Foreign Investments, Banking Position Act As Illicit Financial Conduits, TJN Says


Illicit financial flows continue to damage economies, societies, public finances, and governance of countries around the globe.

Even though it is forbidden by law, rules or custom by many jurisdictions worldover, much of this is carried out in plain sight through what many may believe are geniune means.

According to a report by the Tax Justice Network Africa (TJNA) on the tracking of countries’ vulnerability to illicit financial flows released by the organization. In June 2020, it identified 8 main channels in which trade (exports and imports), banking positions (claims and liabilities), foreign direct investment (outward and inward), and portfolio investment (outward and inward).

What may be a gamechanger in this however is following the launch of the Illicit Financial Flows Vulnerability Tracker which according to TJNA aims to help countries identify the trading partners and channels that pose the greatest risks to their economies.

The tool will allow users to explore illicit financial flows data with interactive tools, and understand which countries are more vulnerable to illicit financial flows, and more importantly, why: which partner countries and which channels are responsible for the vulnerability in a country’s economy.

Illicit cross-border financial flows have been estimated at $1 to $1.6 trillion per year, dwarfing the $135 billion per year or so in global foreign aid. According to the previous report by TJNA, African countries alone have lost over $1 trillion (Sh100 trillion) capital flight, while combined external debts less than $200 billion.

In South America, for example, the TJNA noted ,in comparison, Brazil, Chile, Argentina and Peru, it observed that Brazil is highly vulnerable to illicit financial flows. While Peru’s vulnerability has decreased over time, Brazil’s remained constant.

A key challenge to tackling illicit financial flows is the difficulty countries face in identifying which financial flows carry the largest risk to their economies.

In Europe, with strictier financial laws and a. closely watched financial regime, the majority of foreign direct investment (FDI) entering Ukraine comes from three countries: the Netherlands, Cyprus and Russia. Other highly secretive jurisdiction, such as Switzerland and British Virgin Islands are also among the top investors in Ukraine. Foreign direct investment (inward flow). In this Foreign direct investment exiting Ukraine is primarily destined for Russia and Cyprus pointing to a created channel on money laundering and other illicit movements.

The June 2020 report continues to note a large fraction of India’s inward foreign portfolio investment (non-controlling investment in equity and debt securities) enters the country via Mauritius, Luxembourg and Singapore, notorious corporate tax havens known for their roles as conduits . This is not so evident for outward foreign portfolio investment, dominated by flows to the United States and the United Kingdom.

Globally, Cayman Islands—with a secrecy score of 76, British Virgin Islands —with a secrecy score of 71and Bahamas —with a secrecy score of 75- emerged as three of the most secretive countries in the world .