The scale of wealth that is illegally or illicitly transferred out of developing countries each year threatens aspects of their development such as the rule of law, the stability and legitimacy of institutions, and citizens’ trust in their government. If illicit financial flows (IFFs) are reduced then governments will have more funds available to invest in their country’s development.
Governments and international organisations have paid more attention to IFFs in recent years, with increased emphasis on corruption, addressing secrecy jurisdictions, strengthening the integrity of the global financial system, recovering and returning stolen assets, and combating all forms of organised crime. By curbing IFFs and recovering stolen assets, there is the opportunity to unlock much needed resources for sustainable development.
The scale and impact of IFFs
IFFs are a massive phenomenon in both developing and developed countries. Although research on IFFs presents challenges because they are hidden, there is widespread consensus that their scale is huge and they pose a major obstacle to development. Every year, funds lost by developing countries to corruption, tax evasion, and money laundering could fill the gap for funding sustainable development. The consequences of IFFs can be devastating, having a negative effect on good governance as well as on broader social trust.
The possibility of moving capital illicitly makes corruption easier to engage in. Hiding away wealth, income, and company ownership in secret bank accounts and shell companies encourages tax evasion. Secrecy jurisdictions are especially damaging to developing countries where financial regulation is weak, and where money from taxpayers is desperately needed. When weaknesses in the financial system are not regulated effectively, organised crime and illegal economies can thrive.
While combating IFFs is an important element of tackling the crime, corruption, and violent extremism that threaten stability and economic development, the scale of donor support for tackling IFFs remains relatively modest.
Efforts to address IFFs differ and policies exist at national, regional, and international levels. At national level, the focus is on curbing corruption as a source of IFFs as well as on tackling money laundering related to different kinds of crime. At international level, the initiatives aim at strengthening the integrity of the global financial system, a higher level of transparency, and tackling international corruption as well as the cross-border movement of illicit funds and recovering stolen assets.
National efforts are important, but alone, they are insufficient due to the global nature of the problem. Domestic corruption efforts must address IFFs in order to be successful. IFFs can be combated by robust governance and a strong civil society; anti-money laundering laws and programmes; financial intelligence units; and initiatives to exchange information between jurisdictions and recover stolen assets.
The existing initiatives and policy responses have their weaknesses. Legal loopholes and weak governance exist in many developing countries; there is very low compliance with Financial Action Task Force (FATF) standards; agencies fail to share information; and there are few cases of successful asset recovery. Also, lack of political will can result in non-implementation of laws and policies, despite being integrated into legal frameworks.
Recommendations for development practitioners and donors
IFFs can be tackled through collaboration, coordination and support, providing platforms for the sharing of information and expertise. Also, programmes that tie together activities at national, regional, and international levels, as well as national and sectorial risk analyses to identify areas or sectors most prone to IFFs, should be considered. Governments and donors can leverage their influence for change in existing laws, urge for regulation and control of tax havens, encourage transparent beneficial ownership, and press for domestic and international regulation of financial sectors.