| Global indicator description |
From Goal 16 TST Working Group and OHCHR: Illicit financial flows (IFFs) are commonly defined as the transferred monies that is earned, transferred or utilized through illicit means, into or out of a country. They include legally earned value, money and monetized instruments that are transferred illicitly or value, money and monetized instruments that are acquired through illegal activities, such as the proceeds of crimes, including corruption and tax evasion. They can also capture tax avoidance and trade misinvoicing. Although the UN Economic Commission for Africa, UNDP, Global Financial Integrity and others have produced global country-by-country estimates for illicit financial flows, more work on methodologies would be required. Overview of the main methods of estimating illicit financial flows (adapted from the Mbeki Report of the High-level Panel on Illicit Financial Flows from Africa (http://www.uneca.org/iff)): In terms of the methodologies used to estimate IFFs, several empirical models have been used to estimate both the magnitude of IFFs and their economic implications for developing countries. These models and the analytic methods underlying them deserve further scrutiny. In particular, four methods have dominated the empirical literature: the Hot Money Method, the Dooley Method, the World Bank Residual Method and the IMF Direction of Trade Statistics (DOTS)'based Trade Mispricing Method. The latter two remain the most widely used. The Hot Money Method records IFFs through net errors and omissions in payment balances. The Dooley Method relies on the privately held foreign assets reported in the balance of payments that do not generate investment income. The World Bank Residual Method estimates IFFs as the difference between the source of funds (external debt and foreign direct investment) and the use of funds (current account deficit and reserves). The Trade Mispricing Model assesses IFFs by looking for disparities arising from overinvoicing of imports and underinvoicing of exports after adjusting for ordinary price differences. In this model, imports are generally recorded after adjusting for the cost of insurance and freight, while exports are usually valued free-on-board. To provide the most thorough estimates of IFFs, Global Financial Integrity has combined the World Bank Residual Method and the Trade Mispricing Model in its computations. ECA has used the Trade Mispricing Model (see Mbeki report). An Overview of the Analytical Methodologies Utilized by Global Financial Integrity to Study Illicit Financial Flows (adapted from their website: http://www.gfintegrity.org/issues/illicit-financial-flows-analytical-methodologies-utilizedglobal-financial-integrity/): Global Financial Integrity (GFI) estimates that nearly US$1 trillion of unrecorded money flows out of developing countries annually. There are three forms of unrecorded money moving across borders: Corrupt: Proceeds of bribery and theft by government officials. Criminal: Proceeds of drug trading, human trafficking, counterfeiting, contraband, and myriad forms of additional activities. Commercial: Proceeds arising from import and export transactions conducted so as to manipulate customs duties, VAT taxes, income taxes, excise taxes, or other sources of government revenues. In analyzing IFFs, GFI utilizes sources of data and analytical methodologies that have been used by international institutions, governments, and economists for decades. Basically, these data sources and methodologies are providing information on gaps'gaps in balance of payments data and gaps in trade data. Where recorded sources and uses of funds in balance of payments data do not match, the difference is net errors and omissions, indicating an inflow or outflow that was not recorded. Where bilateral trade data does not match (after adjusting for freight and insurance in the data of the importing country) this indicates reinvoicing of transactions between export from one country and import into another country. Some reviewers of GFI's data sources and analytical methodologies have raised questions, which GFI is pleased to address as follows: GFI well recognizes that statistics can be flawed, due to errors in collection, recording, or conveying. Precisely the same point can be made about virtually every other economic analysis ever undertaken. GFI uses the best data available, data that has been collected, reported, and recorded by governments for decades according to international guidelines issued by the IMF. The reliability and accuracy of trade statistics of developing countries are regularly assessed through the IMF's Data Quality Assessment Framework under the Data component of the Reports on Standards and Codes. These ratings show that for all assessed developing countries (about 72) the quality is "very high" or "high". GFI does not suggest that every single unrecorded transaction is illicit; however, the vast majority of unrecorded transactions are illicit. GFI does not use net illicit outflows and illicit inflows. In countries where unrecorded outflows and unrecorded inflows roughly balance, it would be a mistake to consider that such a country has no problem with unrecorded flows. There is no such concept as "net crime." Indeed, in GFI's view, illicit outflows and illicit inflows should be added, since both sides of the equation generally produce harm. From UNODC: There is no single, agreed definition of illicit financial flows (IFF), but essentially these are financial flows generated by methods, practices and crimes aiming to transfer financial capital in contravention of national or international laws. When anlyzing IFF the following components are generally included: proceeds of crime, proceeds of corruption (national or international corruption), money laundering (including from proceeds of crime), tax evasion, theft of state assets, and market and regulatory abuses.
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