Illicit Financial Flows from the Least Developed Countries: 1990-2008

Abstract

This paper explores the scale and composition of illicit financial flows from the 48 Least Developed Countries (LDCs). Illicit financial flows involve the cross-border transfer of the proceeds of corruption, trade in contraband goods, criminal activities and tax evasion. In recent years, considerable interest has arisen over the extent to which such flows may have a detrimental impact on development and governance in both developed and developing countries alike.This issue has been recognized by the UN as important for development and achievement of the Millennium Development Goals (MDGs). Illicit capital flight, where it occurs, is a major hindrance to the mobilization of domestic resources for development. In many cases, it significantly reduces the volume of resources available for investment in the MDGs and productive capacities. Through theUnited Nations, the international community has committed to strengthen national and multilateral efforts to address it. As the deadline for achievement of the MDGs draws closer, it is vital understand more about the nature of this problem and to explore possible policy solutions, especially for those countries furthest off-track towards the MDGs.The study’s indicative results find that illicit financial flows from the LDCs have increased from US $9.7 billion in 1990 to US $26.3 billion in 2008 implying an inflation-adjusted rate of increase of 6.2 percent per annum. Conservative (lower-bound) estimates indicate that illicit flows have increased from US $7.9 billion in 1990 to US $20.2 billion in 2008. The top ten exporters of illicit capital account for 63 percent of total outflows from the LDCs while the top 20 account for nearly 83 percent. Trade mispricing accounts for the bulk (65-70 percent) of illicit outflows from the LDCs, and the propensity for mispricing has increased along with increasing external trade. Empirical research on illicit flows indicates that there are three types of factors driving illicit flows — macroeconomic, structural, and governance-related.The ratio of illicit outflows to Gross Domestic Product (GDP) averages about 4.8 percent but there is wide variation among LDCs. Of the top 10 countries with the highest illicit flows to GDP ratio, four are small island countries, two are landlocked, and four are neither. In some LDCs, losses through illicit capital flows outpace monies received in official development assistance (ODA).