Illicit financial flows
Illicit financial flows, in economics, are a form of illegal capital flight that occurs when money is illegally earned, transferred, or spent. This money is intended to disappear from any record in the country of origin, and earnings on the stock of illicit financial flows outside a country generally do not return to the country of origin.
Illicit financial flows can be generated in a variety of ways that are not revealed in national accounts or balance of payments figures, including trade mispricing, bulk cash movements, hawala transactions, and smuggling.
Although illicit financial flows are 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 2013 paper, authorized by Raymond W. Baker, Director of the Global Financial Integrity estimated illicit financial flows "out of developing countries are approximately $1 trillion a year". This study also found that China, Russia, and Mexico accounted for the three largest shares of worldwide illicit financial flows.
In Pakistan estimates of illicit financial flows put over $10 billion as escaping taxation and being siphoned off outside the country. This is with nearly one third of the population living below the poverty line.
- CSIS and GFI Conference: Illicit Financial Flows: The Missing Link in Development; Panel 1 — What is Known About Illicit Financial Flows (.m3u format)
- "Illicit Financial Flows From Developing Countries: 2002-2011", Dev Kar and Brian LeBlanc, 2011.
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