Hidden assets: From illicit finance to development gains

Special event of the 15th session of the Trade and Development Commission

Ladies and gentlemen,

My dear colleagues and friends,

Thank you all for being here today – for lending your time, your expertise and your commitment to one of the most pressing challenges in global development.

Let me begin by expressing how truly heartening it is to open this important event in the company of brilliant and inspiring women: Luz Ma De La Mora, Director of UNCTAD’s Division on International Trade and Commodities; Marina Ponti, Global Director of the United Nations Sustainable Development Goals Campaign; Anastasia Nesvetailova, Head of UNCTAD’s Macroeconomic and Development Policies Branch.

Dear friends,

Very often, in development we speak about what countries need more of – more investment, more financing, more infrastructure, more and better institutions and policies.

But today, we will talk about what we need less. We need less Illicit financial flows, less financing of illegal activities and tax avoidance, all of which drain our resources for development and our capacity to live in a peaceful and secure environment.

Today we are discussing development in terms of what is being taken away: about the money that should have served the public “good”, but which is not only not there – but worse still, is money that is going to serve the public “bads”.

Every year, billions of dollars that could build schools, staff hospitals and create opportunities for young people simply vanish. In some countries, what we lose to illicit financial flows (IFFs), equals twice their education budget, or five times what they spend on health. Africa alone loses nearly 100 billion dollars every year to IFFs. That is twice the amount the continent receives in foreign direct investment (FDI) or foreign aid.

I want to make three points.

My first point is about definition.

The question of how we define IFFs seems technical, but it really isn’t. Largely speaking, there are two camps: those who want to measure only the illegal financial flows versus those who argue that the problem is about not only illegal but also illicit financial flows.

Some people argue that we should only measure IFFs that derive from clearly illegal activities, such as organized crime or drug trafficking. But this misses a huge part of the problem.

Take for example aggressive tax avoidance, done in a technically legal way. When a company uses complex accounting to shift their profits from a developing country to a tax haven, the impact on that country's schools and hospitals is exactly the same. Many developing countries lose through these technically legal but harmful practices a significant percentage of what they receive in development finance.

Our research shows that up to a quarter of all FDI in developing countries has no real economic activity associated with them, indicating the magnitude of potential phantom structures.

This is why at the UN Statistical Commission, all Member States agreed to a broader definition that goes beyond the term “illegal” including, and I quote, "financial flows that are illicit in origin, transfer or use." So, not just illegal but illicit. The difference matters.

My second point is about data.

No one can fight blindfolded. This is why UNCTAD is at the forefront of international efforts to correctly measure IFFs.

Working with partners across three continents, we have conducted detailed studies with 22 countries, including Brazil, Mexico and South Africa. We found that trade-related illicit financial flows may be valued between 5% to 30% of official goods’ trade value. This is only for goods trade-related illicit finance, not considering tax or crime-related flows. Think about that for a moment. Up to a third of what crosses some borders may be masking illicit activity.

Also recently, in partnership with the UN Office on Drugs and Crime (UNODC), we developed the world's first official national estimates of illicit financial flows related to migrant smuggling, human trafficking and trade misinvoicing.

For example, UNODC estimates that smuggling foreign migrants from Mexico to the United States generated over $1.1 billion in illicit financial flows per year – just from 2016 to 2018. This is equivalent to the value of total air passenger transportation from Mexico to the rest of the world during the same period.

Or take Nigeria, where we saw many multinational companies shift close to 100% of their profits to tax havens. Some transfers amounted to close to 3% of the GDP of such tax havens.

While it is encouraging that we are making progress in measurement, this is just the beginning. The scale and magnitude of these losses highlight the urgent need to support these countries in reclaiming their rightful share of resources.

And this leads me to my third point: action.

Measurement alone is not enough. Data without policy is diagnosis without treatment.

As co-custodian of the Sustainable Development Goal (SDG) indicator, UNCTAD aims to empower national authorities to track IFFs using national datasets – from customs and tax records to banking transactions. We’ve supported pilot countries to establish a whole-of-government approach to develop data-first strategies to target policy action.

Last autumn at the 2nd Committee, UN Member States requested UNCTAD to strengthen support and provide a platform for international cooperation on IFFs. To date, country exchanges have been useful for fast-tracking progress.

UNCTAD also hosts ASYCUDA, the automated customs system used by over 100 countries, which already has a module that helps track illicit financial flows from misinvoicing. We are now experimenting with AI tools to identify abnormal transactions in customs data and empower countries to do such tracking faster.

What we need to accelerate progress in is support to scale up training, capacity building and the installment of the ASYCUDA modules in countries that don’t have them yet.  Many of the 100 countries have been using ASYCUDA from many years ago. So we have to go back to the 100 countries and see how we can accelerate progress for them to update the tools to meet these needs.

Dear friends,

As we approach the 4th International Conference on Financing for Development (FfD4) in Seville, we must recognize that there is no financing for development without financing from development. In a context where the global economy is de-accelerating – as we saw clearly last week in the Spring Meetings of the World Bank Group and the International Monetary Fund – where trade, investment and aid are all going down, the domestic resource mobilization agenda is becoming ever more important.

Fighting illicit financial flows is integral to that.

We have consistently stated that we need a bigger, better and bolder international development finance system able to crowd in private investment. But at the same time, our countries need to protect their own resources, because their people have no time and no money to lose. And because in doing so we also fight against organized crime – be it drugs, arms or human trafficking.

Today’s discussions will explore many of the issues I have just discussed – from the political economy of financial centers to the role of professional service firms, from state capture to asset recovery. But what makes this challenge particularly difficult is that it operates at the intersection of the visible and invisible, the legal and illegal, the domestic and international.

This is precisely why the diverse perspectives – from academia, governments and civil society – we will hear today are so valuable. They reflect the complexity of the challenge – but also the strength of our collective resolve.

UNCTAD is proud to stand with countries in this fight. The future of development finance – and of sustainable development itself – cannot be addressed without confronting the reality of illicit financial flows. Because ultimately, this is about reclaiming what has been taken. We need more of what gives more, and less of what takes away.

I thank you.