Part 2: Illicit Inflows: Are They the Remedy for Illicit Outflows?

Global Financial Integrity Economist Devon Cartwright-Smith analyzes the relationship between illicit financial outflows and illicit financial inflows in developing economies in this two-part series.

Photograph by Ulrik De Wachter

Yesterday I posed the question of whether it is wise to subtract evidence of illicit inflows from illicit outflows (which are known to hinder developing country economies), as if one would cancel the other out. If billions of dollars are leaving a developing country through illicit channels and billions of dollars are being brought in through illicit channels, can we say with utter certainty that the country has no problems with illicit money? I think not. In fact, I can only think of two enterprises in developing countries that would require the inflow of large sums of cash, and neither offsets the problems created by outflows nor helps the developing country’s economy stabilize and grow.

The first use of the money brought into a developing country under the government radar, through illicit channels, is to finance activity in the underground economy. Do you need to buy a fancy car but do not want to leave a paper trail and pay a small fortune in sales tax? Easy: get it from the black market and pay cash. Like copious quantities of drugs? Better have lots of cash on hand. (They don’t take plastic…I’m told.) Are you a drug lord in need of a massive hacienda to impress your friends and wow your enemies? I bet you can find some contractors to build it, and they probably would have no problem being directly compensated with fat stacks of tax-free cash. A study by Global Financial Integrity finds, tucked away in the appendix at the back, an average of US$30 billion was secreted into Russia from 2002-2006 through trade misinvoicing. Since I cannot personally measure the shadow economy in Russia, I can only point to the numerous suggestions I’ve found that Russia’s black market has flourished. Money makes the black market move all over the world. The entire drug trade is financed and run by cash transactions. Money opens doors and persuades good but poor people to turn a blind eye when they know they shouldn’t. Excessive flows of money (bribes) encourage systems of corruption that undermine a struggling country’s ability to stabilize itself and grow. Underground flows of cash finance terrorism and war. Illicit funds brought into developed countries through hidden channels and fed into the underground economy are not used for the good of the people, and they do not offset the problem of illicit outflows.

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Part 1: Illicit Inflows: Are They the Remedy for Illicit Outflows?

Global Financial Integrity Economist Devon Cartwright-Smith analyzes the relationship between illicit financial outflows and illicit financial inflows in developing economies in this two-part series.

When determining the amount of money that flows out of developing countries, a question naturally arises once the calculations are complete: “Why do some of these countries have huge negative outflows?” If outflows are measured as positive figures, negatives must indicate inflows. So are developing countries really recipients of huge swaths of cash, brought in through illicit channels? If these inflows were legitimate and intended to help alleviate the damage done by illicit outflows, developing countries shouldn’t need quite so much foreign aid from the wealthier countries of the world. Plus, they should be able to pay off all that odious outstanding external debt. Unless, of course, this evidence of inflows is just some data error. Perhaps these countries don’t have their books in order and the numbers they report, or fail to report, don’t jive with reality? This is possible, but unlikely when the evidence of inflows is in the range of billions of US dollars. Data discrepancies aside, suppose the data are good and these recorded illicit inflows are legitimate. Does it make sense to let the amount of illicit inflows be subtracted from the illicit outflows for a net estimate of illicit money moving into or out of a country?

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