Post 2015: Global Action for an Inclusive and Sustainable Future

CHApTER SEvEn
Global Financial
Integrity
estimates that
illicit financial
outflows from
developing
countries reached
about $900 billion
in 2009 whereas
UNDP estimates
that IFFs from
LDCs totalled
about $20 billion
in 2008.
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Box 7.6 Examples of political agreement on the need to curb illicit flows
The G-20 addressed the challenge of illicit
flows in its communiqué following the 2009
Pittsburgh summit and in its 2010 Multi-Year
Action Plan on Development. At the European
Council meeting on the MDGs in June 2010, EU
Member States committed to ‘push for a more
development-friendly international framework’
have sought to limit progress in financial reform,
arguing that more stringent financial regulation and
supervision reduce their external competitiveness
(Griffith-Jones et al., 2010; lall, 2011).
Opportunities and challenges to curb illicit
financial flows
mounting understanding and evidence of the
problem of illicit financial flows (IFFs) have created
broad awareness of the need to develop policies to
curb them (baker, 2005; Kapoor, 2008). While there
are different definitions of IFFs, 84 most discussions
refer to three broad categories: (a) proceeds of
criminal activities (including money laundering);
(b) corruption; and (c) tax evasion and avoidance,
including transfer pricing (leading Group, 2008).
thus IFFs comprise both illegal and borderline
activities such as aggressive tax avoidance (reuter,
2012; Kar and cartwright-Smith, 2008; Everestphillips,
2012). much of the discussion has centred
on the question of scale. the think tank Global
Financial Integrity (GFI) estimates that illicit
financial outflows from developing countries
reached about $900 billion in 2009 (Kar and Freitas,
2011) whereas unDp estimates that IFFs from
lDcs totalled about $20 billion in 2008. While
EuropEan rEport on DEvElopmEnt 2013
to address tax evasion and increase cooperation
and transparency. The European Parliament
published several resolutions in 2010 and 2011,
and in March 2011 adopted a non-legislative
resolution on Tax and Development, calling for
strengthened international tax cooperation.
the lack of agreed definitions and the nature of
the phenomenon confound precise estimation, it is
clear that the volumes are significant. this has led
to broad agreement that IFFs drain development
resources, notably by reducing the scope to mobilise
domestic revenue (leading Group, 2008; oEcD,
2011a; baker, 2005; unDp, 2011). moreover, there
are indications that IFFs undermine governance
in developing countries (blankenburg and Khan,
2012). Wide scope for the illicit expatriation of funds
may exacerbate existing problems of corruption
because the possibility of hiding proceeds reduces
the chances of detection and hence increases the
expected returns of corruption (moore, 2012).
as box 7.6 shows, the scale of financial resources
lost and the negative effects on governance have
heightened agreement on the importance of curbing
illicit flows (com, 2010; G20, 2010a).
the growing awareness of what IFFs cost
developing countries has fostered agreement on a
broad outline of international reforms. research
shows that the structure of the international financial
system, in particular the lack of transparency
in some onshore and offshore financial centres,
so-called secrecy jurisdictions or tax havens, of
84 there is no agreed definition for IFFs. For instance reuter (2012) sees as the defining characteristic of IFFs that (a) the acts involved are themselves
illegal (corruption or tax evasion) in a regime that has some democratic legitimacy, or (b) the funds are the indirect fruits of illegal acts
(for example, benefits given to those who have provided illegal funding for a presidential election). Kar and cartwright-Smith (2008) define
IFFs as funds that are illegally earned, transferred, or used and cover all unrecorded private financial outflows that drive the accumulation of
foreign assets by residents in contravention of applicable laws and regulatory frameworks.