Policy Responses to Curb Commodity Trade-related IFFs

Musselli, Irene; Bürgi Bonanomi, Elisabeth (June 2021). Policy Responses to Curb Commodity Trade-related IFFs (R4D-IFF Working Paper Series R4D-IFF-WP02-2021).

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Illicit financial flows (IFFs) are broadly understood as cross-border transfers of funds that are illegally earned, transferred, and/or used. They stem from corruption, illicit trade, tax evasion, or tax avoidance and are associated with a considerable variety of methods that range in sophistication, including everything from smuggling of cash to exploiting tax loopholes or use of shell companies. Of particular concern for sustainability and development, IFFs can deprive vulnerable countries of much-needed foreign exchange and tax revenue, hindering the mobilization of domestic resources for development and causing wide-ranging societal harms.
The present paper outlines some the most promising regulatory responses and policy innovations to curb IFFs. Our particular focus is on IFFs arising from commodity trade mispricing. However, several of the measures described could be used effectively against various types of IFFs, whether tax-related, corruption-related, or originating from transnational criminal activity. Our analysis considers a spectrum of policy options ranging from short-term to long-term interventions and varying in implementation complexity (Figure 1). We first consider some relatively uncontroversial short-term measures that could be implemented immediately (Section 1). The analysis then turns to policy options that could still be implemented in the short- to mid-term, but would require additional political and organizational efforts – and possibly establishment of new legal bases (Section 2). Finally, our analysis considers long-term structural reforms that would require concerted action at the multilateral level (Section 3). We distinguish between unilateral and multilateral options to curb IFFs as well as between “host” country measures, “home” country measures, and measures that would require transnational coordination. Emphasizing the revenue concerns of lower-income countries, particular priority is given to easy-to-administer rules that could be implemented by countries in the short- to medium-term and have direct, positive revenue impacts.

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