Illicit Financial Flows and the World Bank

December 13th, 2011

In July of this year the World Bank Group took a big step forward in the field of illicit financial flows with its report Barriers to Asset Recovery. The study explicitly concerns reforms that will “enable the recovery of stolen assets” as the result of corruption. It is a topic which has been given a fair amount of attention this year, particularly in the wake of the Arab Spring. Ben Ali of Tunisia, Hosni Mubarak of Egypt, and Muammar Qaddafi of Libya all hid millions of dollars abroad, money that was frozen and publicized soon after revolutions began in their (respective) countries.

Of course, as I’ve noted, injustice also lives outside the headlines. It is not only countries’ most powerful leaders that steal money from their citizens and stash it abroad. In fact, proceeds of corruption escape the boarders of developing countries from nearly all levels of government. In its paper, the World Bank paper specifically addressed this issue by noting governments and institutions could be more effective in recovering stolen assets if central bank registries “identify the beneficial owner of the account and any power of attorney related to the account. By helping to identify accounts, central bank registries…speed the work of law enforcement authorities in asset recovery cases.”

The flip side of this coin is acknowledging and then seeking to understand the delirious effect these flows of money have on developing economies. Of course, the stolen assets of kleptocrats are only one piece of the pie. There are other avenues by which valuable financial resources escape developing economies—trade mispricing, smuggling, hawala transfers, and good old fashioned tax evasion are some examples of ways criminals rob developing countries. Together, these currents of money are termed “illicit financial flows”

The proper definition, as coined by Raymond Baker, Director of Global Financial Integrity, is cross-boarder flows of “money that are illegally earned, transferred, or utilized. Somewhere at its origin, movement, or use, the money broke laws and hence it is considered illicit.” Global Financial Integrity does a terrific job of estimating the worldwide magnitude of these flows on an annual basis. In fact, GFI will release the next paper in this series, Illicit Financial Flows from Developing Countries over the Decade ending 2009, on December 15th.

However, because the nature of illicit financial flows is so varied and country-specific, its effects on development must be studied on a country-by-country basis. While GFI also publishes country-specific reports, a single institution cannot bear the entire weight of this field and there is a significant need for more research. That’s where (hopefully) the World Bank comes in.

The World Bank has now published a repot, which addresses the other side of the asset recovery coin. The report, Ill-Gotten Money and the Economy, Experiences from Malawi and Namibia, examines the experiences of these two African countries and addresses how and why corruption and tax evasion put a drag on economic development. It also comprehensively explains each economic effect, positive and negative, of ill-gotten money. These contributions, particularly in the context of these countries, provide a critical step forward in the field of research.

There is one significant difference between this paper and the research by GFI. The authors study what they term “ill-gotten money,” which they define as “money derived (illegally acquired) from crime and tax evasion.” This includes not only illicit cross-boarder transfers and assets held abroad, but also illicit transfers and assets held and transferred domestically. The difference between this concept and illicit financial flows is important. The economic effect of a criminal activity alone is quite different than the economic effect of a criminal activity with a corresponding transfer of cash internationally. Or the economic effect of an illicit cross-boarder transaction where the underlying activity itself was not illicit.

While I applaud the World Bank for this report and I commend the authors for their contributions, I caution readers and researchers to heed the subtle, but important differences between the phenomenon this report has examined and the one Raymond Baker, Dev Kar, and the other staff of GFI has pioneered.

Written by Ann Hollingshead

Follow @FinTrCo