What Are We Fighting for? Development Vs. Security in European Policies Against Illicit Financial Flows

Thursday, 2 July 2015: 10:15 AM-11:45 AM
CLM.B.05 (Clement House)
Aitor Perez, Elcano Royal Institute, Madrid, Spain; Elcano Royal Institute, Madrid, Spain
Iliana Olivie, Elcano Royal Institute, Madrid, Spain
What Are We Fighting for?

Development vs. Security In European Policies Against Illicit Financial Flows

Aitor Pérez and Iliana Olivié

Illicit financial outflows from developing countries in 2011 have been estimated at US$946.7 billion, meaning that for each dollar developing nations receive in foreign aid, ten in illicit money flow abroad. Although these estimations are not generally endorsed, several NGOs and research instites agree on the relevance of international illicit flows (IFF) and their impact on developing countries. The issue will be part of the UN post-2015 development finance agenda, according to its Intergovernmental Committee of Experts on Sustainable Development Financing.

The fight against illicit flows is very much focused on regulation to make the financial system more transparent. The Financial Action Task Force and the Base Erosion and Profit Shifting plan of action (both OECD initiatives) seem to be the most effective initiatives in this domain. The civil society organizations that have contributed to highlight this problem, also advocate an increased financial transparency in developed countries. Their demand is based on the idea that these flows are supported by a global infrastructure of banks, lawyers and accounting firms, mainly in OECD countries and their satellites. In other words, increased financial transparency in developing countries, would reinforce public authorities’ surveillance of suspicious transactions, and this would stop illicit outflows from developing countries

Based on a case study in Europe, we argue that the current regulative agenda on financial transparency agreed at the OECD level, must be complemented with a more inclusive system of international information exchange and cooperation, in order to positively impact on development finance.

The EU financial system, although still heterogeneous in terms of financial regulation, shows a relatively high degree of financial transparency and makes progress in the achievement of international agreed regulation. Within the EU, some countries stand as world best performers in financial transparency according to the Financial Secrecy Index, and FATF peer reviews. However, an in depth-study analysis of the EU Institutions and three member States (Luxembourg, Belgium, and Spain), show that this is having little impact on developing countries because the information accessible to European national authorities is not systematically shared with developing countries.

We also found out that, in all cases, the analyzed legislative and administrative measures are motivated by goals other than development finance, mainly the fight against international terrorism and organized crime. Moreover, despite of different academic contributions, some of them sponsored by the IMF and the WB, Governments have not put in place a system assessing their exposure to flows and cannot monitor policy impact in this domain. They have put in place activity-based monitoring systems, but neither have estimations on the scale of the problem, nor know about its geographical distribution.

Based on these findings, we propose a global approach to illicit financial flows: a more inclusive governance architecture, and a financial facility allowing developing countries to catch up with OECD countries’ legislation and capacities. An analysis of financial transparency as a global public good would probably conclude the same.