Illicit financial flows

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Md Mahmudul Hasan Rasel Illicit financial flows (IFF) are money that ends up benefiting local and foreign elites rather than the general population. Much of this money is generated by corruption, illegal resource exploitation, and tax evasion. Countries highly dependent on natural resources are among the most severely affected. Several factors make extractive sectors prone to illicit financial flows. First, extractive sectors tend to come under high-level discretionary political control, which can facilitate IFF. Discretionary funds generated by extractive sectors free the political leaders from the pressure of the people and external donors, thereby reducing accountability and openness to reform. Second, there is frequent blurring of public, shareholder, and personal interests with regard to extractive sectors. State companies, especially in the oil and gas sectors, may serve the personal interests of their political patrons. Third, competition is often limited. These results in fewer checks and balances in these sectors compared to other more competitive sectors. Fourth, extractive sectors involve complex technical and financial processes that require a high degree of expertise. This opens the door to manipulation, particularly if auditing capacity is limited or corrupt. High reliance on taxes on profits encourages cost inflation and facilitates mispricing by companies. Finally, resource-rich countries tend to have a high degree of integration into the global economy, but through a limited number of channels, particularly resource exports and imports of food and manufactured goods. These open lucrative opportunities for IFF. Sources of illicit financial flows include proceeds of corruption, involving the abuse of public authority for personal interest at the expense of the broader community, revenues from illegal resource exploitation in which the state is blocked from receiving its legal share and tax evasion. These three sources are not mutually exclusive, but are often found together. Illicit financial flows encourage corruption, undermine sound governance of resources, and erode the tax base. Initiatives need to be taken by national and international regulatory authorities to address these problems and for greater financial self-reliance of the developing countries. Such initiatives include openness of contract and revenue transparency instruments, tax reform and recovery of stolen asset. The writer is a student of MBA programme, Department of Finance, University of Dhaka [email protected]