Trade Estimates

International trade plays an important role in some of the most prominent studies aimed at estimating the scale of illicit financial flows (IFF). This chapter provides a critical survey of the leading estimates of trade-based IFF, addressing separately the strengths and weaknesses of methodologies that rely on data at the country, commodity and transaction level. The current state of data availability makes a trade-off between coverage and quality of estimation inevitable, and at present no approach in this area yields sufficiently a strong, global series. There are a number of promising areas for future development, but unfortunate trade-offs will remain unless there is a step change in data availability.

International Corporate Tax Avoidance

exy2Tax avoidance by multinational companies is the most widely recognised tax abuse, and also the most heavily researched aspect of illicit financial flows (IFF). This chapter provides a critical survey of the leading estimates, highlighting the range of methodological innovation and alternative data. While the global range of estimated revenue losses is wide (between around $200bn and $600bn a year), consistent findings include that it is only a handful of jurisdictions that benefit from profit shifting at the expense of all others; and that lower-income countries lose the highest share of current tax revenues. While there is no single, perfect estimate in the literature, it does point the way to a potential indicator for the UN target.

New Proposals for IFF Indicators in the Sustainable Development Goals

The search for indicators for the UN target to reduce illicit financial flows (IFF) is complicated by data issues and the difficulties of estimating what is deliberately hidden. In this chapter, we propose our two preferred indicators, that address instead the measurable consequences of IFF. In this chapter we lay out the two measures, and evaluate their strengths and weaknesses including in respect of data availability and potential work-arounds at national level. Both measures use relatively newly available data to establish scale: in the first case, the scale of the misalignment between where multinational companies carry out their economic activity, and where they are ultimately able to declare the resulting profit; and in the second case, the scale of offshore wealth which is undeclared to tax authorities.

History and overview of ‘IFF’

This chapter provides a history of the rise of the term ‘illicit financial flows’ (IFF), and the emergence since 2000 of a global tax justice movement. As a broad umbrella term, the phrase was useful in ensuring the political consensus behind the establishment of a target to curtail IFF in the UN Sustainable Development Goals. But that consensus has hidden, to some extent, disagreements over the relative priorities—from the old view of corruption as a problem predominantly of lower-income countries, to the more recent recognition of the central role of typically high-income financial secrecy jurisdictions. Disagreements over political priority have played out as disputes over the definition of IFF, and over the quality of estimates of scale. This chapter provides a comprehensive typology of IFF, and summarises the evidence on the importance of the phenomenon for human development.

Introduction

Global agreement in 2015 on the UN Sustainable Development Goals framework, to guide worldwide progress in the period to 2030, includes for the first time a target to reduce illicit financial flows (IFF). But without agreement on methodologies to measure the scale of IFF, it is not clear that global, regional or national efforts have any prospect of success. This book provides a critical survey of the leading methodologies and data for estimating illicit flows, with particular attention to tax-related IFF. This chapter lays out the structure of the book, and outlines the approach taken.

Conclusion

This book asks: Which flows fall under the umbrella term, ‘illicit financial flows’ (IFF)? How will progress in reducing them be measured? How will that progress be achieved? And who is ultimately accountable? In this closing chapter, we summarise the findings of the volume on these questions, including in respect of the quality of existing estimates, their methodology and data and the likely scope for progress; and on the potential for scale and non-scale indicators of illicit financial flows for global targets, including the Sustainable Development Goals, and for national policy prioritisation. With political progress on the SDG target likely to be difficult, we also identify other opportunities to move the IFF agenda forward in the UN context.

Beyond Scale

This chapter lays out the alternatives to measures of the scale of illicit financial flows (IFF). These include policy-based indicators offering the scope to track global process on transparency measures that are key to curtailing illicit financial flows, and also offer the jurisdiction-level disaggregation to support accountability for policies that maintain opacity; and two related sets of IFF risk measure, which extend the logic of evaluating IFF-facilitating secrecy jurisdictions, to evaluate the exposure of each country to the IFF risks of secrecy elsewhere. While these measures do not offer the single, dollar measure of IFF that the UN target requires, they have the potential to support national, regional and international policymakers in prioritising their responses and ensuring appropriate accountability.

Capital and Wealth Estimates

Capital account-based estimates form an important part of the literature on the scale of illicit financial flows (IFF), along with related approaches to estimate the scale of wealth held offshore and undeclared for tax purposes. This chapter provides a critical survey of the leading estimates. It is clear that offshore wealth is both a significant element in IFF, and offers a valuable avenue to construct indicators of scale. At the same time, however, current estimates of this deliberately hidden quantum are characterised by a high degree of uncertainty, or are based on necessarily partial data sources. But the importance of the area and the relatively high quality of estimates, combined with reasons to expect improving data availability, suggest that offshore wealth should form a core element of IFF scale indicators.