-The following is an extract from the Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs) World Bank program with Marijn Verhoeven, Emile Van der Does de Willebois &Ceren Ozer
We will be talking about illicit financial flows. What illicit financial flows mean? I will talk to turn a little bit give a working definition. Then discuss the impact of illicit financial flows on development. Lastly discuss the role of international community in addressing the illicit financial flows. Emile what’s a working definition of illicit financial flows. So the World Bank defines illicit financial flows as funds that have been illegally earned that all used illegally and that are transferred illegally and across international borders. So any of these three fund transferred used would qualify as an illicit financial flows.
So if a dictator or a corrupt minister steals the public purse all except to bribe. The moment those funds cross international borders we are speaking of illicit financial flows. Moment a terrorist finance funds money to attack in wherever or terrorist organization somewhere in the world again the moment those funds intended full used illegally that would qualify as an illicit financial flows. The transferred is a bit more complicated and gives rise to a lot of discussion because there were talking really about the distinction were talk about taxes first of all we’re talking about the distinction between a tax evasion which is illegal and therefore any tax evasion again soon as across international borders would be an illicit financial flow. Tax avoidance is not necessarily illegal and therefore there is more discussion and more debate internationally about to what extent they are covered by the definition of illicit financial flows.
Verhoeven what is the difference between a tax evasion and tax avoidance particularly from the lands of illicit financial flows. So tax avoidance are the means by which a taxpayer try to lower the tax bills in legal ways and it’s what most taxpayers do. You don’t want to pay more than you absolutely have to. So it’s normal behavior. Tax evasion on the other hand is the efforts that some taxpayers get into to lower the tax bills but in illegal means. So if you strictly taken by that definition the link to I refer is very clear since as a military planes since I first saw about illegal transactions and that cross borders. So evasion that falls on the IFF’s avoidance does not. What I think the discussion sometimes gets caught up in is the idea all around those companies and people who engage in very aggressive forms of tax avoidance.
So strictly it is legal but if you look at what happens and what tricks these people employed. You’ll kind of think well it may not be legal it may not be illegal but it should be illegal or it’s at least morally very suspects. So for those kind of transactions even though they’re not strictly illegal and do not fall under the IFF definition that doesn’t mean that we say it’s okay. To get with other partners including DO city on the base of Ocean and profit shifting initiatives we are
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trying to help countries developing countries adopts legal systems tax laws and build capacity so that this kind of egregious tax avoidance doesn’t happen to the extent that it may happened in the past. What is the impact of illicit financial flows on development and development finance in particular? I think you should distinguish two things here. One is what is the impact of flows that are diverse it in particular if you talk for instance about the proceeds of corruption public corruption those funds should have been used for a public purpose a purpose be it education be it medicine be it at any of the public good and then often that you know that they use for a private ends and the minister or whoever the general gets away with another house in the Riviera or another Ferrari somewhere else said so that is one thing that the depletion of public resources.
The other thing is the effect of the activities that give rise to illicit financial flows and whether that is organized crime whether that is terrorism whether that is any other form of corruption that in itself it hollows out the rule of law fear and violence in and of themselves or have an impact on development. When people are fearful they you know they don’t tend to engage they don’t they know they have to pay hush money that that in itself has an impact on development. So there are those two things. One is what effect does the flow have. The other is what affected the underlying activities have on development and I think it’s important to keep this. So specifically talking about tax so clearly when tax evasion happens it reduces the resources with the government to provide public goods. Emile already discussed that but there is another of their other important effects so one thing is that if people escape taxation and people other people see these other taxpayers aware of this then it reduces their inclination to fulfill their tax obligations.
So it may lead to that may become a little bit of a process where more tax evasion yields more tax evasion. The other problem may be that people become less willing to put political backing behind politicians and political parties that supports higher levels of taxation and higher levels of expenditures and that for countries where tax effect is very low can be problematic. Now there is also connections to equity right if then typically people will have the ability to escape taxation tend to be better off so it may also exacerbate already existing inequities in society and here come back to the idea of the aggressive tax avoidance. If you think about these effects aggressive tax avoidance really has a similar effect as full blown tax evasion. So in terms of understanding developmental impact is not entirely clear that we can draw such a fine line between tax evasion and aggressive tax avoidance and that’s why we work on both sides of that problem.
