Pandora Papers and Illicit Financial Flows

The publication by the International Consortium of Investigative Journalists (ICIJ) of the Pandora papers in October 2021, preceded by Panama papers (2016) and Paradise papers (2017) has once again brought into ­focus the illicit financial flows (IFFs), the reduction of which is now one of the targets in the 2030 Agenda for Sustainable Development of the United Nations. The revelations point to the widespread use of offshore centres and offshore structures in the financial transactions of the wealthy and powerful from across the world, including India, giving rise to speculations about their use in illicit transfer of funds to offshore jurisdictions. Whether the revelations indi­cate any violations of law are a matter of investigation by the authorities, we examine here some empirical evidence on the existence of IFFs, trade misinvoi­cing, round-tripping of funds and the possible role of the foreign direct investments (FDIs) in round-tripping, all of which have serious implications for taxation, investments, diversion of resources and even the stability of the financial system. By their very nature, the use of offshore entities and structures can greatly facilitate this, especially as they offer benefits of taxation, anonymity, and legal protection.

The analysis indicates widespread misinvoicing in India’s trade leading to both illicit outflows and inflows, though, contrary to the popular perception, illicit inflows have exceeded illicit outflows and that the international financial centres have been playing a major part in the illicit ­inflows into India. The analysis also indi­cates a correlation between the infl­ows and outflows, indicating round-­tripping, and strong evidence from reg­ression modelling that the FDI could be a major driver of trade misinvoicing and round-tripping of funds. We also show that the current estimates of trade misinvoicing may have underestimated its extent greatly inasmuch as they use agg­regated country-level trade data while trade misinvoicing takes place at the transaction level and aggregation leads to the cancellation of under- and over-invo­icing at the transaction level, resulting in much lower estimates. We also discuss how the incidence of lost and orphan trade, often ignored in the computations of trade misinvoicing, could act­ually be affecting these estimates. Revelations like Pandora papers serve to put these in a context, as the researchers and investigators attempt to put together the pieces of the jigsaw puzzle.