Foto: Sabine Löwer/Creative Commons/ CC BY 2.0

The challenges of illicit economies and financial flows

Published: 2 May 2018

– Illicit economies pitch the advantages of borderless transport, communications and financial flows against legal systems that remain bound by the confines of the Westphalian nation state. What to do? 

The conference ”Addressing the development implications of illicit economies” took place at SOAS in London 19-20 April. Illicit economies are drivers of increased violence, corruption, exploitation and destruction of natural resources and failures in governance, however, it also ensures the livelihood for many people around the world. Thus, the main question discussed at the conference was how we can cut down on illicit economic activity while at the same time avoiding pushing people into extreme poverty.

Illicit economies can roughly be split into a domestic illicit economy, where the illicit activity is limited to the boundaries of the community or country, and the transnational illicit economy, where there is illegal export/import of goods and money laundering. The main challenges addressed here will be the cross-border transnational crime.

The report “Transnational Crime and the developing world” from Global Financial Integrity (GFI) estimates the value of transnational crime/illicit economy to be on average between $1.6 trillion and $2.2 trillion annually. The categories are transnational crime includes, drug trafficking, arms, humans, cultural property, illegal fishing, illegal logging, illegal mining.

Borderless financial flows VS Westphalian nation states

A large part of the illicit economic activity takes place in less developed countries. However, the illicit economy system is a worldwide one, connected through the widespread use of illicit financial flows (IFFs) which can be defined as money that is illegally earned, transferred or utilized.

– Illicit economies pitch the advantages of borderless transport, communications and financial flows against legal systems that remain bound by the confines of the Westphalian nation state. And whilst the impact of organized crime may be most visible in lower income countries, the money laundering, the professional services and, in many cases, the demand that facilitates such activities, places rich and poor societies together in the global web that is 21st century organized crime, says Alex Chance, PhD candidate at Trinity College Dublin.

Abena Afari from Christian Aid Ghana addressed the impact of illicit financial flows on developing countries:

–  Some of the effects of illicit financial outflows on African economies is the reduced tax collection, decreasing investments inflows and a worsening of poverty. Such outflows, which also undermines the rule of law, stifle trade and worsen macroeconomic conditions, are facilitated by some 60 international tax havens and secrecy jurisdictions.

There have been efforts to regulate the financial sector in Africa to hinder the illicit financial flows, although Research Fellow Murray Ackman from the Institute for Economics and Peace, argued that the legislation addressing Anti-Money Laundering and Combating the Financing of Terrorism (AML and CTF) have not been successfully implemented in several African countries: 

– The attempts to restrict financial flows to terrorist groups has also restricted other legal financial flows. There has been a notable slowdown in banking activity in several countries as a result of constraints placed on the banking sector and money transfers. This has influenced business operations, sending of remittances, mobile money as well as daily economic activity.

The challenge thus lies between cutting down on illicit financial flows which facilitate the illicit economy, while at the same time aim for well targeted policies which has the desired effect. A step in the right direction is the UK government decision on May 1, 2018 to impose public ownership registers for all companies in British territories. Even though we must wait to see how this will be implemented, it without a doubt indicates an increased political will to tackle illicit financial flows, which again will impede the illicit economy.

To avoid the further harms to communities that depend on the illicit economy, Christoph Heuser, PhD candidate with the German Institute of Global and Area Studies, emphasizes the importance of cooperation between communities and governance on policy. If not, they will have a perception of having a normative order imposed on them instead of being involved in the transition, which then could create instability, he says.