Post-2015 Consensus: IFF Perspective, Reuter

Perspective Paper

Summary

The issue of illicit financial flows came to prominence as a public policy issue with the publication of Raymond Baker’s Capitalism’s Achilles Heel in 2005, but it is striking that today we know little more about the issue. Moreover, all the current estimates of such flows are based on those of Global Financial Integrity, set up by Baker after his book was published, and use a single methodology. The state of the art on IFF is essentially pre-science, with no empirical basis for assessing the effectiveness of proposed policies. Nevertheless, Cobham does much to improve on the HLP’s proposed objective. His goals are precise and, while ambitious, are not wholly unfeasible. 

One way to look at the possible consequences for IFF is to examine the international money laundering control regime, aimed at many IFF-related phenomena. This is a relatively well-resourced and high profile effort, with all but a handful of countries claiming to have implemented the recommendations of the OECD-affiliated Financial Action Task Force (FATF). However, in practice it is striking how few countries, even among those that were progenitors of the system, such as the USA, France and the UK, have close to a perfect scorecard. Nevertheless, the FATF can and does put countries on a ‘black list’ for non-compliance and there is evidence that countries care about this. 

The FATF regime has led to important changes in the routines of the financial sector. Nonetheless, there is little evidence that opportunities for money laundering have been restricted.  Indeed, one astonishing feature is that many major international banks flagrantly flout the regime. The AML system is a carefully designed and universally accepted framework to control an important method of protecting the fruits of crimes, but no-one can show any evidence that it has had its intended effect of reducing the level of such crimes. 

What Cobham proposes is in effect a vast extension of the AML system, covering much more than criminally generated revenues, since it would also strike at that which is illicit, such as transfer pricing abuses, as well as the purely illegal.  While AML measures are inherently complex and varied, his three proposed rules seem much easier to design, implement and monitor. Still, the AML experience is instructive in considering how the transparency requirements might be met. Asking a kleptocratic state to create an effective AML system is to ask the fox to create a better hen house; it is the governing political elite that benefits most substantially from the weakness of the existing system of controls. Experience to date is that nations will meet the letter of the law without placing any substantial barriers to the flow of laundered money.

Cobham adopts an apparently very conservative approach to estimate the benefit-cost ratio. Yet these calculations involve a very bold and unarticulated assumption, namely that the implementation of the beneficial ownership disclosure requirement will reduce IFFs.   The experience with AML regulations surely provides cautions here. There are still opportunities to move substantial sums simply by carrying cash across borders, and trade mis-invoicing is not prevented via the proposed transparency measures. On the one hand, it should be noted that crime displacement turns out to be far less complete and ubiquitous that expected. Studies in the Netherlands show that drug dealers are highly conventional in the ways they conceal their assets. 

None of this is to suggest that IFFs are a poor target, but we need to know more about the phenomenon itself and the effects of various interventions before it can be placed high on the list of recommendations for the post-2015 development challenges.