Illicit Financial Flows

Illicit financial flows (IFF) designates cross-border flows of capital that has been illicitly earned, transferred, or used. As a trained development economist, I study illicit financial flows and their implications for development. In addition to depleting foreign exchange reserves and eroding tax revenues, illicit financial flows worsen poverty, undermine the rule of law, and weaken state institutions.

The High Level Panel on Illicit Financial Flows from Africa, chaired by Thabo Mbeki, was established with a mandate to shed light on the scale of IFF in the continent. I served as a consultant on the report produced by the High Level Panel that was subsequently endorsed as a Special Declaration by the African Union at its Twenty-Fourth Assembly (Assembly/AU/Decl.5.(XXIV)).

I regularly engage with policy-makers on the topic of IFF. I was part of the Second Expert Meeting on Statistical Methodologies for Measuring Illicit Financial Flows (jointly organized by UNCTAD and UNODC). I have also presented at the United Nations Economic Commission for Africa’s Inception Meeting on Preventing Trade Mis-invoicing in Selected African Countries, and for the Technical Committee of the High Level Panel.

Trade mis-invoicing

Trade mis-invoicing is an illicit practice designed to move money in and out of a country through the deliberate falsification of customs invoices at import and export. Motivations for trade mis-invoicing include evading tariffs, exploiting subsidy regimes, circumventing capital controls, and escaping domestic regulations.

I have consulted for the United Nations Economic Commission for Africa to develop the organization’s new methodology to estimate trade mis-invoicing (with William Davis and Gamal Ibrahim).

We find that Africa lost on average $83 billion a year between 2000 and 2016 in trade mis-invoicing.

Gross estimates of trade mis-invoicing

The top sectors where commodities are mis-invoiced are Machinery & Electrical followed by Mineral Resources.

Trade mis-invoicing by sector

Risk-based approaches

Risk measures for illicit financial flows

My work on trade mis-invoicing provides estimates of the scale of mis-invoicing, i.e. a dollar value. A complementary stream of work, joint with Alex Cobham, provides a risk-based approach to IFF.

Abstract. “Illicit financial flows” (IFF) is an umbrella term for a broad group of harmful, cross-border economic and financial transactions, comprising two main types: illegal capital IFF (those based on the theft of state assets and the proceeds of crime), and legal capital IFF (those based on tax evasion and avoidance, or regulatory abuses). Most research to date has focused on estimates of scale and harmful impacts. But scale estimates do not typically provide the granularity to support policy prioritization at the national or regional level. A complementary or alternative approach to seeking indicators of scale can be found in a risk-based approach. This has the potential to offer both a more granular analysis, and also to go beyond overall monitoring and accountability, to support policy prioritization at the national level. The central idea behind this approach, pioneered in the work of the High Level Panel on Illicit Financial Flows from Africa (African Union and United Nations Economic Commission for Africa, 2015), is this: because illicit financial flows are, by definition, hidden, the likelihood of an illicit component will be increasing in the degree of financial opacity in any given transaction. Combining measures of the financial opacity offered by individual jurisdictions with bilateral data on trade, investment and banking relationships, we present a new dataset allowing comparative analysis of IFF risks facing individual countries. We show that there exists large variation in the range of vulnerabilities facing different countries and regions, with clear implications for the most important areas for policy response at each level.

Click here for interactive maps presenting the jurisdictions with the highest exposure to IFF risk in banking positions, direct investment, portfolio investment, and trade.

Zooming in on Africa

We use this methodology to estimate the vulnerability and exposure of African countries to IFF risk. We present risk profiles for individual African countries, which allows for granular comparison of IFF risk across countries and by channel, and highlights the partner jurisdictions where IFF risk is the highest. We provide guidance for policy-makers on policy areas to prioritize in order to combat IFF on the continent. See here for the blog, and here for the report (published by the Tax Justice Network).