Illicit Financial Flows: theory and measurement challenges

Publication type: Working Paper

Country: Other

Author(s): Mushtaq Khan Pallavi Roy Antonio Andreoni

Keywords: Finance


This Working Paper, by the Executive and Research Directors of SOAS-ACE, examines the problem of defining  and measuring illicit financial flows, and the implications of this for policy-making.

The theory and measurement of illicit financial flows (IFFs) is a vital challenge for the implementation of SDG targets. The challenge has a number of components. First, it is important to agree on a broad definition of IFFs. Second, we need to define which IFFs are the most policy relevant – which have the most impact on development outcomes. This paper posits that for an IFF to be policy relevant:

  • It must be possible to estimate the indicator using available statistics and techniques, or using feasible extensions of existing statistics;
  • It must be possible to target the indicator using feasible policies to reduce what the indicator measures;
  • Finally, the indicator must be precise enough in its measurement of damaging flows so that if policies succeed in reducing the value of the indicator, the result will be an improvement in development outcomes or prospects.

Given the complexity of illicit flows, and the limits of our understanding, the authors argue instead of a single indicator to measure illicit flows across all countries, a reasonable strategy would be to develop a multi-level indicator system composed of indicators targeting specific illicit flows and to test their usefulness for policy in different contexts. As our understanding of the usefulness of these indicators improves, we will be able to achieve a better consensus about the indicators that are most appropriate for particular types of contexts, countries or problems, in line with the SOAS-ACE approach.