First official estimates on illicit financial flows

IFFsIllicit financial flow impact sustainable development negatively, especially in developing countries where resources are in dire need. They drain resources from development not only when they leave a country (outflows), but also when they enter a country (inflows), they can have detrimental impact by fuelling money laundering and corruption thus undermining the rule of law and the stability of markets. The COVID-19COVID-19 is an infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19 -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-. pandemicCommonly described by the WHO as ‘the worldwide spread of a new disease’, no strict definition is provided. In 2009, they set out the basic requirements for a pandemic: • New virus emerges in humans
• Minimal or no population immunity
• Causes serious illness; high morbidity/mortality
• Spreads easily from person to person
• Global outbreak of disease.
The US Centre for Disease Control uses a similar approach, but with a reduced set of criteria. It is very difficult to gauge whether the spread of a disease should be termed an outbreak, epidemic or pandemic. In other words, when to declare a pandemic isn’t a black and white decision -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-., conflicts, and the increasing costs of climate change and environmental challenges have had a particularly devastating impact on developing economies highlighting the critical need for addressing the financing gap, including to curb illicit financial flows.

The ability to achieve the SDGsSustainable Development Goal remains fragile when IFFs continue to drain resources that would be needed to fulfil human rights and pursue sustainable development. In Bridgetown, member States -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—- expressed their great concern over the negative impact of illicit financial flows on sustainable development, especially in developing countries. They emphasized the need for global cooperation, and strengthening of existing work avenues to tackle illicit financial flows and the activities that underlie their occurrence.

The 2030 Agenda identifies the reduction of IFFs as a priority area, as reflected in target 16.4 which aims to significantly reduce illicit financial flows. This target is critical for financing efforts to achieve SDGs. Regardless of its importance, data on SDGSustainable Development Goal indicator 16.4.1, “total value of inward and outward illicit financial flows”, are not yet comprehensively reported -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-. The world needs comparable and reliable statistics on IFFs to shed light on the activities, sectors and channels most prone to illicit finance, pointing to where actions should be undertaken as a priority to curb these flows. First official estimates of IFFs are now available, covering some crime-related IFFs for the first countries.¹

Country pilots show that illicit financial flows can be estimated

As co-custodians of SDG indicator 16.4.1, UNCTAD and UNODCUnited Nations Office on Drugs and Crime lead global methodological work to develop statistical definitions and methods to measure IFFs to support member States in monitoring progress towards target 16.4. UNCTAD leads methodological work and enhancing national capacities to measure tax and commercial IFFs, and UNODC focuses on crime-related IFFs (see section: UNCTAD leads global efforts to measure illicit financial flows jointly with UNODC and United Nations Regional Commissions). To date, 22 countries across three continents have tested the measurement of IFFs. The experience shows that, while estimating illicit financial flows is challenging, it can be done.

IFFs can be generated by many illicit tax and commercial practices, illegal markets, corruption or exploitation. To date, 14 countries, 12 in Africa and two in Asia, have tested methods to measure selected types of tax and commercial IFFs using datasets available to customs or tax and revenue authorities, and eight countries have tested measurement of crime-related IFFs. Several countries prepared preliminary unofficial estimates of IFFs from trade misinvoicingTrade misinvoicing refers to the act of misrepresenting the price or quantity of imports or exports in order to hide or accumulate money in other jurisdictions -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-. by analysing asymmetries in customs reporting between countries (PCM+Partner Country Method Plus) or abnormal prices in transaction-level customs data (PFM+Price Filter Method Plus) using UNCTAD’s -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—- Methodological Guidance. Trade misinvoicing affects trade in various commodities: for example, beverages, petroleum, ore in Burkina Faso; precious metals and stones, electrical machinery in South Africa (Map 1). While values indicate billions of IFFs, it is noteworthy that differences in time and spatial coverages (trading partners) render direct comparison unwarranted. Offering relative measure as a percentage of IFFs in respective official trade, these values are far from insignificant: IFFs may reach even a half of officially recorded trade.

Drug trafficking is a major proceeds-generating crime, and in countries affected by intensive cross-border drug flows it generates significant inward and outward IFFs. First estimates reveal that for example Mexican drug cartels generated inward IFFs for an estimated US$12.1 billion on average between 2015 and 2018, an amount comparable to the value of agricultural products exports of Mexico. Similarly, in Colombia, cocaine trafficking between 2015 and 2019 was estimated to have generated inward IFFs between US$1.2 and US$8.6 billion (from 3 per cent to 23 per cent of legal commodity exports), while in Peru cocaine trafficking-related inward IFFs (were valued at US$1.3-1.7 billion) represent 3.5 to 4.5 per cent of total exports.²

Significant IFFs are generated in the context of opiates trafficking. According to latest estimates, traffickers have generated inward IFFs worth between US$5.8 and US$9.8 billion in the three countries with the highest opiates production - Afghanistan, Myanmar, and Mexico.³ Opiates trafficking in Asia has spillover effects in countries close to major opium poppy cultivation areas. Here opiates are manufactured and traded for local consumption and in some cases re-exported to other destination countries. Opiates imports are at the origin of outward IFFs in South Asian countries. Their value is significant compared to legal economic activities. For example, in the Maldives heroin trafficking generated IFFs similar to the value of imports of sugar cane, beets and chemical pure sucrose, in Nepal to that of imports of pharmaceutical goods. In Bangladesh, outward IFFs due to the import of opiates are estimated to range between US$15.6 and US$310 million (Figure 1).

Inward IFFs are a major source of income for drug trafficking groups in these countries. Money laundering from such inflows cause significant harm to security and justice by fueling further criminal activities, violence and corruption, as well as to the economy by infiltrating ill-gotten gains that undermine integrity of financial markets and contribute to monetary instability.

These insights and the preliminary estimates resulted from pilot studies conducted by 22 countries, jointly with UNCTAD, UNODC, the United Nations Regional Commissions and other partners (Map 2). In addition to the first estimates, the pilots have provided or continue to provide critical information for refining statistical methods to measure IFFs and for accumulating country experiences in applying these or alternative methods. For instance, in Kyrgyzstan trade misinvoicing methods were extended by studying grey re-exports -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—- and inspecting remittance flows or tax compliance -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-.

Illicit financial flows are generated by a wide range of activities

As the above preliminary estimates show, countries are affected by many different activities that may generate IFFs. The types vary greatly across countries, while some countries are more affected by tax evasion, some struggle with IFFs related to extractive industries, and others are impacted by trafficking in persons or drug trafficking. IFFs are hidden but also take many forms making them challenging to measure. Therefore, countries usually select a few types of IFFs for first measurement exercises among the flows affecting them most and for which data can be acquired. Due to the wide range of IFFs, defining their scope was a long, consultative journey. To this end, UNCTAD and UNODC established a Task Force on the Statistical Measurement of IFFs⁴ and engaged in a series of expert consultations since 2017. The result is reflected in the -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—- Conceptual Framework for the Statistical Measurement of Illicit Financial Flows which was endorsed by all member states in the UN Statistical Commission in March 2022 -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-, based on concepts and standards approved by the IAEG-SDGsInter-Agency and Expert Group on Sustainable Development Goals indicators in October 2020. The Framework identifies the main types of activities that may generate IFFs (Figure 2) and defines IFFs as financial flows that are illicit in origin, transfer or use, that reflect an exchange of value, and that cross country borders.

Figure 2. Four main types of illicit financial flows

Source: -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-

IFFs need to be classified using a discrete, exhaustive and mutually exclusive statistical classification aligned with existing statistical frameworks and principles. The ICCSInternational Classification of Crime for Statistical Purposes -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—- provides a good starting point for identifying the activities that could generate IFFs. As the ICCS does not cover all tax and commercial activities that may generate IFFs, for instance IFFs related to aggressive tax avoidance, a more exhaustive classification is being developed, where each activity is being analysed considering three aspects (Figure 3):

• Change in income: whether the activity is economic (directly or indirectly generating a change of income) or non-economic;
• Direct or indirect flows: activity generating a change of income with or without direct exchange of resources;
• Productive or non-productive activities: falling within or outside the production boundary as defined in the SNASystem of national accounts.

Figure 3. A decision tree helps to identify and classify IFFs

Source: Deliberations by Task Force on the Statistical Measurement of IFFs.

Scaling up IFFs measurement and policy formulation

There is a need for continued capacity strengthening and support through the technical expertise from custodian agencies UNCTAD and UNODC, and partners including United Nations Regional Commissions and their experts. In its latest resolution adopted in December 2022, the United Nations General Assembly -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—- calls for concerted actions and effort, both at national and international levels to train and report on SDG indicator 16.4.1 using the recommended methodology and to work in coordination with UNCTAD and UNODC.⁶

Estimating IFFs will not only provide clarity on the scope of IFFs, but also help improve the quality of key macroeconomic statistics, such as GDPGross domestic product (GDP) is an aggregate measure of production, income and expenditure of an economy. As a production measure, it represents the gross value added, i.e., the output net of intermediate consumption, achieved by all resident units engaged in production, plus any taxes less subsidies on products not included in the value of output. As an income measure, it represents the sum of primary incomes (gross wages and entrepreneurial income) distributed by resident producers, plus taxes less subsidies on production and imports. As an expenditure measure, it depicts the sum of expenditure on final consumption, gross capital formation (i.e., investment, changes in inventories, and acquisitions less disposals of valuables) and exports after deduction of imports -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-., by improving their coverage and exhaustiveness. Standardized concepts and full alignment with other relevant frameworks, such as SNA and BoPBalance of payments, will increase IFF statistics applicability and add value in pursuing sustainable development for all.

Measurement of IFFs is the first step in identifying threats and risks from IFFs, and serves as evidence base for further policy formulation. Estimating IFFs will thus also help improve policy agenda and actions towards reducing economic inequalities and reinforcing fundamental human rights for all. African countries, for example, with high IFFs are deemed to spend on average 25% less on health and 58% less on education -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-.

A global 2023-2026 United Nations Development Account capacity enhancing project is currently starting, relying on methodological support, guidance and training by UNCTAD and UNODC. It is carried out in coordination by ECA with all UN Regional Commissions. The project will enhance statistical capacities of nine developing countries across regions to measure and curb IFFs, but also enhance investigative and analytical capacities and improve domestic resource mobilisation to strengthen socio-economic resilienceThe ability of a system, community or society exposed to hazards to resist, absorb, accommodate, adapt to, transform and recover from the effects of a hazard in a timely and efficient manner, including through the preservation and restoration of its essential basic structures and functions through risk management -—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—--—
– ‒
- –
—-. to pursue the 2030 Agenda.

Work by custodian agencies continues to develop a comprehensive classification of IFFs and design methods to aggregate various types of IFFs into a single indicator on IFFs, towards measuring and reporting on SDG indicator 16.4.1. Deliberations of Task Force members are ongoing on aggregation measures to report IFFs as a single SDG indicator, exploring the use of a matrix approach to identify areas of (potential) overlap between different methods and types of IFFs and prevent double counting. Further practical studies in countries will be needed to design suitable and robust aggregation methods in the future.

Global and concerted action is needed: to all countries and international organizations, start by reviewing available resources (here) and stay tuned for future activities and updated figures from countries working jointly with UNCTAD and UNODC. 2030 Agenda is a global commitment by all, and we all need to step up and scale up our joint work on measuring and curbing IFFs.

Notes

1. Selecting data series to reflect SDG indicator 16.4.1 on SDG Indicators Database: https://unstats.un.org/sdgs/dataportal/database returns Indicator 16.4.1 series: Total value of inward illicit financial flows (DI_ILL_IN) and Total value of outward illicit financial flows (DI_ILL_OUT).
2. See also https://unctad.org/news/first-ever-official-data-illicit-financial-flows-now-available. Data sourced from UNODC work in Colombia and Peru -—
   – ‒
   - –
   —--—
   – ‒
   - –
   —--—
   – ‒
   - –
   —--—
   – ‒
   - –
   —-.
3. In Mexico, the value of IFFs from heroin exports in 2018 was comparable to that of beer exports, amounting to over $4 billion USD -—
   – ‒
   - –
   —--—
   – ‒
   - –
   —--—
   – ‒
   - –
   —--—
   – ‒
   - –
   —-. In Afghanistan, opiates are the most valuable commodity exported, potentially generating IFFs from a value estimated between 1.5 to 2.5 times that of total legal commodity exports in 2021 -—
   – ‒
   - –
   —--—
   – ‒
   - –
   —--—
   – ‒
   - –
   —--—
   – ‒
   - –
   —-. In Myanmar, opiate exports have generated IFFs averaging between 3% and 7.5% of total legal exports between 2018 and 2021, or a value comparable to legal corn exports -—
   – ‒
   - –
   —--—
   – ‒
   - –
   —--—
   – ‒
   - –
   —--—
   – ‒
   - –
   —-.
4. The Task Force is composed of statistical experts from Brazil, Finland, Ireland, Italy, Peru, South Africa and the United Kingdom. The Task Force also includes experts from international organisations with recognised expertise in this field: ECA, ECLACUnited Nations Economic Commission for Latin America and the Caribbean, ESCAP, Eurostat, IMFInternational Monetary Fund, OECDOrganization for Economic Cooperation and Development, UNSDUnited Nations Statistics Division, WCOWorld Customs Organization, UNCTAD and UNODC.
5. https://unctad.org/news/counting-cost-illicit-financial-flows; https://unctad.org/news/un-project-supports-egypt-measure-illicit-financial-flows
6. A/RES/77/154 resolution ‘Promotion of international cooperation to combat illicit financial flows and strengthen good practices on assets return to foster sustainable development’ “Invites all institutions involved in measuring and reporting on illicit financial flows to use the statistical concepts and methods to estimate illicit financial flows, and encourages all Member States to report on Sustainable Development Goal indicator 16.4.1, using the methodology adopted by the Statistical Commission, and calls upon the United Nations system entities, international organizations and donors to work in coordination with the custodian agencies to train national statistical offices and other entities in charge of reporting on illicit financial flows on these agreed methods”.

References

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Donec tincidunt vel mauris a dignissim. Curabitur sodales nunc id vestibulum tempor. Nunc tortor orci, sodales nec eros eget.
Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Donec tincidunt vel mauris a dignissim. Curabitur sodales nunc id vestibulum tempor. Nunc tortor orci, sodales nec eros eget.
Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Donec tincidunt vel mauris a dignissim. Curabitur sodales nunc id vestibulum tempor. Nunc tortor orci, sodales nec eros eget.
Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Donec tincidunt vel mauris a dignissim. Curabitur sodales nunc id vestibulum tempor. Nunc tortor orci, sodales nec eros eget.
Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Donec tincidunt vel mauris a dignissim. Curabitur sodales nunc id vestibulum tempor. Nunc tortor orci, sodales nec eros eget.