Myths and realities of illicit financial flows

Every day, billions in international currencies flow in and out of accounts across the world. Money from crime, fraud, drug trafficking, smuggling, corruption, terrorism and more has created one of the world’s largest industries. This industry is said to be worth 1.5 trillion dollars a year and is called money laundering.

Transnational organized crime (TOC) is considered as one of the major threats to human security, impeding the social, economic, political and cultural development of societies worldwide. It is a multi-faceted phenomenon and has manifested itself in different activities, among others, drug trafficking, trafficking in human beings; trafficking in firearms; smuggling of migrants; money laundering; etc. In particular drug trafficking is one of the main activities of organized crime groups, generating enormous profits.

Transnational Organized Crime (TOC)

Transnational Organized Crime (TOC)

As globalization has expanded international trade, so the range of organized crime activities has broadened and diversified. The traditional hierarchical forms of organized crime groups have diminished; replaced with loose networks who work together in order to exploit new market opportunities. For example organized crime groups involved in drug trafficking are commonly engaged in smuggling of other illegal goods. The links between drug trafficking and other forms of transnational organized crime calls for a more integrated approach to address this nexus.

The UNO estimate for the illicit financial flow amounts (generated by the transnational organized crime market available for laundering through the financial system) would be equivalent to 2.7% of global GDP (2.1%-4%) or US$1.6 trillion in 2009. Expressed as a proportion of national GDP, all crime proceeds appear to be generally higher in developing countries and tend to be laundered abroad more frequently. The ‘interception rate’ for anti-money-laundering efforts at the global level remains low. Globally, it appears that much less than 1% (probably around 0.2%) of the proceeds of crime laundered via the financial system are seized and frozen.

Criminal funds, even if invested in the legal economy, may create a number of problems, from distortions of the resource allocation, to ‘crowding out’ licit sectors and undermining the reputation of local institutions, which, in turn, can hamper investment and economic growth. The situation is less clear-cut for financial centres receiving illicit funds, but the long-term consequences may be negative if they do not actively fight money-laundering.

Money laundering schemas do not only affect the financial sector but all other economical sectors, since the deception schema of illicit financial flows are more and more sophisticated entering and mixing themselves into legal economical activities. For example one of the growing segment affected by this phenomenon is the eco-sector of alternative energy and recycling.

According to the PWC survey 2011 on economic crimes it appears that the perception of the private sector regarding economic crimes will have a strong increase in the cyber-criminality dimension. Compared to the UNO report this seems to be a erroneous perception since in the global problematic cyber criminality remains a minor threat. It is our opinion that such wrong perception could lead to useless countermeasures with devastating effects.

(A. Galli)

GFI Director Raymond Baker Explains Illicit Financial Flows and their Impact on Development
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