The effects of illicit financial flows from financial crimes on developing country economies

Abstract

Illicit financial flows have come under the spotlight recently, following highprofile controversies and growing awareness of their negative consequences for developing nations. Despite the fact that illegal financial flows have many and various definitions made by various organizations, there is no single definition given for them. Today’s literature shows that illicit financial flows often involve practices such as bribes which are given by international companies, money laundering, trade mispricing and tax evasion. Therefore, illicit financial flows have come to the point where criminal financial activities exceed national boundaries. Illicit financial flows have found easier conditions for development in developing countries where weak legal systems, uncontrolled regimes, and systematic problems such as lack of implementation and poor interagency cooperation exist. Many of these activities, such as money laundering, corruption and tax evasion, which produce illegal funds are criminal and harm all countries. However, the impact on developing countries is more destructive. One of the common problems of developing countries at this point is that tax evasion is tolerated in various forms due to the inadequacy of capital accumulation. In developing countries, the financial system is not transparent enough, and there is a structure that is suitable for financial crimes due to the lack of administrative and legal authority mechanisms and weak inter-agency cooperation. These crimes are returned to the original owner without any taxation using mechanisms such as the resulting income, transfer mispricing, round tripping, hidden ownership, etc.; shell companies and money laundering methods are used when these transactions are carried out. The “illegal” dimension of illicit financial flows is understood because the tax revenue lost at this point is lost due to tax evasion. One of the key determinants of the developmental dynamics of developing countries is tax revenues. Financing public and social spending without the need for any foreign sources is an indication of the efficient collection of tax revenues. However, illicit financial flows from financial crimes in developing countries are not real and qualified financial resources for these countries. These flows are moving towards developed countries or tax haven countries during the first period of financial fragility in developing countries. Developing countries do not benefit from accessing the countries of these illicit financial flows, so they should not be traded in the same way as the entry of registered capital, such as direct capital investments (FDI) or portfolio investments. © Peter Lang GmbH.