from The Internationalist and International Institutions and Global Governance Program

Taking Stock of the Global Fight Against Illicit Financial Flows

A cash withdrawal of Ethiopian Birr at a bank in Addis Ababa. Ethiopia faces a number of significant vulnerabilities that pose continual and increasing risks of money laundering and terrorist financing. Neil Thomas/Getty Images

A growing number of actors have joined the fight against dirty money. The success of global efforts to combat illicit financial flows, however, remains uncertain. 

October 24, 2018

A cash withdrawal of Ethiopian Birr at a bank in Addis Ababa. Ethiopia faces a number of significant vulnerabilities that pose continual and increasing risks of money laundering and terrorist financing. Neil Thomas/Getty Images
Blog Post
Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

The following is a guest post by Miles Kahler, CFR senior fellow for global governance, and Kyle L. Evanoff, CFR research associate in international economics and U.S. foreign policy.

Financial globalization has produced a world of large-scale cross-border flows of capital. Among those rivers of beneficial finance are concealed substantial streams of dirty money, money linked to illegal activities, from drug trafficking and terrorism to corruption and tax evasion. The networks that sustain these flows may originate with those committing predicate crimes, but they extend to financial institutions, corporate service providers, and a host of other complicit intermediaries. Dismantling this web of illicit financial flows (IFFs) has become an international priority in recent decades, at first because of a demand to combat the associated crimes but also out of recognition that IFFs undermine good governance and rule of law, hinder economic development, threaten financial stability, and reduce international security. The importance of curbing IFFs was confirmed in Goal 16 of the UN 2030 Agenda for Sustainable Development.

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Transnational Crime

Global Governance

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Development

A growing global coalition has promoted combating IFFs on the international agenda. National governments, nongovernmental organizations, international organizations (some, like the Financial Action Task Force, created to counteract dirty money), and private financial institutions have all enlisted. As the contributors to Global Governance to Combat Illicit Financial Flows: Measurement, Evaluation, Innovation make clear, however, agreement on the importance of combating dirty money has not created consensus on other important questions. As Maya Forstater describes [PDF], one disagreement concerns the definition of illicit financial flows—are they rooted in illegality or should the label also apply to financial flows perceived as harmful to global welfare? Data on the scale of these flows is another major uncertainty, one that derives from the incentives to conceal criminal transactions. That uncertainty helps in attracting political attention to the issue, since outsized numbers make headlines, but unreliable statistics can also undermine confidence in global efforts to combat IFFs.

Imprecise measurement also hinders assessment of policies and programs to combat IFFs. For this reason, methods aimed at evaluating the impact of anti-IFF policies on compliance are often more useful than those that attempt to estimate the effects of policy on the volume of aggregate flows. Michael G. Findley describes [PDF] the insights that innovative impact evaluation can produce, documenting the weak influence of international money-laundering standards on actual compliance and the importance of national enforcement in shaping private behavior.

The task of evaluation is made even more difficult by the unintended consequences of global efforts. Some of these consequences are positive: as Jodi Vittori suggests [PDF], whatever the effectiveness of these global efforts, they may have positive security spillovers in the form of intelligence gathering against terrorists and criminals. On the other hand, those concerned with the plight of poor societies plagued by conflict are troubled that efforts to stop dirty money produce de-risking on the part of financial institutions, effectively redlining populations that are already among the most marginalized in the world.

The large, diverse, and often fractious coalition targeting IFFs should be an asset in the fight against dirty money, imitating the “all hands on deck” approach to climate change mitigation and other global challenges. The risk, however, is that fragmentation and lack of coordination will prevail, producing less political attention and investment. Leveraging the full potential of the anti-IFF coalition requires innovation in global governance:  

  • Definition and measurement would benefit from disaggregation of IFFs, despite the incentives to reach for the largest possible figure (and greatest political effect). Different predicate crimes and different channels mean that a more discriminating set of measures will be more effective in both estimating illicit flows and targeting the harms they cause.
  • An ever-expanding agenda risks lowering the effectiveness of anti-IFF measures. Tax avoidance and profit-shifting (common strategies among multinational corporations) may reduce the resources available for development and contribute to inequality, but they are not illegal. The anti-IFF coalition should recognize that reducing these practices will require a distinct arsenal of international cooperative measures. Given limited resources and political leverage, efforts to combat criminal activities should have priority.
  • Better measurement of disaggregated IFFs should be matched by greater efforts to evaluate existing measures to combat those flows. Far too much attention has been paid to “checking boxes” and harmonizing national standards of dubious efficacy, rather than determining which international and national policies have measurable effects on outcomes—both IFFs and the global “bads” that they produce. Better evaluation could also lower the unintended, negative consequences of anti-IFF measures that are ineffective.
  • Attention to technological change is essential for future success. Advances in artificial intelligence (AI) may permit more discriminating and rapid identification of dirty money in the midst of large cross-border flows. At the same time, cryptocurrencies, as described [PDF] by Yaya J. Fanusie, provide yet more underground channels for illicit flows, and could pose major difficulties for  national enforcement agencies if adoption rates increase. Quantum computing, another disruptive (albeit immature) technology, threatens current modes of encryption and thus the integrity of digital finance. The full downstream effects of these and other emerging technologies remain murky; the need for greater technical expertise, however, is clear.
  • Above all, treat measures to combat IFFs and their associated ills as a global issue. Too often, policymakers in the industrialized world have viewed these efforts as primarily the responsibility of governments in the developing world, which has been misidentified as the source of IFFs. The rise of kleptocracy and corruption on the anti-IFF agenda has made clear that IFFs can only cross borders with the collaboration of a host of intermediaries in the rich countries, which too often view themselves as immune to corruption. A centerpiece of such steps are efforts to enforce transparency of beneficial ownership, a major concern in the natural resources industries, as described [PDF] by Erica Westenberg. Those who benefit from IFFs will resist such measures. Moreover, the political incentives for curbing corruption or assisting development through such anti-IFF measures as the recovery of stolen assets remain too slender. The anti-IFF coalition must continue to redress this imbalance of political influence, supporting those whose interests are harmed by the flow of dirty money.

More on:

Transnational Crime

Global Governance

International Finance

Corruption

Development

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