World Bank: Illicit financial flows and the post-2015 development agenda

Ilicit Flows_World Bank

Last year, the U.S. Department of Justice made a startling announcement: an FBI investigation had uncovered over $480 million in corruption proceeds hidden in bank accounts around the world held by Sani Abacha, former military dictator of Nigeria. In the mid-1990s, Abacha and his family systematically embezzled public funds from the Central Bank of Nigeria on the pretense that the funds were necessary for national security initiatives. Funds involved in Abacha’s schemes were laundered through U.S. branches of several global financial institutions, including Goldman Sachs and Credit Suisse, and were eventually stored in offshore bank accounts in the Channel Islands, France, and the United Kingdom.

Even more startling was that the funds recovered were only a fraction of Abacha’s total haul: it is estimated that Abacha stole approximately $4 billion during his four and a half years in office, and only roughly half of these proceeds have been recovered and forfeited by investigative authorities around the world.

The Abacha case is a prime example of one of the most serious threats to the post-2015 global development agenda. Illicit financial flows, the illegal — or quasi-legal — movement of money or capital from one country to another, drain developing countries of much-needed domestic resources and reinforce corruption and instability. By all estimates, the scale of these illegal flows in aggregate is massive: globally, about half a billion dollars flows out of developing countries each year, substantially more than the annual total for global development aid.

Illicit financial flows threaten to undermine the entire international development enterprise. Take Africa, for example: The research and advocacy group Global Financial Integrity reports that in almost every year from 1980-2009, the amount of capital flowing out of the continent through illicit means exceeded the total capital inflow. This turns on its head the common narrative of Africa as a global aid drain; Africa is, in fact, a net creditor to the rest of the world.

Illicit financial flows are not just a problem for developing countries. The steady financialization of the global economy over the past few decades has brought about rapid and often excessive cross-border capital mobility, which can have serious destabilizing effects on the entire international financial system. The unchecked movement of illicit flows threatens to further destabilize an already crisis-prone system, leaving nearly all economies — developing and developed — vulnerable. Moreover, some illicit financial flows derived from illegal activities pose a direct threat to the security of developed countries — most prominently, they are often linked to the international drug trade and to terrorist groups. It is therefore in the interests of high-income countries to help bring illicit financial flows under control.

Addressing the problem should be a major priority for the post-2015 development agenda. The UN-backed Sustainable Development Goals are soon to be finalized and will likely be even more ambitious than the Millennium Development Goals set to expire this year. Effective development financing will be critical to realizing the goals, and this will require a substantial increase in both external investment into developing countries and the mobilization of domestic resources in those countries. For this agenda to be successful, illicit financial flows will need to be reined in.

There are no currently agreed-upon “best practices,” as illicit financial flows have become a major topic of discussion in development only during the past decade and the empirical literature is still thin. Comments and suggestions are much appreciated. I look forward to an engaging discussion of the problem of illicit financial flows and the emerging role of development banks in addressing it.

World Bank              July 2, 2015