A better way to understand the effects of Money Laundering and Financial Crimes
Illicit financial flows (IFFs), defined as “money illegally earned, transferred or used”, are increasingly understood as a threat to sustainable development and one of the greatest contemporary global development challenges. They undercut economic growth and legitimate trade, depriving governments of financial resources they might otherwise invest in public goods such as health, education or infrastructure. As they present a significant threat to security, stability and development in many regions of the world, IFFs have increasingly featured on the agenda of leading political initiatives like the G8 and G20.
IFFs carry a high price, as they are increasingly concomitant with the illicit arms trade, drug trafficking and the commodities that resource conflict. IFFs are particularly prevalent and damaging in the context of weak, developing and fragile states, where they tend to exploit and exacerbate weaknesses in state institutions, undermine governance and empower those who operate outside of the law. Globally, states with weak institutions run the greatest risk of the onset or recurrence of conflict, and of extreme levels of criminal violence.
Often, discussion of IFF is restricted to measurement and usually refers to issues of commercial tax payments. Such a narrow approach overlooks the broader range of acts and impacts linked to the phenomena.
Typically, they are understood as the revenue and proceeds generated by the following activities:
• corruption: the proceeds of theft, bribery, graft and embezzlement of national wealth by government officials
• commerce: the proceeds of tax evasion, misrepresentation, mis-reporting and mis-invoicing related to trade activities, and money laundering through commercial transactions
• crime: proceeds of criminal activities including drug trafficking, smuggling, counterfeiting, racketeering (also known as criminal protection or extortion) and terrorist financing.
The analysis that intuitively results from the term “illicit financial flows” often fails to adequately capture the extensive and multi-dimensional nature of harms that derive from criminal economies. First, the IFF framework tends to capture value and impact solely in monetary terms. In this way, it gives disproportionate importance to the highest value flows, without recognising that other types of illicit activity may have a greater and more damaging impact. Understanding harm may always be subjective, but it is an important and valuable analytical exercise that affects setting priorities for responses.
A second challenge that derives from the way IFFs are understood, the term can pre-define a set of responses that focus on controlling money flows. By default, programmatic priorities are narrowed. For example, policy makers could become focused on strengthening law enforcement or border control and increasing regulation over the financial sector to prevent the financing of terrorism. However, these interventions can only be minimally effective within the region’s socio-economic and political framework. In a region where the informal sector dominates the economy, where mobility between states is both a citizenship right and a resilience strategy, and where capacity for regulation over borders and transactions is weak and corruption and impunity is widespread, such interventions are hamstrung from the start.
Instead, holistic strategies are required to target controllers of criminal enterprises; analyse and break down the networks that perpetuate individual or multiple forms of crime; and break down the vested interests that perpetuate criminal economies. This will include analysing actors and interests from the level of the community, to the nation state, the region and internationally in response to global transnational flows, and then co‑ordinating and harmonising responses.
Incoherent state policies and capacities enable criminal economies and their actors. Relevant policy areas include trade and subsidy regimes, as well as criminal justice systems and penalties. Criminal networks move flexibly between criminal markets and illicit commodities with impunity. Typically, they generate rents to further perpetuate the conditions needed to thrive: weak and corrupt state institutions, and legitimacy and support from local communities.
The Global Initiative seeks to widen the definition of IFFs to be more encompassing of the broader harms that result from their perpetuation, and to engage with a more diverse community of stakeholders to develop holistic responses. We have undertaken extensive research that is both thematic and geographic in scope, in order to move towards policy relevant conclusions and the development of responses that would strengthen the integrity of states and specific sectors to prevent IFFs.
*Source: Global Initiative Against Organized Crime.