Illicit Financial Flows
Illicit financial flows (IFFs) are illegal movements of money or capital from one country to another. GFI classifies this movement as an illicit flow when the funds are illegally earned, transferred, and/or utilized. Some examples of illicit financial flows might include:
- A drug cartel using trade-based money laundering techniques to mix legal money from the sale of used cars with illegal money from drug sales;
- An importer using trade misinvoicing to evade customs duties, VAT, or income taxes;
- A corrupt public official using an anonymous shell company to transfer dirty money to a bank account in the United States;
- An human trafficker carrying a briefcase of cash across the border and depositing it in a foreign bank; or
- A terrorist wiring money from the Middle East to an operative in Europe.
GFI estimates that in 2013, US$1.1 trillion left developing countries in illicit financial outflows. This estimate is regarded as highly conservative, as it does not pick up movements of bulk cash, the mispricing of services, or many types of money laundering.
Click here for a more thorough briefing on methodologies used by GFI to analyze illicit financial flows.
What Impact Do Illicit Financial Flows Have on Developing Countries?
US$1.1 trillion is a tremendous amount of money to drain out of developing countries. A 2013 GFI report found that even after you account for all types of financial flows (both legitimate and illegitimate)—including investment, remittances, debt forgiveness, and natural resource exports—Africa is a net creditor to the world:
GFI is currently in the process of applying this analysis of “Net Resource Transfers” to the rest of the developing world.
Beyond the damaging economic impact of the overall capital outflows, illicit financial flows have a terrible, subversive impact on governments, victims of crime, and society. They facilitate transnational organized crime, foster corruption, undermine governance, and decrease tax revenues.
Where Does the Money Go?
Every dollar that leaves one country must end up in another. Very often, this means that illicit financial outflows from developing countries ultimately end up in banks in developed countries like the United States and United Kingdom, as well as in tax havens like Switzerland, the British Virgin Islands, or Singapore. GFI research suggests that about 45% of illicit flows end up in offshore financial centers, and 55% in developed countries.
This does not happen by accident. Many countries and their institutions actively facilitate—and reap enormous profits from—the theft of massive amounts of money from developing countries. GFI believes that developed countries have a responsibility alongside developing countries to curtail the flow of illicit money.
What Can We Do About Illicit Financial Flows?
GFI believes that the most effective way to limit illicit financial flows is to increase financial transparency. GFI believes that we should enact policies to:
- Detect and deter cross-border tax evasion;
- Eliminate anonymous shell companies;
- Strengthen anti-money laundering laws and practices;
- Work to curtail trade misinvoicing; and
- Improve transparency of multinational corporations.