Illicit financial flows
Encyclopedia
Illicit financial flows, in economics
, refers to a form of illegal capital flight
and occurs when money is illegally earned, transferred, or utilized. This money is intended to disappear from any record in the country of origin, and earnings on the stock of illicit financial flows outside of a country do not normally return to the country of origin. Illicit financial flows can be generated through a number of means that are not revealed in national accounts or balance of payments
figures, including trade mispricing, bulk cash movements, hawala transactions, smuggling and more.
Although the term illicit financial flows is closely related to capital flight
, they differ in one major respect. Capital flight is an expression that places virtually the whole of the problem upon the developing countries out of which the money comes. It suggests, without quite saying so, that it is almost entirely their responsibility to address and resolve the concern. The expression illicit financial flows does a better job of clarifying that this phenomenon is a two-way street.
There are several economic models used to provide estimates of illicit financial flows and capital flight. The two most common methods are the World Bank Residual Model
and the DOTS based Trade Mispricing Model, which uses the IMF's Direction of Trade Statistics (DOTS) database to analyze discrepancies in trade statistics between partner countries. Another way to estimate trade mispricing is with the IPPS-based Model, which was developed by John Zdanowicz of Florida International University. This method uses individual import and export transactions of the United States with the rest of the world to find inconsistencies in export and import prices. Economists also use Hot money
(Narrow) Method and the Dooley Method in these estimates.
A 2008 paper, authorized by Raymond Baker, Director of the Global Financial Integrity
and written by Dev Kar and Devon Cartwright-Smith, estimated illicit financial flows "out of developing countries are some $850 billion to $1 trillion a year." This study also found that China
, Saudi Arabia
, and Mexico
accounted for the three largest shares of worldwide illicit financial flows
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, refers to a form of illegal capital flight
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...
and occurs when money is illegally earned, transferred, or utilized. This money is intended to disappear from any record in the country of origin, and earnings on the stock of illicit financial flows outside of a country do not normally return to the country of origin. Illicit financial flows can be generated through a number of means that are not revealed in national accounts or balance of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...
figures, including trade mispricing, bulk cash movements, hawala transactions, smuggling and more.
Although the term illicit financial flows is closely related to capital flight
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...
, they differ in one major respect. Capital flight is an expression that places virtually the whole of the problem upon the developing countries out of which the money comes. It suggests, without quite saying so, that it is almost entirely their responsibility to address and resolve the concern. The expression illicit financial flows does a better job of clarifying that this phenomenon is a two-way street.
There are several economic models used to provide estimates of illicit financial flows and capital flight. The two most common methods are the World Bank Residual Model
World Bank Residual Model
The World Bank Residual Model, in economics, refers to a widely used model by economists to measure illicit financial flows. The data sources for this analysis are the large-scale macroeconomic databases maintained by the International Monetary Fund and the World Bank.In order to estimate illicit...
and the DOTS based Trade Mispricing Model, which uses the IMF's Direction of Trade Statistics (DOTS) database to analyze discrepancies in trade statistics between partner countries. Another way to estimate trade mispricing is with the IPPS-based Model, which was developed by John Zdanowicz of Florida International University. This method uses individual import and export transactions of the United States with the rest of the world to find inconsistencies in export and import prices. Economists also use Hot money
Hot money
Hot money is a term that is most commonly used in financial markets to refer to the flow of funds from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts...
(Narrow) Method and the Dooley Method in these estimates.
A 2008 paper, authorized by Raymond Baker, Director of the Global Financial Integrity
Global Financial Integrity
Global Financial Integrity is a non-profit, research and advocacy organization located in Washington, DC. GFI advocates and conducts research on national and multilateral policies, safeguards, and agreements aimed at curtailing illicit financial flows and enhancing global development and security...
and written by Dev Kar and Devon Cartwright-Smith, estimated illicit financial flows "out of developing countries are some $850 billion to $1 trillion a year." This study also found that China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
, Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
, and Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
accounted for the three largest shares of worldwide illicit financial flows
See also
- Capital flightCapital flightCapital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...
- Global Financial IntegrityGlobal Financial IntegrityGlobal Financial Integrity is a non-profit, research and advocacy organization located in Washington, DC. GFI advocates and conducts research on national and multilateral policies, safeguards, and agreements aimed at curtailing illicit financial flows and enhancing global development and security...
- Money launderingMoney launderingMoney laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
- Raymond W. BakerRaymond W. BakerRaymond Baker is the director of Global Financial Integrity, a research and advocacy organization in Washington, DC, and director of the Task Force on Financial Integrity and Economic Development, an international private-public coalition of civil society groups and governments working on the issue...
- Task Force on Financial Integrity and Economic DevelopmentTask Force on Financial Integrity and Economic DevelopmentThe Task Force on Financial Integrity and Economic Development is a unique global coalition of civil society organizations and more than 50 governments working together to address inequalities in the financial system that penalize billions of people...