CMI: Extractive Sectors And Illicit Financial Flows: What Role For Revenue Governance Initiatives?
November 21st, 2011
Most countries do not reap the full benefits from their wealth in natural resources. One of the major causes is illicit financial flows (IFF), that is, money that ends up benefiting local and foreign elites rather than the general population. Much of this money is generated by corruption, illegal resource exploitation, and tax evasion.
There are currently at least a dozen international initiatives that seek to curb IFF. One of the most prominent is the Extractive Industries Transparency Initiative, focusing on financial flows between companies and governments. Individual countries have also taken measures. For example, one recent case resulted in a US$1.2 billion settlement between US authorities and oil and gas service companies accused of corruption in construction of a liquefied natural gas plant in Nigeria. Recently, given high commodity prices and record profits by resource companies, frustration with this issue has been growing—not only among the public in producing countries, but also among donor countries concerned with improving public finances in the midst of economic crisis.
This U4 Issue Paper looks at the potential of these initiatives to reduce illicit financial flows from extractive sectors, particularly those initiatives that target resource revenue governance. Section 2 provides a brief overview of resource governance challenges and the nature of illicit financial flows in extractive sectors, highlighting consequences for development in poor countries. Section 3 summarises international initiatives to improve resource revenue governance, focusing on information disclosure and certification. It also discusses their comparative achievements and factors for success. Section 4 sums up the potential for these initiatives and suggests priorities within them as well as the possible need for additional actions.