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Drivers of Illicit Financial Flows

Cross-border capital movements that serve to conceal illegal activities or evade taxation have been recently placed at the centre of the international agenda. Trade misinvoicing, profit shifting by multinational corporations, and offshore bank deposits to conceal the proceeds of crime or simply to avoid taxes, all deprive national treasuries of much needed resources. Resources which could otherwise be invested in development. Vulnerable populations in developing countries are the most affected by the harmful consequences of illicit financial flows.

One clear demonstration of the growing international concern around IFFs is that, for the first time ever, the United Nations-driven renewed global development agenda incorporates a specific target related to combating illicit financial flows. The 2030 Agenda for Sustainable Development that includes 17 goals with 169 targets and is reflected in the UN Resolution on Transforming Our World (adopted by the UN General Assembly on 25 September 2015), makes specific reference to IFFs. In particular, the target 4 of Goal 16 (SDG 16.4) aims to “significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime.”

This study offers a comparative analysis of 42 countries, examining common trends among causes leading to illicit cross-border money transfers. Its findings support existing theoretical frameworks on the key drivers of illicit financial flows. Our analysis has identified that most countries that experience large transfers to offshore bank accounts are characterized by weak regulatory systems: i.e., shortcomings in the institutional capacities to detect, monitor and prosecute illicit financial flows are the primary drivers behind tax evasion.

Other factors that influence tax evasion using offshore accounts include countries’ dependence on natural resources, the corporate tax rate for domestic businesses and the levels of corruption.

Our findings also suggest that, in non-resource-endowed countries, high levels of tax evasion are driven by a combination of low regulatory capacity and high corporate tax rates. Resource-dependent economies experience high revenue losses due to a combination of low regulatory capacity and high levels of corruption While our findings cover only some of the countries under examination, the high magnitude of IFFs in other cases appear to be driven by additional conditions, which should be explored by future research. Also, further study is needed regarding the prevalence of certain types of illicit financial flows in specific contexts. Thus, more in-depth, country-level studies would enrich our understanding of the mechanisms of illicit cross-border money flows.

The present paper has been produced thanks to the support of Compagnia di San Paolo.

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