Illicit financial flows (IFF) is a broad term which conflates a lot of different things, including cross-border laundering of the proceeds of crime, the financing of terrorism, the theft of state assets, private-sector bribery and—of course—abuses of taxation, both personal and corporate. IFF can take many forms, through manipulated or anonymous transactions in banking, commercial trade, direct and portfolio investment, and in most areas of the public finances including contracting (for further detail see the typology in this paper for the Tana High-Level Forum).
These different flows are difficult to disentangle. For example, trade mispricing might reflect transfer pricing abuses by multinational companies, but could equally be the result of individual or corporate tax evasion through unrelated party transactions, or of criminal money laundering. Maya Forstater has set out some of the errors made here.
Instead of trying to tackle all these problems altogether, we should be trying to make progress on specific issues. In each case, we need to assess the current state of knowledge, identify data priorities to improve the scope for new work, and ideally set some broad directions. And in each case, a credible lead institution with some resources would be needed. Here are my five suggestions:
1. National tax gaps
An ongoing source of debate, in OECD countries and as a development issue, is the size of the tax gap. In the UK, for example, there is a longstanding dispute over the difference between estimates of the tax authority and of civil society (led by the trade union of most of the tax authority’s staff). The process would bring together a range of actors, domestic and international, and from research and policy, to explore international best practice, and to indicate directions for progress (h/t Iain Campbell).
Possible joint lead organisations: given the practitioner focus, and the need to draw on best practice internationally, Tax Inspectors Without Borders might be well placed, with Tax Justice Network – Africa as a partner to ensure a balanced and critical approach, as well as strong national partners from developing countries, both official and civil society (perhaps including ActionAid).
2. Corporate profit-shifting
Existing estimates suggest profit-shifting (and its effects on the tax base and revenues) are substantial—for example, Gabriel Zucman estimates it reduces the tax bill of US-owned companies by about 20 per cent—while highlighting that “Quantifying the government revenue losses caused by profit-shifting to lower-tax jurisdictions is fraught with difficulties” (p.10).
The acknowledged scale is also the reason for the ongoing Base Erosion and Profit Shifting (BEPS) initiative, which the OECD has been charged with by the G-20 countries. Action Point 11 (of 15) requires the construction of a data baseline to evaluate more precisely the scale of BEPS, and to track progress. So far, the consultation and responses have made clear that a lack of data is a fundamental problem – although a number of business group submissions have argued against any additional data requirements, because of the uncertain compliance costs.
Possible lead organisations: The OECD has its hands full, and in any case is seen as having skin in the game because larger BEPS estimates imply greater issues with the current (OECD) international tax rules. A civil-society lead like the Tax Justice Network (TJN) might been seen as provocative by business groups, while the UN Tax Committee currently lacks the necessary capacity (because of condemnably weak support from member states). A good possibility would be the International Centre for Tax and Development, which has shown it can convene both leading academics and policy organisations, for example in its research programme on unitary taxation which covers some of the same ground.
3. Undeclared wealth
Zucman summarises the leading estimates of undeclared, ‘offshore’ wealth: those of TJN’s Jim Henry of $21–32 trillion; the Boston Consulting Group’s $8.5 trillion; and Zucman’s own $7.6 trillion, which he characterises as a lower bound. Estimates hinge on quality and choice of data; on estimates of the undeclared share of total assets in particular jurisdictions; on the use, or otherwise, of ‘tax haven’ lists to identify opacity; and on the range of financial and real assets considered. Oxfam pioneered policy work on havens back in 2000, and has now returned to the theme of tax-related inequalities. And Alan Hudson at Global Integrity and the Follow the Money network did some groundbreaking research on the political geography of havens around the same time.
4. Trade mispricing
The most commonly used trade data for IFF estimates does not allow disaggregation; and yet the most robust estimates may be those with the most finely disaggregated data. A set of questions arise about how to ensure the most robust estimates with existing data; and how to ensure data improvements over time. Leading researchers here have used national-level data (e.g., Global Financial Integrity; James Boyce and Léonce Ndikumana); commodity-level data (e.g., the UN Economic Commission for Africa (for the Mbeki panel); UNECA authors; and Christian Aid); and, rarely, transaction-level data (e.g., Simon Pak and John Zdanowicz).
Possible lead organisation: given their recent focus, and the ongoing workstream, UNECA could both host a process of interrogation of existing methods and data, and provide their own technical input.
5. Capital account IFF estimates
Finally, there is rather less divergence among the main IFF methodologies that focus on capital account anomalies. Nonetheless, as an important component of the most high-profile estimates, they should not go unscrutinised. Leading researchers include again Global Financial Integrity, James Boyce and Léonce Ndikumana and TJN/Jim Henry; but there is also a long history of work at the World Bank and elsewhere from the earlier period of focus on capital flight. ONE has recently contributed also.
Possible lead organisation: I’m tempted to suggest CGD. That’s not as immodest as it sounds because I’m not thinking of myself. Liliana Rojas-Suarez has great expertise on international financial flows, and Vijaya Ramachandran and Matt Collin are now starting to work on IFFs; while the DC office is conveniently located as a meeting place for all the above researchers.
A final thought
Matt Collin pointed out that the five categories risk recreating some confusion because areas 2 and 3 reflect particular IFF motivations, while 4 and 5 are channels. There is also overlap; for example, estimates of 4 and 5 could be used to generate estimates of 3. Nonetheless, I think the five areas reflect the main elements of extant work and so are useful distinctions to make use of; but any efforts should bear in mind the overlaps and make sure the various groups are able to draw upon each other’s’ progress.
I’m sure I’ve missed a number of researchers and organisations here with important contributions, so apologies—please add your names and thoughts either in the comments below, or directly to me. I hope that named organisations and individuals will also give thought to the roles they could play, and again respond below or directly. And of course if any funders, such as T/AI and its members who also bring expertise, would like to offer support, I’m sure that would ease the way.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.