Illicit Financial Flows

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STRICTLY EMBARGOED UNTIL TUESDAY NIGHT, 28 MAY 2013 AT 18:59 EDT / 23:59 BST / 23:59 WEST / 23:59 CET 42 African Development Bank and Global Financial Integrity
STRICTLY EMBARGOED UNTIL TUESDAY NIGHT, 28 MAY 2013 AT 18:59 EDT / 23:59 BST / 23:59 WEST / 23:59 CET VI. Policy Recommendations VI Our study shows that in spite of increasing recorded inward transfers through the balance of payments, most African countries experienced a net drain of resources over the 30-year period, 1980-2009, driven largely by illicit outflows. As a result, policies to curb this decline should focus on restricting the global absorption of illicit financial flows and curtailing the generation of these flows within Africa. For these initiatives to be effective, it is imperative that both African countries suffering from illicit financial flows and the developed countries absorbing these flows align their policies to address the issue. Lastly, we briefly suggest policies aimed at boosting net recorded transfers into Africa by improving the business climate. i. Policies to Restrict the Absorption of Illicit Financial Flows This section discusses three initiatives aimed at stemming the absorption of illicit financial flows that can be undertaken both by African countries and the developed countries that absorb these flows: promoting a higher standard of transparency in the global financial system, facilitating the automatic exchange of tax information between countries, and signing double tax avoidance agreements. a. Promote Transparency in the Global Financial System Recent work by GFI (e.g., Kar, Cartwright-Smith, and Hollingshead (2010)) has highlighted the role of offshore financial centers (“OFCs,” also called “tax havens” or “secrecy jurisdictions”) and banks in developed countries in facilitating the absorption of illicit capital from developing countries. 8 Although issues related to opacity of tax haven operations have been brought to the forefront of public debate, less attention has been paid to the secrecy surrounding bank information particularly pertaining to private sector deposits of developing countries allegedly due to confidentiality requirements. Accordingly, we suggest two steps that should be taken to foster transparency in the financial system and stem the flow of illicit capital. First, banks and OFCs should be required to regularly report to the Bank for International Settlements (BIS) detailed deposit data by sector, maturity, and country of residence of deposit holders. Moreover, BIS must be permitted to widely disseminate this cross-border banking data for specific source and destination countries, enabling researchers to “map” non-bank private sector 8 Kar, Dev, Devon Cartwright-Smith, and Ann Hollingshead. The Absorption of Illicit Financial Flows from Developing Countries: 2002-2006 Washington DC: Global Financial Integrity, (2009). Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-2009 43
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