The IMF and the Fight Against Illicit Financial Flows

March 12, 2020

Illicit financial flows (IFFs) 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, IFFs 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.

Endangering Economic and Financial Stability

IFFs can have a big 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 and reduce government revenue. They divert resources from public spending and can cut the capital available for private investment. Illegal flows can also encourage criminal activity, undermining the rule of law and political stability of a country. Finally, destabilizing flows can have a negative impact on the broader economy, with potential spillovers into other economies, as they often cross borders.

Measuring and Tackling IFFs

IFFs are difficult to measure given their illegality and the type of activities that underlie them. While those activities listed above are deemed financial crimes within the context of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), opinions differ about whether practices such as legal, but aggressive, tax planning/avoidance should also be included.  Similarly, there is no consensus about how to measure IFFs. Measurement techniques rely on indirect methods (including identifying mismatches in balance of payments and trade statistics). As a result, available estimates are often approximations, sometimes incorrect, and can result in gross overestimations of IFFs.

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

The role of the Fund in addressing IFFs

As part of its mandate to ensure the stability of the international monetary system, the Fund works to address IFFs in the following ways:

AML/CFT: Over the last 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 how vulnerable member states are on the issue of governance—including corruption—and make a judgement about the potential economic impact of such vulnerabilities. Where necessary, they make recommendations or add conditions to address any concerns. The Fund can also assess whether the legal and institutional frameworks of member states are adequate to criminalize and prosecute foreign bribery, and whether member states 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 foster tax compliance and enforcement. It has worked with several countries to help them develop the legal framework and administrative means to exchange tax and banking information, internationally. The Fund has also been a leader in fiscal transparency standards and implementation advice, including in the area of natural resources.

Combating legal tax avoidance activities: The Fund is heavily engaged in technical assistance to help member countries guard against Base Erosion and Profit Shifting (BEPS). International taxation issues are increasingly being raised in Fund surveillance, including in select G20 countries. The Fund participates in global discussions about international taxation and conducts analytical work on international tax flows, as well as participating in various international 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 in the Platform for Collaboration on Tax, 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 IMF Committee on Balance-of-Payments Statistics’ Task Force on the Informal Economy (TFIE) has also been in contact with the  UNODC-UNCTAD Expert Group to work on addressing data gaps on IFFs. Research by IMF staff suggests that 40 percent of global foreign direct investment (FDI) is financial investment with no associated real activity.