Guyana’s G$313 billion hustle: Procurement fraud, illicit capital flight and the underground economy

Shock and dismay

 

Today’s lesson (4) continues identifying the orders of magnitude of corruption-linked economic haemorrhage currently taking place in Guyana. Last week’s column had offered a best estimate of public procurement (G$140 billion) and procurement fraud (G$ 28-35billion) as calculated from estimates provided by none other than Guyana’s former Auditor General, in Part 11 of a series on public financial management (Stabroek News, April 13 2015). In order to signify the importance of corruption in public procurement it was compared to several economic indicators: GDP; total government revenues and expenditures; total investment; and, public investment.

Because of its criminal nature, several readers have expressed shock and dismay at its extent. Indeed some have rightly observed this fraud wipes out all the economic growth Guyana achieves in a good year, as it ranges from five to six percent of its GDP! Further, it accounted for 17 to 21 percent of projected government revenue and 13 to 16 percent of expenditure for 2014. In this regard readers should note that budget projections of government revenue and expenditure targets are typically well above that realized. The picture portrayed here is therefore, conservative.

The remainder of today’s column provides the orders of magnitude for two other areas of significant illegality and corruption in Guyana, which generate massive economic haemorrhaging; namely, illicit capital flight and the criminal underground economy. Although mal-administered, tax giveaways/expenditures are not considered here, because in Guyana these are not illegal per se.

 

Illicit capital flight

 

guyana and the wider worldIn Guyana, Illicit or illegal capital flight refers to money, commodities (gold) or other assets, whether legally obtained or otherwise by residents, which are intentionally transferred, smuggled, or sent abroad without the knowledge of the GRA, taxation and /or other regulatory/oversight authorities; and, further, are not generally intended to yield proceeds that will be returned. Because these transactions are illegal, they are kept secret. Therefore, when capital flight occurs, the capital disappears from Guyana’s financial/asset records, even though it might turn up in records elsewhere.

During the 1980s and 1990s capital flight was widely acknowledged as a major problem confronting Guyana. During the 2000s however, it has been barely referenced by the Authorities. Despite this, as the information cited below reveals, during that time capital flight had resumed with a vengeance. This took place because the ruling political elites have been promoting collusion, through mutually -supporting networks, with criminal endeavors seeking to evade the regulatory and oversight functions of the state. As I have argued elsewhere this presently constitutes the starkest reminder of the on-going criminalization of the state and its associated ascendancy of neoliberalism in Guyana’s backward crony capitalist system.

What are the drivers of this collusion between the “political rulership” – state officials- and criminal operators? These are far too many to list here, but the key ones are 1) realization of the gains from crime, ranging from individual pillaging of state coffers to the transfer of organized crime proceeds 2) evasion of political and economic uncertainty and risk (like now with a hotly contested election due shortly) 3) circumventing economic fears, such as: risk of exchange rate devaluation, inflation, new or stiffened controls on capital movements, and, most importantly 4) fears caused by bad governance. These drivers reveal that illicit capital flight is deeply intertwined with other criminalities: procurement fraud, money laundering and the criminal underground economy.

 

Capital flight estimates

 

This column has repeatedly referred to the information provided by two international sources responsible for annual tracking and reporting on aspects of global capital flight, including Guyana; which I will not repeat here in any detail. One is the United Nations, as part of its worldwide task of tracking of organized crime, especially trafficking in narcotics, persons, arms and dangerous materials. The other is Global Financial Integrity (GFI) founded in 2006. The latter organization is a far better source on capital flight, as it provides annual measures for 145 countries of their illicit financial flows. These flows are obtained from the IMF country databases of official reports on international trade and balance of payments data. For sure these flows constitute a major component of illicit capital flight, but do not account for all of it. Table 1 summarizes the most recent Guyana information, 2010-2012 in its sixth report.

Table 1: Guyana’s Illicit Financial Flows

YEAR      US$MILLION

2010         575

2011         316

2012        440

Av.2010/12       443

Source GFI, December, 2014

The information for the most recent three years, 2010-2012, reveals Guyana’s illicit financial flows had averaged US$443 million or about G$90 billion. Although these flows do not fully account for total capital flight, they provide an order of magnitude for that sum. By any standard, this is a humongous amount that has risen rapidly during the 2000s. Retrospectively, the 2010-2012 average compares to US$83 million back in 2003. This had doubled to US$173 million by 2006, and doubled yet again by 2010 to US$575 million. The recorded growth in capital flight therefore, has been explosive during the 2000s.

 

The underground economy

 

Guyana’s underground economy refers to corrupt transactions that are prohibited by law and/or are undertaken by unauthorized providers. It has two main drivers: tax evasion and regulatory non-compliance. Operators in it range from individuals to highly organized criminal enterprises (for example trafficking narcotics, persons, arms and gold). On several previous occasions, this column has provided estimates of its size based on available published studies, including my own (2011). These will not be repeated here but my study had revealed over the period 2001-2008, the underground economy ranged in size from 32 to 111 percent of the official GDP; averaging 61 percent for the full period. Conservatively, I utilize here the lowest revealed estimate (32 percent) to represent its present size. This estimate yields a size of approximately G$188 billion or US$940 million.

 

Conclusion

 

As an order of magnitude therefore, the grand total arrived at as my estimate of Guyana’s current economic haemorrhaging arising from procurement fraud (G$28 to 35 billion); capital flight (G$90 billion); and, the underground economy (G$188 billion), is equal to approximately G$308 to 313billion or US$1.5 billion or about 52 percent of GDP.

A new Government committed to good governance should carefully milk this potential windfall for the benefit of Guyana’s poor and hitherto powerless.