Friday, October 23, 2015

Going to the source! Identifying a country’s most vulnerable sectors and activities generating IFF, by Manuel Papouschek

Anyone working to detect activities such as corruption, drug trafficking, counterfeit, smuggling and other types of similar activities knows how difficult it is to identify and prove these crimes. These difficulties are compounded by the fact that once a crime is identified, it is usually associated with others hidden further underground: for example, illegal fisheries associated with human trafficking; illicit mining financing criminal groups; corruption associated with money laundering…[1]
Possibilities to generating illicit financial flows (IFF) are manifold, ranging from activities on the edge of legality or even completely legal (whose revenues only become illegal once transferred or used for illegal activities as terrorism); from high level theft of state funds to small scale commercial fraud. Other types cannot be explicitly labelled illegal or criminal but also result in a loss of state resources (for example, small scale mining often results in unpaid royalties but the individual diggers involved are likely to be engaged in this as a livelihood and are not per se criminals – therefore the activity requires a different set of responses beyond criminalisation). The commonality is that all of them damage society in many ways, reducing the legitimacy of the state, creating parallel power structures and diverting resources from the state’s budget and generating IFF.

If addressing these is a significant endeavour for developed countries, for poor ones it presents additional challenges. The latter usually lack systems to scan which activities are more vulnerable and pose a higher threat of being exploited for the extraction of illicit funds. Yet, given the great potential to increase domestic revenue by combating crimes and semi-criminal activities, this should be one of the main priorities for developing countries. Since fighting them requires expertise and funds, it is of utmost importance for developing country’s authorities to identify where to deploy their relatively scarce skills and resources.

This requires good analytical and diagnostic tools to properly assess risks – including the likelihood and impact of certain activities and then identify and prioritize appropriate responses given constraints. A number of risk assessment tools exist and are being used. However, these tools mostly assess risk for money laundering (i.e. the vulnerability of certain channels to be used to circulate illicit funds) and most are being individually carried out by specific institutions such (i.e. tax authorities, financial intelligence units). Few countries though take a comprehensive and holistic approach to identifying the source of the illicit funds.

A holistic comprehensive tool would have to bring data and efforts from institutions and government agencies together; hence its implementation would be the responsibility of an agency with the power to harness the intelligence and participation of several public bodies. Its results would accordingly be more superficial than one of the in-depth assessments (for example, on transfer pricing risks); but the benefit would be to provide a wide scan of all activities and sectors in a country to identify spots of higher vulnerability. Once this assessment points to the more vulnerable areas, a more detailed analysis of the most vulnerable sectors, their current institutional framework and capacity could entail, indicating the level of effort required to address the vulnerability.

In a first step to identifying sources, the OECD is currently finalizing a report analysing different sorts of illicit trade as a source of IFF in West Africa (trade of counterfeits, narcotics as well as gold and human smuggling). Building on these insights, a tool to help developing countries to identify which distinct issue poses the largest threat to a given country in the area of IFF would be a very useful instrument for authorities committed to dealing with the domestic angle of IFF. In light of the commitment made in SDG 16, such a tool is urgently needed so developing countries can deploy their resources most efficiently. The tool would be useful as well to developed countries and their development agencies in structuring aid related programmes that support partner countries in fighting activities that not only result in lost revenue, but have an overarching detrimental effect on state building.

The views expressed in this blog are those of the author alone and should not be reported as representing the official views of the OECD or of its member countries.

UNIAP (2009): Exploitation of Cambodian men at the sea: Siren Case Analysis, United Nations Inter-Agency Project on Human Trafficking, 22 April 2009,

The Guardian (2015): Revealed: how the Thai fishing industry trafficks, imprisons and enslaves, 20 July 2015,

Enough Project (2014): The Impact of Dodd-Frank and Conflict Minerals Reforms on Eastern Congo’s Conflict, June 2014,

WSJ (2015): Swiss Authorities Open Investigation Into Brazil’s Odebrecht, 22 July 2015,

[1] Examples can be found in many types of activities: illegal fisheries, a criminal endeavour in itself, has been associated with human trafficking (UNIAP 2009; The Guardian 2015); the artisanal mining or charcoal sector for example financing military groups (Enough Project 2014); bribery payments being laundered at international financial markets (WSJ 2015).