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).

Background

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

Much of the research on IFFs has faced criticism for relying on poor data and weak methods. This project’s objectives are twofold: to improve our knowledge and understanding of commodity trade-related IFFs and, on that basis, to design and promote policies to effectively curb such IFFs.

The project addresses four related, research questions:

1) How much? How can we improve methodological approaches to ascertain the volume and channels of commodity trade-related IFFs?

2) Why? What are the main incentives and legal/regulatory issues that explain the persistence of IFFs?

3) Who? Can we identify the major stakeholders exerting a significant influence on IFFs in commodity exporting and trading countries?

4) What can be done? Which policy responses at national, regional and global levels, are most effective for curbing commodity trade-related IFFs?

Highlights and most important results

The project seeks to deliver the following five outcomes:

1) Rigorous scientific evidence and stronger research capacities: the project will propose ways to improve data-collection and methodological approaches to generate credible evidence on IFFs. The international, multidisciplinary consortium promotes stronger research capacities through North-South, interdisciplinary collaboration.

2) Effective policy change: evidence-based policy recommendations will result in more effective policy responses and regulatory initiatives to curb trade-related IFFs.

3) Greater engagement from the private sector: a predictable regulatory environment is vital for business. Solid scientific evidence shall foster greater engagement from corporate actors and effective partnerships required to reduce IFFs.

4) Empowered civil society: by releasing evidence on commodity trade-related IFFs and highlighting incentives behind them, civil society organizations will be enabled to effectively campaign for the reduction of IFFs and channel additional revenues towards implementing the SDGs.

5) Greater awareness in the media and the general public: through a documentary film on commodity trade-related IFFs and online training modules, the project will contribute to greater awareness on the challenges and opportunities from curbing IFFs for the purpose of domestic resource mobilization.