What are Illicit Financial Flows?

What are Illicit Financial Flows?

Not many people know that Germany plays an important role in the movement of illicit funds around the world and I was one of those people until I had the opportunity to attend two trainings organised/facilitated by the Civil Forum for Asset Recovery (with support from the Erasmus Plus Programme and Gefördert von ENGAGEMENT GLOBAL im Auftrag des BMZ). The first training tagged ‘Action Weekend on Illicit Financial Flows’ took place in Berlin between November 25 -26, 2017 and the second training tagged ‘Youth for a Transparent and Open Europe’ held in Berlin between Dec 7 -12, 2017.

Coming from a country perceived to be one of most corrupt in the world, it never occurred to me that Germany intentionally and unintentionally plays a role (my mind would usually be on Switzerland only) in promoting the movement of illicit funds from countries in the global south, which in turn affects the developmental capabilities of the affected countries. It may sound preposterous to many, especially Germans to learn that Germany as one of the largest global financial hubs in the world is also the recipient and or conduit for the movement of illicitly acquired funds. It has been said that the major issue with the financial system in German is the lack of transparency in beneficial ownership with the country being ranked as one of the biggest financial secrecy jurisdiction in the world.

The first training focused on what constitutes illicit financial flows, how it is carried out and asset recovery processes. It is not easy to define what constitutes IFFs but basically, the idea revolves around the movement of funds from sources that are illegal or movement of funds in order to evade and avoid the payment of relevant taxes. For instance, funds transferred from Nigeria to Switzerland by the late dictator General Sani Abacha, funds moved around by Italian mafias in different money laundering schemes, or funds placed in accounts owned by shell companies in tax havens are all IFFs. IFFs are usually designed in very complex structures in order to avoid detection; structures and modes can include the use of shell companies/state owned corporations, ambiguous state laws that require private corporations forming alliances with corrupt state officials, deals to facilitate market access, companies controlled by state elites, tax havens and secrecy jurisdictions (popular among which are Panama, British Virgin Island, Luxembourg, Switzerland, Cayman Island, Ireland, Singapore and Mauritius. It is also important to note that tax havens do not necessarily have to be companies, for example, the State of Delaware in the United States of America and the sovereign city-state of Monaco are tax havens). It is also important to state that tax havens are not necessarily illegal, most are actually legal (and there are legitimate and transparent users of tax havens), the issues that one should be concerned about is the morality of such arrangements (the secrecy enables and motivates money launderers, mafias, embezzlers and dictatorial kleptocrats) especially due to its debilitating effect on the global south where a lot of the monies come from.

Another key strategy used in IFFs is the three-pronged process of placement, layering and integration which involve mixing funds from different sources or businesses with illicitly acquired funds and mixing the destinations of the funds in such a way that it becomes difficult to detect the networks of the funds in order to determine which part is illegal or stolen.

 

Pic                                                                                Source: United Nations Office on Drugs and Crime

 

Asset Recovery involves the process of tracking illicit funds and returning same to the country of origin. Unfortunately, there is no globally accepted procedure for the recovery of illicit funds and only about 1% of IFFs are ever confiscated.

How can we combat IFFs? The very first solution is to create awareness about the problem, research has shown that corruption perception by citizens affects the fight against corruption in any country, if the people do not perceive that there is a problem that requires urgent remedies, there is less pressure on government to take action at combating IFFs. Another point is the need for domestic resources mobilization i.e. ensuring and fighting against misappropriation of funds especially within countries in the global south. There is also the need to strengthen and stabilize the rule of law and improve legal frameworks to combat and discourage the illegal acquisition of public funds and then ensure inclusive growth, inclusive growth will see to it that citizens are de-motivated from enriching themselves at the expense of the general populace. It is also important to ensure transparency in countries of destination for IFFs, for example in Germany, there is the need to ensure that beneficial ownership registers are available to the public and that they are updated on a regular basis. There is also the need to streamline the process for obtaining information on the professional identity and customer due diligence for trusts and foundations (which are often used as tools for laundering money in Germany).

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Oluwatosin Fatoyinbo is a first-year student at the Willy Brandt School of Public Policy. He is in the Conflict Studies and Management track of the MPP programme. He holds a bachelor's degree in Law from the University of Ibadan, Nigeria and qualified as a lawyer in Nigeria in 2014. He worked as an Associate at Banwo & Ighodalo, a full-service commercial law firm in Nigeria. His areas of interest include Illicit Financial Flow, Democratic Peace theories, Artificial Intelligence governance and Water Cooperation.