New Report on the Role of Commodity Trading Hubs in Illicit Financial Flows, December 2019

In December 2019, Kristina Enger, Floris de Klerk Wolters and Alex Ho Cheung Wong submitted a Capstone report focusing on the role of prominent trading hubs as one of the main actors facilitating the network of IFFs. The researchers are current Masters students in International Affairs, at the Graduate Institute of International and Development Studies. The report provides novel evidence by highlighting key patterns in the global commodities trade, pull-factors for IFFs towards trading hubs, and possible policy interventions to remedy this phenomenon.

The discussion surrounding IFFs, especially concerning commodity trade, tends to focus on the extractive phase and the countries of origin. Less attention is paid to subsequent phases, including the entry of these commodities into ever-larger commodity hubs. Despite many changes in the international economic governance system in the past two decades, a big gap remains between the regulatory environment and the realities of IFFs.

The report analyses the pull factors for IFFs into specific trading hubs, mainly focusing on Dubai, London and Singapore. The findings illustrate how these hubs, despite their differences (e.g. in commodity types and geographic location), can be strikingly similar at the core of their business model (e.g. taxing practices). This offers a valuable perspective in a wider context, such as describing the pattern of various ‘levels’ of hubs along the commodity value chain (CVC).

Primary hubs (e.g. Singapore or London) are supplemented by secondary, more specialised or regional hubs (e.g. Antwerp for diamonds, St. Petersburg for Eastern Europe). Tertiary hubs are local hubs, such as capitals in resource-rich countries or smaller regional hubs (e.g. Accra/Vientiane as capitals, or Beirut as smaller regional hub). IFFs are increasingly blurred in with more transparent flows higher in the CVC: rarely is a shipment of oil, cobalt or gold completely ‘illicit’, but it often has problematic elements. 

Trading hubs

Based on combining existing literature and interviews, the report identifies five main categories of pull factors:

1) Governance and Enforcement Practices
Inadequacies in international business integrity regulations and the civil society, as well as lenient enforcement of rules governing commodity trading makes the hubs attractive destinations for IFFs

 2) Regulatory Structure and Free Trade Zones
Loopholes in the regulations of anti-money laundering and counterterrorism financing (AML/CTF) and free trade zones help draw IFFs into these trading hubs.

3) Tax Incentives
The tax environment of the hubs can act as a pull factor for IFFs (e.g. through aggressive tax environment or favorable tax rates)

4) Financial Sector
The financial sector might facilitate IFFs (e.g. through informal banking system, bank secrecy or lack of beneficiary ownership registrar

5) Infrastructure and Network Functions
The connection of hubs with the world might facilitate IFFs (e.g. through refineries and visa/customs policy)

Each of these pull factors play a separate role in attracting IFFs, often globally interconnected. Their prominence differs per hub: London’s recent commitments to new international financial governance initiatives, such as beneficial ownership  (BO) registration, is ahead of Dubai and Singapore. However, London has close(r) connections with offshore tax havens. 

Moreover, the report put forward a variety of policy recommendations linked to these pull factors. Examples are expanding BO-registers, expanding whistle blower programmes, adopting a risk-based AML/CTF approach, decreasing the number of intermediaries, stricter controls on small volume precious metals trade,  expanding origin verification/due diligence schemes, improving data availability, and introducing higher fines.

The report is the result of close collaboration between the R4D research project on Curbing Illicit Financial Flows from Resource-rich Countries with Master students in International Affairs at the Graduate Institute Geneva. The project partners are Prof. Gilles Carbonnier and Dr Rahul Mehrotra. The full report will be available in the publications section of this website soon. An information video about the report and findings can be found below.

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