The IMF and the Fight Against Illicit and Tax Avoidance related Financial Flows

March 8, 2021

Illicit financial flows refer to the movement of money across borders that is illegal in its source (e.g. corruption, smuggling), its transfer (e.g. tax evasion), or its use (e.g. terrorist financing). Over the last two decades, these flows have been the focus of increasing global concern and the IMF has played a key role in international efforts to combat these opaque and often destabilizing transfers of capital. The IMF has also long been concerned with flows that, while not strictly illegal, are associated with tax avoidance resulting from aggressive tax planning.

Endangering Economic and Financial Stability

Illicit and tax avoidance related financial flows (ITAFFs) can have a significant impact on the economic stability of a country and the broader global financial system. For example, they can drain foreign exchange reserves, affect asset prices, lower tax receipts, distort competition and reduce government revenue. They divert resources from public spending and can cut into the capital available for private investment. Illegal flows can also encourage further criminal activity, undermine the rule of law and political stability of a country. Finally, ITAFFs can have a negative impact on the broader economy, with potential spillovers into other economies, including by deepening inequality and weakening social cohesion across and within countries.

Measuring and Tackling IFFs

ITAFFs are inherently difficult to measure given the illegality associated with some of these flows, their cross-border nature, and the general lack of transparency in relation to the activities that underlie them. Many of these flows are generated through activities which are deemed financial crimes within the context of anti-money laundering and combating the financing of terrorism (AML/CFT).

Measurement techniques rely on indirect methods (including identifying mismatches in balance of payments and trade statistics) and as a result, available estimates are often approximations and sometimes incorrect. Nevertheless, evidence suggests that these flows may be substantial. While recent advances in tax transparency—in particular the adoption of Country-by-Country Reporting (CbCR) of the global allocation of income and taxes of large multinationals—have created new sources of data for measuring tax avoidance flows, the coverage of such data remains limited and generally unavailable publicly.

There are several international efforts to counter ITAFFs. These include:

The role of the Fund in addressing ITAFFs

The multi-faceted nature of ITAFFs requires simultaneous efforts to address them and their underlying activities. As part of its mandate to ensure the stability of the international monetary system, the Fund works to address ITAFFs in the following ways:

AML/CFT: For more than two decades, the IMF has helped shape domestic and international policies against money laundering and terrorism financing. It cooperates with member countries to enhance their AML/CFT frameworks and provides input to the work of the FATF and other organizations. AML/CFT and financial integrity are fully integrated into the Fund’s mainstream activities, including in surveillance, Fund programs, the Financial Sector Assessment Program, and capacity development. The Fund has also introduced the issue of financial integrity into its work in areas ranging from fintech, through governance and corruption.

Enhancing governance: The proceeds of corruption are a key part of illicit financial flows and the Fund’s Executive Board has supported greater engagement on governance and corruption issues in member countries. Fund staff assess member countries’ vulnerabilities in the area of governance—including corruption—and make a judgement about the potential economic impact of such vulnerabilities. They make recommendations under the Fund’s surveillance activities where governance issues are considered sufficiently severe to significantly affect prospective or present balance of payments and domestic stability of a member, or establish conditions under a Fund-supported program if they are critically important to achieving the goals of the member’s program. The Fund can also assess whether the legal and institutional frameworks of member countries are adequate to criminalize and prosecute foreign bribery, and whether member countries have appropriate mechanisms to stop the laundering and concealment of illicit proceeds.

Tax evasion: For more than 50 years, the Fund has provided technical assistance to strengthen member countries’ tax systems, including by improving tax compliance and enforcement. It has worked with several countries to help them develop the legal framework and administrative capacity to exchange tax and banking information, both domestically and internationally. The Fund has also been a leader in fiscal transparency standards and implementation advice, including in the area of natural resources.

Combating tax avoidance: The Fund similarly has a longstanding technical assistance program to help member countries strengthen their tax systems to guard against both domestic and international tax avoidance, including but not limited to the issues addressed by the OECD/G20 BEPS project. International taxation issues are also increasingly being raised in Fund surveillance, including in select G20 countries. While the Fund is not a standard setter in this area, Fund staff participate in and contribute to global discussions on international taxation through its analytical work and building on its in-country experience, and participates in relevant multilateral forums such as the Inclusive Framework on BEPS and the UN Committee of Experts in Tax Matters. Finally, the IMF collaborates with the OECD, World Bank and UN through the Platform for Collaboration on Tax, for instance by developing toolkits to help developing countries address challenges in international taxation.

Monitoring IFFs: The Fund provides technical assistance to help countries better understand the size of flows. It has developed guidance on how to record in fiscal statistics the recovery of looted assets and unaccounted wealth. The Fund has been in contact with the  UNODC-UNCTAD Expert Group, which has been involved in developing a statistical framework on addressing data gaps on IFFs, and in developing pilot estimates. The issue will also be discussed by the Informal Economy Task Team—established to review guidance on the informal economy as part of the update of the international statistical manuals