The IMF and the Fight Against Illicit Financial Flows

Source details

Canonical URL

The IMF and the Fight Against Illicit Financial Flows

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: February 22, 2023

What are illicit financial flows (ITAFF)

• 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).
• The IMF has longstanding concerns with flows that are not strictly illegal but are associated with tax avoidance.

How big a problem are ITAFF

• ITAFF are inherently difficult to measure given the illegality and opacity associated with some of these flows, their transfer across borders, and the lack of transparency into the activities that underlie them.
• Many ITAFF are generated by activities deemed financial crimes in the context of anti-money laundering and combating the financing of terrorism (AML/CFT).
• Attempts to measure ITAFF rely on indirect methods, so estimates are often approximations and sometimes incorrect.
• Evidence suggests that these flows may be substantial.

What is the impact of ITAFF

• ITAFF can drain foreign exchange reserves.
• ITAFF can distort competition.
• ITAFF can inflate prices for real estate and other assets.
• ITAFF can lower tax receipts and reduce government revenue.
• ITAFF divert resources from public spending and can cut into the capital available for private investment.
• Illegal flows can encourage further criminal activity and undermine the rule of law.
• ITAFF can erode trust in public institutions and threaten a country’s political stability.
• ITAFF can have negative spillovers into other economies, including by deepening inequality and weakening social cohesion across and within countries.

International efforts to combat ITAFF

• Financial Action Task Force (FATF): sets standards for international action against money laundering and terrorist financing.
• Global Forum on Transparency and Exchange of Information for Tax Purposes: sets standards for the automatic exchange of financial account information, including to reveal the real owners of anonymous legal structures.
• OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS): tackles tax avoidance by improving coherence of international tax rules and addressing new tax challenges arising from the digitalization of the economy.
• Extractive Industry Transparency Initiative (EITI): promotes open and accountable management of natural resources.
• The World Bank: works in related areas to promote transparency and accountability.

How the IMF addresses ITAFF

• AML/CFT
  • The IMF has helped shape domestic and international policies against money laundering and terrorism financing.
  • The IMF works with member countries to enhance their AML/CFT frameworks.
  • AML/CFT and financial integrity are fully integrated into mainstream IMF activities and programs, including policy advice, capacity development, and the Financial Sector Assessment Program (FSAP).
• Tax evasion
  • The IMF provides technical assistance to strengthen member countries’ tax systems, including by improving tax compliance and enforcement.
  • The IMF helps countries develop legal frameworks and administrative capacity to exchange tax information internationally and domestically.
  • The IMF has been a leader in fiscal transparency standards and implementation advice, including in the area of natural resources.
• Tax avoidance
  • The IMF runs a technical assistance program to help member countries strengthen tax systems to guard against domestic and international tax avoidance, including issues addressed by the OECD/G20 BEPS project.
  • IMF staff contribute to discussions on international taxation in forums such as the Inclusive Framework on BEPS and the UN Committee of Experts in Tax Matters.
  • The IMF collaborates with the OECD, the World Bank, and the United Nations through the Platform for Collaboration on Tax, in particular on international tax issues.
• Enhancing governance
  • The IMF’s Executive Board supports engagement on governance and corruption issues in member countries because proceeds of corruption are a key part of illicit financial flows.
• Monitoring
  • The IMF provides technical assistance to help countries better understand the size of illicit financial flows.
  • The IMF has developed guidance on how to record unaccounted wealth and the recovery of looted assets.

References

• IMF addressing ITAFF AML CFT
• policy advice
• Financial Sector Assessment Program (FSAP)
• IMF addressing ITAFF Tax evasion
• technical assistance
• fiscal transparency standards
• natural resources
• IMF addressing ITAFF Tax avoidance
• governance and corruption issues