First official estimates on illicit financial flows

SDG indicators
Goal 16: Peace, justice and strong institutions

SDG target 16.4: By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime
SDG indicator 16.4.1: Total value of inward and outward illicit financial flows (in current United States dollars) (Tier II)

IFFs 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-19 pandemic, 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 SDGs remains fragile when IFFs continue to drain resources that would be needed to fulfil human rights and pursue sustainable development. In Bridgetown, member States -—
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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 SDG indicator 16.4.1, “total value of inward and outward illicit financial flows”, are not yet comprehensively reported -—
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. 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 UNODC 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 misinvoicing by analysing asymmetries in customs reporting between countries (PCM+) or abnormal prices in transaction-level customs data (PFM+) using UNCTAD’s -—
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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.

Map 1. Preliminary estimates from pilot studies indicate a significant IFFs presence
(US$ millions, annual average)

Source: UNODC -—
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; UNCTAD and United Nations Economic Commission for Africa -—
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; and UNCTAD calculations based on data from UNCTADstat -—
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Note: This figure shows first official estimates for different types of crime-related IFFs and early unofficial estimates resulting from 2021-2022 country pilots using different methods to measure tax and commercial IFFs from trade misinvoicing. Annual averages are shown (and ranges, where these not available) in US$ million for indicated period covered. Where applicable (tax and commercial IFFs), a share of IFFs in total merchandise trade is shown in percentage. Direct comparison between countries’ preliminary estimates and between different types of IFFs is not possible. Preliminary estimates are likely to be refined and extended by national authorities in the future.

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 Mexico2. 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)3, 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.4

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.5 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 Nepal heroin trafficking generated IFFs similar to the value of imports of pharmaceutical goods6.

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 -—
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and inspecting remittance flows or tax compliance -—
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Map 2. 22 countries have studied the measurement of IFFs in 2018-2022 and nine countries will do so in 2023-2026

Source: UNCTAD and UNODC

Note: Situation reflected on the map as in May 2023.

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 IFFs7 and engaged in a series of expert consultations since 2017. The result is reflected in the -—
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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 -—
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, based on concepts and standards approved by the IAEG-SDGs in October 2020. The Framework identifies the main types of activities that may generate IFFs (Figure 1) 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 1. Four main types of illicit financial flows

Source: -—
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IFFs need to be classified using a discrete, exhaustive and mutually exclusive statistical classification aligned with existing statistical frameworks and principles. The ICCS -—
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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 2):

  • 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 SNA.
Figure 2. A decision tree helps to identify and classify IFFs

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

★ UNCTAD in Action ★

UNCTAD leads global efforts to measure illicit financial flows jointly with UNODC and United Nations Regional Commissions

Between 2017 and 2023, UNCTAD and UNODC held 21 expert meetings, including Task Force meetings, to develop concepts and methods to measure IFFs. This collaborative effort to enable estimating of progress towards SDG 16.4.1 has involved over 500 experts (Table 1). Additionally, UNCTAD organised sessions at 11 international events (with 868 participants) to raise awareness on concepts and methods on tax and commercial IFFs, often accompanied by UNODC to discuss crime-related IFFs. These events include the ESCAP Asia-Pacific Stats Café Series, the UNCTAD Illicit Trade Forum, the Pan African Conference on IFFs and Taxation, as well as side events at the United Nations Statistical Commission and at the Financing for Development Forum.

Table 1. 32 events to develop methods to measure IFFs reached over 1 400 experts
Type of meetingNumber of meetingsTotal number of participantsTotal share of women
UNCTAD-UNODC Expert consultations312632%
UNCTAD-UNODC Task force meetings1841338%
UNCTAD-UNODC organised sessions in events11868N/A
Total321 40735%

Source: UNCTAD, MPED, ECA and ESCAP.

Note: For some events organized by other organizations or where part of a larger event, the exact number of participants or the exact share of women were unavailable. Approximations, when appropriate, were made.

Between 2021 and June 2023, UNCTAD and its regional partners, ECA and ESCAP, held 39 national workshops in Africa and Asia. In total, 1 919 participants were trained, of whom 29 per cent women. These include five regional workshops, 11 national kick-off workshops, 28 national training events and an interregional training workshop for both regions.

Table 2. 45 events to train over 1 900 experts to measure IFFs
Type of workshopNumber of workshopsTotal number of participantsTotal share of women
Regional workshop563716%
National kick-off workshop1130232%
National trainong workshop2874421%
Interregional training workshop123635%
Total451 91929%

Source: UNCTAD, MPED, ECA and ESCAP.

Note: The six-day online interregional training had an overall participation of 1 185 participants, from 146 to 236 participants per day. To avoid double counting between the days, a conservative estimate of the maximum value for one day has been used as a total number of participants while it is likely that some people participated only on some days making the real total number larger. The share of women can be calculated for registered participants only, which amounts to 35 per cent on average per day. Similarly, for other events, share of events is calculated based on data available.

The feedback from participants of the inter-regional training events revealed that 72 per cent considered knowledge gained in the workshop useful for their work and more than 90 per cent found that the resource persons demonstrated mastery of the subject. As a result of these activities nine countries have already produced estimates of selected types of tax and commercial IFFs and many established new collaboration mechanisms between agencies to track and curb IFFs8. Repeated requests for national and country-specific training have been voiced, indicating the need for further support to member states.

…interviews with country focal points have indicated that the project has made relevant authorities and technical staff aware of the relevance and feasibility of estimating IFFs, in addition to enhancing cross-department collaboration and improving the quality of information related to IFFs.Independent evaluation of the UNCTAD-ECA Project on Illicit Financial Flows in Africa

For more information on the independent evaluation of the UNCTAD-ECA Project on “Defining, estimating and disseminating statistics on Illicit Financial Flows in Africa” see -—
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National institutions track IFFs together

All countries involved in measuring tax and commercial IFFs formed a technical working group to bring together key experts from across government agencies and sometimes other stakeholders to address IFFs. These inter-agency groups often include national statistical offices, central banks, tax and customs authorities, relevant ministries including international cooperation, financial intelligence units etc (Figure 3). The composition depends on the national institutional set-up. IFFs leave traces in many administrative and statistical records. The data scattered across various institutions need to be pooled together to estimate IFFs.

To ensure provision of objective information for SDG reporting, the national statistical office is often involved to support and coordinate work, as foreseen in the General Assembly resolution A/RES/71/313 and the Fundamental Principles of Official Statistics -—
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Figure 3. Multiple national stakeholders address tax and commercial illicit financial flows
(Number of countries where the institution was engaged)

Source: UNCTAD, MPED, ECA and ESCAP

Note: The data indicate institutions involved in the measurement exercise in 14 countries

Each involved agency has their distinct mandates and expertise in addressing IFFs. This may include data or knowledge about key data gaps. In the first pilots to measure tax and commercial IFFs, countries were invited to test one or two methods considering the complexity of the exercise. Countries chose the method based on the expected relevance of the type of IFF and data availability for measuring it in the country. UNCTAD offered a suite of six methods for testing (Table 3). Of the 12 countries in Africa and two in Asia, all tested measurement of trade misinvoicing: all countries applied method #1, the partner country method plus (PCM+), and ten applied the price filter method plus (PFM+). Far fewer countries applied the remaining methods to measure multinational profit shifting and offshore wealth and faced significant challenges in arriving at estimates. Available preliminary estimates are shown in Map 1.

Table 3. Methods to estimate IFFs from trade misinvoicing tested by all countries
MethodNumber of countries applied itEstimates produced – descriptiveEstimates produced – numeric
#1: Partner Country Method Plus1459
#2: Price Filter Method Plus1027
#3: Global distribution of MNEs’ profits and corporate taxes320
#4: MNE vs comparable non-MNE profit shifting110
#5: Flows of undeclared offshore assets indicator*101
#6: Flows of offshore financial wealth by country101

Source: UNCTAD, MPED, ECA and ESCAP.

* Used alternative/complementary method of tax compliance by individuals.

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 -—
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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.9

Figure 4. UNCTAD and UNODC have engaged in close collaboration with partners to advance work on SDG indicator 16.4.1

Source: UNCTAD and UNODC

Estimating IFFs will not only provide clarity on the scope of IFFs, but also help improve the quality of key macroeconomic statistics, such as GDP, by improving their coverage and exhaustiveness. Standardized concepts and full alignment with other relevant frameworks, such as SNA and BoP, 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 -—
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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 resilience 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. UNODC estimates based on pilot study conducted in Mexico by UNODC-INEGI Center of Excellence for Statistical Information on Government, Crime, Victimization and Justice. See also -—
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  3. Pilot estimates conducted by UNODC Colombia Country Office. See also -—
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  4. See also https://unctad.org/news/first-ever-official-data-illicit-financial-flows-now-available. Data sourced from UNODC work in Peru -—
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  5. In Mexico, the value of IFFs from heroin exports in 2018 was comparable to that of beer exports, amounting to over $4 billion USD -—
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    . 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 -—
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    . 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 -—
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  6. Pilot estimates conducted by UNODC in Nepal. See also -—
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  7. 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, ECLAC, ESCAP, Eurostat, IMF, OECD, UNSD, WCO, UNCTAD and UNODC.
  8. https://unctad.org/news/counting-cost-illicit-financial-flows; https://unctad.org/news/un-project-supports-egypt-measure-illicit-financial-flows
  9. 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

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