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Measuring Illicit Financial Flows – Getting Closer to a True Estimate of Global Money Laundering

Over $1 trillion is laundered globally every year, and less than one per cent is seized.

Where do these numbers come from? Are they accurate? Even if they’re not accurate, can they be useful, if used responsibly?

I first asked, and answered, these questions in an article published on September 7, 2018, UNODC Report 2011 – The Estimate for Global Money Launderinge-estimate-for-global-money-laundering/.

The first question can be answered simply: both of those numbers come from the same United Nations Office of Drug Control report issued in October 2011 titled “Estimating illicit financial flows resulting from drug trafficking and other transnational organized crimes.” The report is available at https://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_flows_2011_web.pdf.

As to the second question: are the numbers accurate? The authors warn in the preface of the report that “the final monetary estimates are to be treated with caution. Further research and more systematic collection of data on this topic are clearly required.” And the various estimates of total criminal proceeds, criminal proceeds available for laundering, and transnational criminal organization proceeds laundered through the financial system, are all given in broad ranges. And the estimate of the amount seized by law enforcement – “less than one per cent” – is both accurate and inaccurate: the report actually provides that “globally, it appears that much less than 1% (probably around 0.2%) of the proceeds of crime laundered via the financial system are seized and frozen”. So yes, 0.2% is “less than 1%”, but it isn’t an impressive number either way.

As to the third question: even if they’re not accurate, can they be useful, if used responsibly? In my opinion, yes. Whether the amount laundered through the global financial system is $1,000,000,000,000 or $2,000,000,000,000 ($1 trillion or $2 trillion), the problem is enormous and must be addressed.

In an article titled Proceeds of Crime and GDP – Are We Comparing Apples to Oranges published on January 8, 2020, I noted that the 2015 National Money Laundering Risk Assessment estimated that the total amount of criminal proceeds generated in the United States was approximately $300 billion, or 2% of gross domestic produce (GDP). That report provided:

“United Nations Office on Drugs and Crime (UNODC) estimated proceeds from all forms of financial crime in the United States, excluding tax evasion, was $300 billion in 2010, or about two percent of the U.S. economy. [Footnote: United Nations Office on Drugs and Crime, Estimating Illicit Financial Flows Resulting From Drug Trafficking and other Transnational Organized Crimes, October 2011.] This is comparable to U.S. estimates. UNODC estimates illicit drug sales were $64 billion, which the DEA believes is a reasonable current estimate, putting the proceeds for all other forms of financial crime in the United States at $236 billion, most of which is attributable to fraud.” (citations omitted)

The figures of $300 billion in 2010 and two percent of the US economy are the midpoints of estimates based on a 2004 report. The UNODC report provided:

“… the criminal income in 2010 (excluding tax evasion) may have amounted to some US$350 bn in the world’s largest national economy [the United States]. This would probably be the upper limit estimate. A lower limit estimate – assuming that the nominal increases found over the 1990-2000 period continued unchanged over the 2000-2010 period, would result in an estimate of around US$235 bn for the year 2010 or 1.6% of GDP. A mid-point estimate would show criminal income of some US$300 bn (rounded) or 2% of GDP for 2010. (UNODC Report, page 20).”

I concluded that a critical review of the UNODC report, and the reports that it relies on, suggested that these estimates needed to updated. And, as the title of the article suggests, I questioned whether using GDP as a way to measure money laundering was even appropriate.

A recent report by the UNODC may go a long way to answering many of these questions and addressing many of these concerns.

Measuring Illicit Financial Flows – A Conceptual Framework

The United Nations Office on Drugs and Crime, or UNODC – the same organization that published the original 2011 estimate for global money laundering – teamed up with the United Nations Conference on Trade and Development, or UNCTAD, to develop a methodology to statistically measure illicit financial flows. The result of a three+ year effort was a report published on October 15, 2020 titled Conceptual Framework for the Statistical Measurement of Illicit Financial Flows. The effort and report were part of the United Nations’ 2030 Agenda for Sustainable Development. That Agenda had a number of goals or targets, and as the report provides, a critical component of meeting those goals or targets is combating illicit financial flows, or IFFs. In fact, one of the targets was Target 16.4: “by 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime.”

The report defined “illicit financial flows” as “financial flows that are illicit in origin, transfer or use, that reflect an exchange of value and that cross country borders.” IFFs therefore have four features:

  1. Illicit in origin, transfer or use: a flow of value is considered illicit if it is illicitly generated (e.g., it originates from criminal activities or tax evasion), if it is illicitly transferred (e.g., violating a country’s currency controls), or if it is illicitly used (e.g., for financing terrorism);
  2. Exchange of value – not only financial transfers but an exchange of goods or services;
  3. Flow of value over time; and
  4. Flows that cross a border – including assets physically crossing a border, and the ownership of an asset changing from a person or entity in one country to a person or entity in another country.

In July 2017 the UN General Assembly developed a framework to monitor progress toward meeting those sustainable development goals or targets. The framework, or Indicator Framework as it is called, for Target 16.4 is “Indicator 16.4.1: Total value of inward and outward Illicit Financial Flows”.

As of July 2017 “there was no universal agreement on what should be included within the scope of illicit financial flows or how the component parts should be measured.”

This is a key admission. In addition, this October 2020 UNODC report on global illicit financial flows does not reference the October 2011 UNODC report on the global estimate of money laundering. The 2020 report provides that “this document reflects the results of international work on the statistical definition of illicit financial flows and concepts to enable their measurement.”

Illegal Activities Generating Illicit Financial Flows

The definitions for the the illegal activities generating IFFs come from the International Classification of Crime for Statistical Purposes, or ICCS. The ICCS groups these illegal activities into four categories: for each of these four types of illegal activities, IFFs emerge at two different stages: (i) at illicit income generation, and (ii) at illicit income management.

  1. Tax and commercial activities
  2. Illegal markets
  3. Corruption
  4. Exploitation-type activities and financing of crime and terrorism

Conclusion

The 2011 UNODC Report provides that “tracking the flows of illicit funds generated by drug trafficking and organized crime and analysing the magnitude and the extent to which these are laundered through the world’s financial systems remain daunting tasks … As with all such reports, however, the final monetary estimates are to be treated with caution. Further research and more systematic collection of data on this topic are clearly required.”

It appears that further research and more systematic collection of data on this topic has been provided with the UNODC’s conceptual framework for the statistical measurement of illicit financial flows. We are one step closer to a true estimate of global money laundering.