Illicit Financial Flows from Developing Countries

Illicit Financial Flows from Developing Countries

Measuring OECD Responses You do not have access to this content

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Author(s):
OECD
Publication Date :
23 Apr 2014
Pages :
128
ISBN :
9789264203501 (PDF) ; 9789264203495 (print)
DOI :
10.1787/9789264203501-en

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This publication identifies the main areas of weakness and potential areas for action to combat money-laundering, tax evasion, foreign bribery, and to identify, freeze and return stolen assets. It also looks at the role of development agencies and finds that the potential returns to developing countries from using ODA on issues like combating tax evasion or asset recovery are significant.  Finally, it identifies some opportunities for a scaled-up role for development agencies.

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    Foreword and Acknowledgements

    The issue of illicit financial flows (IFFs) is at the forefront of the international agenda. Governments worldwide are joining forces to combat money laundering, tax evasion and international bribery, which make up the bulk of IFFs. Although the exact scale of the problem is unknown, IFFs have devastating effects on developing countries. Instead of attempting to quantify precisely what is, by definition, a hidden activity, now is the time to determine where public funds should best be targeted to make the most impact.

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    Acronyms and abbreviations
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    Executive summary

    Illicit financial flows originating in developing countries – from money laundering, tax evasion and bribery – often reach OECD countries. Recognising these risks, OECD countries are taking action to avoid being safe havens for illegal money.

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    What do illicit financial flows mean for developing countries?

    Illicit financial flows (IFFs) are generated by methods, practices and crimes aiming to transfer financial capital out of a country in contravention of national or international laws. The funds strip urgently needed resources from developing countries, which then lack means to finance their development efforts. Illicit financial flows generally fall in one of four categories: money laundering, bribery and tax evasion by international companies, and trade mispricing. There are many international initiatives underway that aim at combatting illicit financial flows. OECD countries have a large role in this agenda, as OECD country systems in this area often exhibit weaknesses.

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    Combating money laundering

    Anti-money laundering and counter terrorist financing regimes are among the most effective tools for combating financial crime and illicit financial flows. This chapter looks at the most recent reviews of OECD country compliance with the 2003 Financial Action Task Force (FATF) Recommendations in these two areas. In order to stem illicit financial flows and to avoid becoming safe havens for illicit financial flows, as well as to be in line with the revised 2012 FATF Recommendations, OECD countries should begin by adopting a risk-based approach to combating money laundering and terrorist financing. Based on the analysis of areas where countries have faced the biggest difficulties in complying with the 2003 FATF standards, the following may deserve particular attention: i) strengthening implementation of customer due diligence procedures; ii) improving compliance with beneficial ownership requirements; iii) ensuring effective regulation, supervision and sanctions, including for non-financial businesses and professions, and trust and company service providers.

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    Tax evasion and illicit financial flows

    Effective exchange of information between tax authorities is critical for combating all forms of international tax evasion and avoidance. OECD countries are generally compliant on standards for the effective exchange of tax information as set down by the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum). Cross-border agreements to assist developing countries in collecting taxes could provide critical support in recovering the taxes legally due. Developing countries need to continue to expand their network of agreements with relevant jurisdictions and they will need the technical capacity and political will to actively pursue international tax evasion through exchanging information. While the existing standard is based on exchange on request, the G20 is committed to automatic exchange of information and significant capacity building support for developing countries is needed in this area. Donors should play a role by helping to build the necessary technical expertise in developing countries to comply with international standards and to detect and pursue tax crimes effectively.

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    International bribery and illicit financial flows

    An estimated USD 1 trillion is paid each year in bribes, and bribery in the developing world may amount to the equivalent of 15-30% of all official development assistance. Reducing bribery reduces the opportunities for illicit gains and hence illicit financial flows. The OECD Anti-Bribery Convention is the first and only legally binding instrument to focus on tackling the supply side: the bribe payers. Progress in implementing the convention has been mixed among OECD member countries. Monitoring of the convention is encouraging improved compliance amongst signatories through a phased system of peer reviews. Reviews highlight both examples of good practice that could be adopted by other member countries and some common concerns. All signatories to the convention should signal that the fight against bribery is a political priority and put the mechanisms in place to uncover it, including effective protection for whistleblowers. Penalties should be harsh enough to form an effective deterrent and signal to the entire business community that bribery is no longer an option.

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    Freezing, recovering and repatriating stolen assets

    Progress on recovering and repatriating stolen assets to developing countries has been modest. OECD countries can do more to signal that asset recovery is a political priority and to put in place the necessary legal and institutional framework to repatriate assets. This means dedicating more resources to legal and technical expertise to handle complex and costly cases involving developing countries. It also means adopting legal best practice, such as allowing for rapid freezing of assets when requested to do so by a foreign jurisdiction; directly enforcing foreign confiscation orders; allowing for non conviction-based asset confiscation; recognising foreign non conviction-based forfeiture orders; allowing foreign countries to initiate civil actions in domestic courts; and where appropriate, allowing compensation, restitution or other damages to benefit a foreign jurisdiction. In turn, developing countries must make it a priority to engage in effective mutual legal assistance, provide the necessary information to investigating authorities with which they co-operate, and proactively pursue and sanction their nationals implicated in corruption cases.

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    Role for development agencies in combating illicit financial flows from developing countries

    Combating illicit financial flows (IFFs) from developing countries is an increasingly important area of work for development agencies. This chapter highlights current initiatives by bilateral development agencies to tackle corruption and money laundering, reduce tax evasion and avoidance, and support civil society efforts to deal with IFFs. The scale of donor support is relatively modest and development agencies are not exploring the full range of options for supporting this complex agenda. Development agencies could play a greater role mainly on the ground in developing countries where they must continue to help build technical expertise and the capacity to negotiate and use exchange of information agreements, tackle abusive transfer pricing and investigate economic crime. They should also support civil society organisations in holding governments to account and generating pressure for reforms. They could also support further research into illicit financial flows, maintain political momentum within OECD countries to ensure that current reforms have a development dimension and undertake proper risk assessment to target aid to where it is most needed.

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