Watchdogs or partners in crime? The power play of governance and illicit financial flows: a systematic literature review

Vulnerability and Exposure to Illicit Financial Flows Risk in Africa

PurposeThis paper aims to discuss the tax-related illicit financial flows from a human rights perspective. It argues that curbing illicit financial flows, and specifically tax abuse, is essential not only for realizing human rights but also for achieving the sustainable development goals. It provides definitions of tax evasion and avoidance, as well as estimations of illicit financial flows. It studies the tax abuse implications for human rights and sustainable development, as well as the obligations in the field of human rights and tax abuse. It also critically assesses the recent international initiatives aim at curbing illicit financial flows. It concludes with a set of recommendations on how to curb illicit financial flows.Design/methodology/approachThis paper combines economic, legal and policy perspectives to study the multidimensional, complex and global problem of illicit financial flows. It not only proposes an explanation of the volume, roots and economic, social and human rights implications of illicit financial flows but it also proposes reforms that states and other stakeholders need to implement in order to curb this phenomenon.FindingsCombating tax abuse and illicit financial flows more broadly, is essential to make better progress in realizing international human rights obligations. The inclusion of a specific target to reduce illicit financial flows under the sustainable development goals makes clear that curbing such flows is also essential for creating an enabling environment for sustainable development. While we should applaud that reducing illicit financial flows is mentioned in one of the targets of the sustainable development goals, the target remains broad and vague. Specific measures to operationalize this target are needed to ensure that progress is achieved and that such progress can be tracked and measured. The author presents recommendations for discussion. To promote accountability, the recommendations are addressed to specific stakeholders.Originality/valueThis paper tries to contribute to improve our knowledge and understanding of illicit financial flows and tax abuse more specifically at global level and their implications for human rights, to make the need for change more compelling, as well as to stimulate the debate around reforms that need to be implemented to curb illicit financial flows.

The first target of Goal 17 of the Sustainable Development Goal (SDG) emphasizes the need to strengthen domestic resource mobilization and improve revenue collection. However, the average tax‐to‐GDP ratio is much lower than the optimal threshold required to finance development. Meanwhile, Africa is losing a significant amount of its capital through illicit financial flows, primarily driven by trade misinvoicing, but at the same time offering fiscal incentives and improving governance to create an environment for increased domestic revenue. Using random and fixed effects models, the study examines the tax revenue effects of trade misinvoicing, and further examines the extent to which tax holidays and regulatory quality dilute or deepen the revenue effects of trade misinvoicing for 13 African countries over the period 2000 to 2015. The results suggest that trade misinvoicing reduces tax revenue. While tax holiday strengthens the effect of trade misinvoicing, regulatory quality dilutes the effect of trade misinvoicing on tax revenue. The study, therefore, recommends that the governments of SSA should promote good governance, reduce trade misinvoicing and review existing tax incentives as critical components of the ongoing efforts to increase domestic resource mobilization for development.

This article aims to analyze the challenges posed by the illicit financial flows (IFFs) that emerged from the consolidation and globalization of financial markets and the persistent and rising inequality of wealth and income. In a first step, we show the key dimensions behind IFFs (governance, trade, finance, taxation, monetary), which affect the multilateral order and promote new relations of dependence between the Global North and the Global South. In a second step, we analyze the cartographic representation of the developing world regarding the challenges posed by IFFs. We argue that IFFs are a subproduct of inefficient international policies and multilateral regulatory frameworks that have decreased the scope of action of nation-states and reduced the incentives for them to cooperate in certain areas of financial markets and global governance, such as international cooperation on tax and IFFs. In the article, we examine the multidimensionality of IFFs through multivariate techniques: More specifically, we use factor and cluster analysis methods based on the most recent information available between 2015 and 2020. Factor analysis reveals four main components behind this global problem: governance issues, foreign direct investment and trade-related issues, bank stability, and taxation. A clustering hierarchical solution provides four clusters of developing countries, in terms of phantom investment and trade misinvoicing, revealing the heterogeneous composition and shortcomings of the Global South. These results help understand the complexities behind IFFs and highlight the relevance of tailored actions to promote a more effective global governance system.

This study on Illicit Financial Flows (IFFs) in the Wildlife and Tourism sectors in Southern Africa emanated from the TrustAfrica (TA) and the Open Society Initiative for Southern Africa (OSISA) project “Assessing the extent and impact of illicit financial flows in key economic sectors in Southern Africa”. The three components of the project are mining, agriculture and wildlife. IFFs are illicit movements from one country to another of money or products that are illegally acquired. The money typically originates from three sources in the private sector: commercial tax evasion, trade misinvoicing and abusive transfer pricing. However, other types of criminal activity can produce IFFs, which in this study include the trafficking of live animals and plants and their products and associated corruption (bribery and theft by corrupt government officials) through which the proceeds end up in another country. This wildlife trade and tourism IFF study is the first of its kind and the methodologies involved a combination of population modelling, estimated product offtakes and open source trade data. The trade research is limited to eight species groups – elephants, rhinos, lions, pangolins, crocodiles, abalone, sharks and rays, and cycads. The study concluded that for the period 2006-2014, Southern Africa lost almost US$ 1.5 billion in illicit transfers of funds or products overseas, or close to 50% of all wildlife commodity exports. Surprisingly, illegal exports of abalone meat made up almost half of this amount. The IFFs in the wildlife tourism sector were much larger, estimated at over US$ 22 billion in the ten years 2006-2015, and deriving mainly from tax evasion and trade misinvoicing, sometimes involving offshore shell companies. We predicted that more than US$3 billion could have been lost in 2016 in the eight countries covered in this study. The main causes of the huge losses to the economies of Southern Africa in wildlife trade were CITES trade bans and the fact that local communities were not empowered to manage what should rightfully be their resources on their land. Trade bans and disenfranchisement led communities to harvest illegally and to sell wildlife products to illegal exporters. The only way to mitigate these losses would be to do away with trade bans, bring most species into the legal sector, and establish supply and demand regulatory systems that would ensure conservation of the species while also satisfying legitimate stakeholder interests, primarily those of communities and enterprises that live in association with the wildlife and which share common habitats.

PurposeIllicit financial flows are targeted by the United Nations’ (UN) sustainable development goals (SDGs). However, these illicit flows are not entirely understood. Furthermore, they can benefit from economic norms, laws and regulations that lack mechanisms to detect and penalize them. This paper aims to investigate whether a recent test, the embezzler test, can be used to identify regulatory architectures that facilitate illicit financial flows and related financial crimes.Design/methodology/approachThis paper develops a more advanced version of the embezzler test in terms of definitions and practical implementation methodology.FindingsIn this test, the definition of embezzlement can be understood to be the occurrence of illicit financial flows crossing the boundaries of organizations and/or countries. This is a multistage test, which intentionally simulates illicit financial flows to observe how well equipped is the regulatory architecture to deal with other financial offences that are related with these flows, such as theft, money laundering, fraud, corruption, market manipulation and tax evasion.Research limitations/implicationsFuture research can use the version of this test to stress test a large range of economic norms, laws and regulations.Social implicationsThis test’s new version can assist achieve the UN SDGs’ illicit financial flow reduction target. Furthermore, it can be used to study both existing and proposed norms, laws and regulation.Originality/valueTo the best of the author’s knowledge, this is the first explicit test that has been presented to identify norms, laws and regulations that facilitate illicit financial flows and related financial crimes.

This chapter assesses the readiness of national, regional and international institutions in Africa to combat trade-based illicit financial flows (IFFs), particularly trade mis-invoicing. Trade mis-invoicing is a form of tax evasion (covered broadly in chapter 2) that moves money illicitly across borders by falsifying the stated price, volume or value of imports or exports on invoices or customs declarations submitted by importers and exporters, respectively, to customs agencies and port authorities. IFFs, including trade mis-invoicing, harm the governance of African economies.

A major source of illicit financial flows (IFFs) out of developing countries accrues from the under-invoicing of commodity exports. This erodes the tax base of resource-rich developing countries, and hence their capacity to mobilise domestic resources for development. The Sustainable Development Goals (SDGs), adopted in 2015, specifically call on states to reduce IFFs and enhance domestic resource mobilisation. Yet a weak capacity to assess the magnitude and drivers of the phenomenon has limited the ability of developing countries to effectively curb IFFs. This has been compounded by a lack of consensus over IFF definitions together with poor data and weak methods. Drawing on six years of interdisciplinary research into commodity trade–related IFFs, this chapter examines novel data sources and recent methodological advances that researchers and regulators can draw upon to better capture and eventually reduce IFFs. It situates such advances within the fast-expanding literature on domestic resource mobilisation, taxation and IFFs, focusing on three major channels; namely, trade mispricing, abusive transfer pricing and tax evasion through wealth offshoring. The chapter concludes by discussing the scope for improved data collection and evidence generation. This, together with global taxation reform, can greatly contribute to effectively enhancing domestic resource mobilisation in developing countries.

Illicit financial flows (IFFs) inhibit African development by draining foreign exchange, reducing domestic resources, stifling trade and macroeconomic stability and worsening poverty and inequality. This study focuses on Africa as a recent assessment revealed that Africa lost between US$1.2 and US$1.3 trillion in illicit outflows over the 32 years, 1980-2012. Of great concern is that these figures are almost four times Africa‘s current external debt and nearly equivalent to its current Gross Domestic Product (GDP). Zimbabwe is not an exception, with IFFs rampant in industries such as mining, especially among artisanal miners who operate clandestinely, avoiding selling their products to the state and evading tax. The rationale for a greater focus on domestic resource mobilisation in Zimbabwe springs from the quest for ever-elusive fiscal consolidation and debt sustainability. However, domestic resource mobilisation cannot succeed without tackling IFFs and other resource leakages through tax evasion and aggressive tax avoidance. According to the Zimbabwe Coalition on Debt and Development (ZIMCODD), the country loses an average of US$276 million annually through IFFs. Motivated by this problem, the study interrogated the challenges and opportunities for curbing these illicit flows to boost domestic resource mobilisation for financing sustainable development in Africa. The study used a desk review and secondary data to explore IFFs and domestic resource mobilisation, with a special focus on the dollarisation period in Zimbabwe. An inadequate regulatory framework, the lack of information and communication technologies facilities, transportation and other relevant infrastructure, , to mention a few, were some of the factors found to be inhibiting the prevention of IFFs. The study concludes that curbing illicit financial flows can help African countries mobilise capital to finance the achievement of the Sustainable Development Goals (SDGs) and other national priorities.

PurposeThis paper aims to assess the roles of agencies in combating illicit financial flows (IFFs) in Nigeria. Specifically, this paper explores the roles of the major anti-corruption agencies – the Economic and Financial Crimes Commission (EFCC) and Independent Corrupt Practices and other Related Offences Commission (ICPC) – in curbing IFFs in Nigeria. This paper reviews the various activities and achievements of these agencies in combating IFFs and concludes that in spite of the effort made by these anti-graft agencies, Nigeria still ranks top among African countries suffering from IFFs. Therefore, this study recommends a need for a collective and coordinated strategy by authorities worldwide to address the difficulties posed by financial crimes.Design/methodology/approachThis study reviews the roles of anti-graft agencies in combating IFFs in Nigeria. Specifically, this study explores the roles of EFCC and ICPC in combating IFFs.FindingsThis study concludes that in spite of the effort made by Nigeria’s anti-graft agencies, IFFs have continued to increase thereby impeding the effort to achieve Sustainable Development Goal 16.4 – reduce IFFs.Originality/valueThis study contributes to the existing body of knowledge by exploring Nigeria's major anti-graft agencies and their effort in curbing IFFs in Nigeria.

Illicit financial flows have been an issue of great concern over the past decades due to the challenge they present for economic development in Africa. Illicit financial flows undermine the productivity and growth of African economies as countries lose foreign exchange and tax revenues. Countries lose financial resources needed for development programs, hence undermining social service delivery and retarding poverty reduction. To effectively combat illicit financial flows, it is imperative to examine their determinants. This study seeks to examine the determinants of illicit capital movement in the China‐Africa trade through the mechanisms of trade misinvoicing over the period 1990–2019. The IMF's Direction of Trade Statistics (DOTS) database is used to estimate trade misinvoicing. Estimates using mirror trade data indicate that both exports of Africa to China and imports from China to Africa are mainly underinvoiced. The net effect shows that trade misinvoicing in the China‐Africa trade results in net illicit capital outflow for about 44% of countries in Africa. The results from panel data regressions indicate that tax evasion is one of the major factors behind misinvoicing in China‐Africa trade. In addition, corruption control is found to reduce export underinvoicing, while political stability reduces both export overinvoicing and import overinvoicing. Export misinvoicing increases with the presence of natural resources in the exporting country. Other factors associated with trade misinvoicing in China‐Africa trade include openness to trade, current account deficit, and real exchange rate. The study suggests ways to reduce trade misinvoicing in China‐Africa trade.

Purpose The development of the Nigerian industrial sector is critical for the achievement of sustainable development. However, the gowing volume of trade misinvoicing, among other illicit financial flows, greatly undermines the limited available domestic resources needed to power industrial development. The Nigerian government has made concerted efforts toward industrialization, but the efforts seem futile. Thus, this study investigates whether trade misinvoicing is one of the factors fostering or dampening industrial development in Nigeria. Design/methodology/approach Annual time-series data covering the period between 1986 and 2018 were sourced, and the dynamic ordinary least squares (DOLS) estimation technique was used to analyse the data. Findings The results reveal that trade misinvoicing has a catastrophic effect on industrial development, as it has largely impeded industrial progress in Nigeria. This adverse effect not only restrains the contribution of the industrial sector to aggregate output but also limits the sector's capacity to absorb the teeming Nigerian labour force. Practical implications The practical implication of these findings is that the Nigerian government and policymakers need to design and implement sound strategies and policies to tackle trade misinvoicing, improve regulatory quality and bolster industrial development. Originality/value The research is the first to empirically examine the effect of trade misinvoicing on industrial development in Nigeria.

This article investigates the patterns of business ownership in Europe, using a unique dataset on the nationality of 28.7 million shareholders of companies registered in 41 European countries. By means of an exploratory multivariate analysis, it tests whether ownership links between different countries are driven exclusively by social and macroeconomic variables – such as trade or geographical or cultural proximity – or are also related to measures of financial secrecy, corruption and lack of compliance with anti-money laundering regulations. The results indicate that factors other than licit economic incentives explain the international ownership structure of European companies. European firms have an abnormal number (that is, above the predicted value) of owners from tax havens and countries with poor financial transparency, which may suggest the use of holding companies for money laundering and tax evasion and to conceal illicit financial flows. However, ceteris paribus, the number of owners is abnormal in countries where rule of law and the control of corruption are more effective, suggesting that a high level of corruption may be a cost in money laundering activities. The findings contribute to the current international debate on illicit financial flows – as framed by United Nations Sustainable Development Goal 16.4 – and can be used by public agencies and private actors to detect anomalies in business ownership and prevent potential financial crime schemes at corporate level.

Defined as money illegally earned, transferred, or used, illicit financial flows (IFFs) are phenomena preventing the development of the African continent and violating human rights. In a context where Africa has to reach the 2030 Sustainable Development Goals (SDGs) and the African Union (AU) Agenda 2063, civil society must strive for the intensification of the fight against IFFs. South Africa is one of the most affected African countries while benefiting from suitable institutions and procedures to fight against IFF. This chapter explores first the reasons why South Africa is confronted with the biggest scandal which led to IFFs today (“state capture”). The paper further explores how civil society, through the study of the Organization Undoing Tax Abuse (OUTA), is today involved in the fight against IFFs from South Africa. Thus, the state capture became one of the battle horses of OUTA which also presented to the South African Parliament a report titled No Room to Hide: A president caught in the act, in order to “use the laws of the land and the Constitution to correct the matter through various avenues of litigation, mediation and arbitration available to society” (OUTA).

BackgroundNearly all countries have ratified the United Nations Convention on the Rights of the Child and, therefore, support children having access to their rights. However, only a small minority of children worldwide have access to their environmental, economic, and social rights. The most recent global effort to address these deficits came in 2015, when the United Nations General Assembly agreed to a plan for a fairer and more sustainable future by 2030 and outlined the Sustainable Development Goals (SDGs). One remediable cause is the lack of revenue in many countries, which affects all SDGs. However, illicit financial flows from low-income to high-income countries, including international tax abuse, continue unabated.MethodsUsing the most recent estimates of tax abuse perpetuated by multinational companies and tax evasion through offshore wealth, and precise econometric modelling, we illustrate the potential regarding child rights (or progress towards the SDGs) if there was an increase in revenue equivalent to tax abuse in Malawi, a low-income country particularly vulnerable to climate change. The Government Revenue and Development Estimations model provides realistic estimates of government revenue changes in developmental outcomes. Using panel data on government revenue per capita, it models the impact of increased revenue on governance and SDG progress.ResultsIf cross-border tax abuse and tax evasion were curtailed, the equivalent increase in government revenue in one country, Malawi, would be associated with 12,000 and 20,000 people having access to basic water and sanitation respectively each year. Each year, an additional 5000 children would attend school, 150 additional children would survive, and 10 mothers would survive childbirth.ConclusionsMore children would access their economic and social rights if actions were taken to close the gap in global governance regarding taxation. We discuss the responsibility of duty bearers, the need for a global body to arbitrate and monitor international tax matters, and how the Government of Malawi could take further domestic action to mitigate the gaps in global governance and protect itself against illicit financial flows, including tax abuse.