Three years into the project

Our project began in 2017 and as we look back over the past three years, we see that much progress has been made. We termed the period between 2017-2020, “Phase 1”. During this time we carried out cutting-edge inter-disciplinary research to improve collective knowledge and understanding of IFFs. It was organized around work packages (WPs): WP1 – generation and econometric analysis of original commodity trade data; WP2 –legal and regulatory analysis of IFF concepts and drivers; and WP3 – institutional and political economy analysis focusing on relevant key actors and value chains at national and international level. National workshops and continuous engagement with experts and policy makers, including our high-level multi-stakeholder Advisory Group and R4D review panel, ensured outreach to (and substantive feedbacks from) scholars and policymakers.

Our project is now well anchored within ongoing national and international academic and policy debates on IFFs. Our initial findings have been inserted into – and we have been invited to contribute to – flagship reports of international organizations such as UNCTAD and to discussions on specific SDG targets such as SDG 16.4 on reducing illicit financial flows and SDG 17.1 on increasing domestic resource mobilization. Apart from these direct links, curbing IFFs contributes to advancing SDG 8 (economic growth) through increased public investment and consumption, SDG 16 (peaceful societies) through reduced grievances and SDG 17 (partnerships for the Goals) through greater co-operation between producer and trading partner countries as well as state and non-state actors.

Background

Drawing on economics, law and political science, this interdisciplinary research project seeks to analyze how commodity-trade related Illicit Financial Flows (IFFs) from resource-rich countries can be significantly reduced in order to finance the Sustainable Development Goals (SDGs). Our research focuses on commodity trade-related illicit financial flows (IFFs) from resource-rich developing countries, specifically related to trade mispricing and abusive transfer pricing. These IFF channels have been highlighted as a major cause of tax-base erosion in developing countries whose budget largely depend on commodity export revenue.

The implementation of the Sustainable Development Goals (SDGs) in developing countries is expected to be financed primarily by domestic resources. Yet this endeavour is undermined by significant levels of Illicit Financial Flows (IFFs) that erode the ability of developing countries to raise the required tax revenues. IFFs are defined as cross-border movements of money that are wrongfully earned, transferred, or utilized. This implies that even in cases where the money is legitimately earned, it can become illicit if transferred abroad in violation of exchange control regulations, corporate tax law or international tax agreements. Since the 2008 financial crisis and the adoption of the SDGs in 2015, IFFs have garnered increasing policy traction and scholarly attention. However, research to date – conducted primarily by think-tanks and advocacy groups – suffers from poor data and methodological concerns.

In theory indeed, the revenues drawn from natural resource extraction should result in greater domestic revenue mobilization, which can serve to finance social expenditures and public investments. An abundant literature, however, indicates that this is not the case, in part due to high levels of commodity trade-related IFFs. The latter may result from trade mispricing (under-invoicing of commodity exports to reduce export duties and corporate income tax) or abusive transfer pricing (trade mispricing between affiliates of the same multinational group).

Project Goals

The overall research objectives are firstly, to improve our collective knowledge of IFFs and understanding of the major IFFs drivers and policy options for producer countries and trading hubs; and secondly, to devise and promote ways to effectively reduce commodity-trade-related IFFs (SDG 16.4) in order to support resource-rich developing countries to mobilize domestic resources to finance the implementation of the Sustainable Development Goals (SDG 17.1). To achieve these objectives, our interdisciplinary research team addresses four research questions:

1. How much IFFs are there? What are the strengths and weaknesses of existing methods to ascertain the volume and channels of IFFs related to commodity trade?
2. Why IFFs continues unabated? What are the main incentives and legal/regulatory issues involved?
3. Who are the main actors? What are the roles, responsibilities, and capacities of major stakeholders exerting a significant influence on IFFs in both producer countries and trading hubs.
4. What can be done? What are the most promising policy responses and innovations at the global and national levels to effectively curb IFFs?

Funding

We are funded through the “Swiss Programme for Research on Global Issues for Development” (r4d programme) by the Swiss Agency for Development and Cooperation (SDC) and by the Swiss National Science Foundation (SNSF). For more information: www.r4d.ch