Illicit Financial Flows

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Illicit financial flows—money moved secretly from one jurisdiction to another—is an important factor in corruption that so often undermines development. Though scale is hard to measure (these are after all secret transactions) annual illicit flows from developing countries to banking secrecy jurisdictions run by rich countries may easily exceed total aid flows. CGD research on this topic seeks to provide a solid knowledge base for the growing international effort to combat such flows through increased financial transparency.

Ngozi Okonjo-Iweala, Nigeria’s finance minister and a member of CGD’s board, flagged this dirty money as “an under-discussed serious problem… that must be addressed for elementary global justice,” in her 2007 Richard Sabot Memorial Lecture:

 

In many instances, developed-country financial centers (and now increasingly those in emerging markets) become recipients of these funds… integrating the funds back into the regular formal economy so that they appear sterilized. Stolen funds are often very difficult to repatriate to their impoverished nations and true owners, as all types of legal and administrative obstacles are put in the way of sending such monies back. Politicians and civil society in developing countries therefore perceive this as hypocrisy: the sanctimonious way in which developed countries preach against corruption yet appear complicit in harboring stolen funds.

 

Since her speech the problem has drawn increased international attention and can no longer be said to be “under-discussed.” Yet that has been relatively little rigorous research on the issue. CGD’s work on the topic, led by research fellow Alex Cobham, aims to fill this gap.

Illicit financial flows include the cross-border components of tax evasion (predominantly through trade mispricing), laundering of proceeds associated with crime, bribery of public officials, and the theft of public assets. In each case, these flows rely on being hidden, typically through the exploitation of financial secrecy provided by other jurisdictions.

So far most analysis of illicit flows has focused on estimating the global total or the amounts leaving specific countries or arriving in specific secrecy jurisdictions. While the scale estimates allow us to imagine the amount of damage that is being done, less can be said about the type of damage, the degree of vulnerability of developing countries to illicit flows, and the development impacts of different policy measures to curtail illicit flows. These issues provide the central motivation for CGD’s work. Understanding issues of national and international tax policy form an important sub-section of the research agenda.

CGD research on other aspects of corruption by senior fellows Owen Barder, William Savedoff and Arvind Subramanian and others is also included on this page.