Relationship between illicit economic activity and illicit financial flows (GSDRC Helpdesk Research Report 1019)

Abstract

Query

Identify literature which discusses the relationship between illicit economic activities (specifically people trafficking, narcotics, illicit trade in minerals and manufactured goods or arms) and illicit financial flows. Look to identify evidence which proves (or disproves) a causal relationship between the two.

Overview

Econometric evidence finds a mutually reinforcing relationship between illicit economic activities and illicit financial flows. Qualitative research identifies impacts of illicit economic activities and financial flows. These may provide potential ways of explaining the causal link.

It is important to note that data on illicit economic activities and illicit financial flows is very difficult to obtain, with quantitative analysis based on often complex estimation techniques which are limited by the strength of these (arguably strong) models. Many analyses group illegal economic activities together, and illegal financial flows are not always disaggregated by origin. It has therefore not been possible to identify to what extent individual types of illicit economic activities are drivers and driven by illicit financial flows.

People trafficking, narcotics, illicit trade in minerals and manufactured goods or arms, are a type of criminal activity which make up one form or grouping of illicit financial flows. The other forms are from government corruption and from commercial transactions. Within financial flows from criminal activity, illicit drugs are the most valuable market, and therefore the largest contributor to illicit flows.

Econometric analysis of data from Russia, India and Mexico find a significant link between illicit flows and the illicit or underground economy with the two driving each other (Kar, 2010, 2012; Kar and Freitas, 2013). The underground economy is made up of criminal activities, such as illicit drugs and human trafficking, but also includes money earned legitimately which has been transferred through illegal channels. From this quantitative research the causal pathway between illicit economy activities and illicit financial flows is not clear.

Illicit economic activity and illicit financial flows have a number of impacts. These impacts may help explain the causal link, specifically how illicit economic activity and illicit financial flows mutually reinforce and drive each other.

Citation

Rao, S. Relationship between illicit economic activity and illicit financial flows (GSDRC Helpdesk Research Report 1019). Governance and Social Development Resource Centre, University of Birmingham, Birmingham, UK (2013) 8 pp.

Relationship between illicit economic activity and illicit financial flows (GSDRC Helpdesk Research Report 1019)

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