 billion while the total accumulated outflow is USD 217.3 billion. The total illicit financial flows is 846.3 billion dollar within the period. The average annual inflow is USD 44.92 billion and outflow is USD 15.52 billion during the period. Based on the annual analysis from 2001-2014, the largest illicit financial outflow from Indonesia took place in 2012 with an estimated value of USD 24.5 billion. The top three countries with the largest financial inflow values (sum of under invoicing of import and over invoicing of export) are Singapore, China, and Japan. The annual average of illicit financial inflow from Singapore to Indonesia is USD 15.6 billion between 2001 and 2014. Therefore, Singapore is Indonesia’s trade partner with the largest indication of illicit financial inflow, followed by China at USD 5.4 billion, and Japan at USD 3.6 billion. Furthermore, the top three countries with the largest financial outflow values (sum of over invoicing of import and under invoicing of export) are Saudi Arabia, China, and Singapore. An illicit financial outflow from Indonesia to Saudi Arabia is USD 2.1 billion in average per year for the period of 2001-2014. Therefore, Saudi Arabia is Indonesia’s trade partner the largest indication of illicit financial outflow, followed by China at USD 1.55 billion, and Singapore at USD 1.4 billion per year.

The results of econometric calculation show that the Third Party Funds, M2 (money supply), and Total Trade are the determinants of the GER Outflow, while GER outflow might have an impact to the Calculating Illicit Financial Flows to and from Indonesia: a Trade Data Analysis, 2001 – 2014 ix Industrial Production Index (IPI). If a 10 percent income tax is applied to the annual illicit financial outflow, which is USD 15.52 billion, would give Indonesia an additional revenues of USD 1.56 billion or IDR 20.28 trillion. This is more than six fold of the total foreign aid to Indonesia in 2015, which was only IDR 3.3 trillion. Meanwhile, if the USD 44.93 billion illicit financial inflow comes from commodities that can be sold, and they are charged with a 5 percent tax, then the value could reach USD 2.25 billion or equals to IDR 29.21 trillion. This amount is IDR 3 trillion more than state revenues from property tax which is IDR 26.7 trillion in 2015.

The study recommends an improvement in the trade management (import/export) because these errors in recordings (mis-invoicing), both intended or unintended took place out of poor management of custom authority. Oversight agencies such as KPK (Corruption Erradication Comission), PPATK (INTRAC), Police, and the attorney general, must also put a tighter monitoring toward the customs as there are huge potentials for state revenue losses from trade. For future research, e.g. to analyze commodity-based financial inflow and outflow, a much larger dataset is required due to a long standard coding system.

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