The illicit financial flows (IFF) agenda has momentum, but weaknesses remain in its foundations, both with the definition and measurement of IFF, especially as these apply to country-level studies. Some of these issues derive from an impoverished view of corruption’s role in IFF. Researchers, policy makers, and donors must refocus the IFF agenda by bolstering the definition of IFF with an eye toward promoting the success of country-level studies and policies.
The most widely used definitions of IFF come from the Organisation for Economic Co-operation and Development (OECD) and Global Financial Integrity (GFI). But both definitions turn out to be difficult to apply at the country level because the qualifying factors within their definitions require some interpretation and can vary depending on the context. Given that these qualifying factors concern the illegal activities that generate the money to transfer, the transfer mechanism itself, or the ultimate use to which the transferred money is put, researchers and policymakers face immense difficulties as they seek to apply these definitions for purposes of reliable identification and measurement of IFF.
Both definitions also require that qualifying factors be illegal, but neither is explicit about whether every factor in a chain of flows must be illegal or not. A related problem is that these definitions provide little guidance as to where exactly cross-border transfers should be understood to end. They also seem to neglect relevant activities that may be illicit, but not clearly illegal. Even where the (il)legality of each step in the chain of flows is not in question, in some countries, the laws do not reflect a societal consensus of what should be legal and not, because those who make the laws do not represent well the people at large. Finally, the illegality qualification suffers from jurisdictional questions, especially where national laws may be interpreted as conflicting with relevant international law. These interrelated issues make it all the more difficult to identify IFF under these definitions, especially at the country level.
Beyond the difficulties associated with qualifying factors and their illegality, these typical definitions for IFF focus exclusively on financial transfers, and thus miss many other important transfers of value, including human beings (as in trafficking), natural resources, and wildlife. These definitions also pay little attention to IFF that individuals, rather than businesses and governments, generate.
As problematic as the conceptual foundations of IFF are, the methodologies researchers have used to make estimates of IFF within specific countries have proven to be perhaps even more problematic. The use of full balance of payments or ‘mirror’ trade mismatches will fail to capture many forms of IFF, including most of those originating from government corruption, criminal activities, and illegal corporate activity. There are also reasons to question the underlying assumption of the prominence of misinvoicing among IFF within such estimate methodologies. Finally, the integrity of datasets from individual countries remains an issue for making good IFF estimates.
The role of corruption in IFF
From a country study perspective, it is a mistake to see corruption only as a source of IFF. Often, corruption is also an enabler or facilitator of many IFF activities. Corrupt actors or practices can help make illegal transfers possible. Corruption can protect certain activities from legal scrutiny, including those illegal activities that generate the funds for IFF. Corruption can also incapacitate the public and private institutions that could detect or prevent IFF, including those with a role in preventing the illegal use of funds from it. To make anti-IFF measures effective, researchers, policy makers, and donors will need to think much more critically about the nature, location, and type of corruption relevant to countering IFF at the country level.
Practical proposals at the country level
With respect to the data used to identify IFF, there are a number of promising alternatives to the balance of payments or ‘mirror’ trade mismatch approaches. Researchers at the country level should analyse the steps involved in illegal activities linked to cross-border transfers, map trafficking-type crimes that lead to IFF, and investigate tax crimes that lead to IFF. But international banking and other data on financial assets abroad may also provide supplementary information useful to country-level studies. At the country level, studies can also improve on the methodologies involved in researching trade misinvoicing by looking more closely at how a given country inspects, assesses, and records trade flows, as well as how it compiles and structures its data.
Concerning IFF research, as always, there is a need to take account of the governance realities of the specific country before any solutions to address IFF are selected. If relevant governance ‘preconditions’ – such as rule of law, regulation of financial markets, sound institutions, public access to information, and a minimally effective criminal justice system — are not satisfied, then some typical anti-IFF policies will not have a chance to succeed. Within a given country, such background context should also inform the choice of whether to primarily rely on repressive measures against illegal activity or to address the underlying conditions that drive and facilitate those activities. Drawing on relational and processual sociology as well as identity economics, the study of the drivers and facilitators of IFF inevitably becomes the study of human action in specific contexts.
On the policy front, policy makers and donors must recognise that corruption is a fundamental hurdle to implementing anti-IFF measures at the country level. Accordingly, provided there is enough popular support, donors should prioritise addressing the enablers/disablers of IFF –like corruption- as they are preconditions for success. Where formal institutions are weak and a transition to ‘good governance’ is far from completion, support collective action initiatives to reshape the social norms that help maintain corrupt practices. Of particular concern for both anti-IFF and anti-corruption is grand or political corruption, as it can indicate vested interests in maintaining status quo. This means that donors should spotlight policy consequences, institutions, factors, and dynamics relevant to grand or political corruption to find the contextually relevant entry points for its prevention. In some instances, the best entry points may be levers at international level.
Finally, as regards the measurement of IFF, donors focused on reducing the extent of IFF should discount past (flawed) IFF estimates and concentrate on in-country research that goes in-depth across the full range of IFF-related activities. Donors should also place a high premium on research projects aimed at avoiding incoherent country level and international anti-IFF policies.