How Can We Make Illicit Finance Less Illicit?

The truth is: we don’t know much about illicit finance. We don’t have exact figures on the volume of transactions which could fall within this category, and we also don’t know whether these transactions have any significant impact in developing countries and elsewhere. Adding up estimates of different types of illicit flows provides lurid headline figures (one trillion dollars a year) but more specific analysis is needed to determine whether, and how much, better policies might improve development. Even so, a group of experts who gathered at a meeting organized by the Center for Global Development in Europe and the Elcano Royal Institute at the end of March agreed that this is a potentially important issue; and it is important to include the needs of developing countries.

The meeting discussed a paper by Iliana Olivie and Aitor Perez, researchers at Elcano Royal Institute, which summarizes the current understanding of illicit finance and its relevance for developing countries. The paper concludes that the EU has the tools to bring about a more transparent financial system, even though the direct potential impact on developing countries remains uncertain.

The experts at the meeting suggested some legislation is already in place but enforcement is variable. They discussed whether the international institutions – which include the EU’s Financial Intelligence Unit, the Financial Action Task Force (FATF) and Financial Stability Board (FSB) – are playing a strong enough coordinating role.

One of the challenges is making sure that developing countries benefit from the steps that are being taken internationally to reduce illicit financial flows. Participants argued that developing countries should have access to the automatic exchange of information about tax needs, and that tax cooperation agreements ought to be on multilateral, not bilateral basis.  Furthermore, registers of beneficial ownership should be open to the public. Although this is not specifically required by last year’s anti-money laundering directive, some countries (including the United Kingdom, France and Denmark) intend to go beyond the requirements of the directive by doing so; others should follow suit.

The meeting concluded that, although illicit financial flows are likely to be bad for developing countries, there is no single policy option that will tackle these problems.  A range of policy measures are needed, and will need to be enforced, involving cooperation at local, regional and international level.  Development campaigners should be wary of assuming that these flows will be easily interrupted: firms and individuals might well simply find new jurisdictions to protect their financial secrecy.

We’d like to invite anyone interested to send us comments on the consultation draft.