Updated: Jul 31, 2020
I am extremely excited to teach a new class this upcoming fall semester on illicit financial flows and illicit trade, both of which make up the illicit economy. These topics go hand in hand with two classes that I regularly teach: money laundering and corruption. Illicit finance and the various financial crimes that give rise to illicit funds are constantly evolving. Globalization, along with recent advances in technology and communications (the internet and the World Wide Web in particular) have significantly and fundamentally changed the licit and illicit economies as well as their various drivers, making this a very dynamic area of study.
What are Illicit Financial Flows (IFF)?
Illicit Financial Flows (IFF) is a comparatively recent field. Although there is currently no commonly recognized definition of the term, IFF generally refers to the cross-border movement of money associated with illegal activity and illegally obtained funds. An example of IFF would be the use of an anonymous shell company to transfer criminal proceeds to an offshore bank account. Such illicit finances generally flow from developing countries and jurisdictions with poor economies to developed countries and jurisdictions with more stable and developed economies, such as the United States and the United Kingdom, as well as tax havens, such as Switzerland.
The issue of illicit financial inflows may seem like a victimless one, but actually presents a serious global problem. Some common reasons for illicit financial inflows include tax evasion and the financing of illegal activities, such as human trafficking, weapons smuggling, and drug trafficking. Both illicit outflows and inflows result in loss of taxes to governments, and therefore negatively impact the resources available to those who need them most.
What is Illicit Trade?
Closely related to IFF, illicit trade encompasses a wide range of issues, spanning from the cross-border sale of illicit products (such as the sale of narcotics) to the sale of licit goods for illicit purposes (such as the sale of artwork in order to launder money).
Similar to IFF, there is presently no internationally-recognized definition of illicit trade. However, it has been preliminarily defined as an exchange in the control or possession of an illegal good or service, and it encompasses both tangible and intangible goods. An example of illicit trade in tangible goods would be the sale of counterfeit Rolex watches. An example of illicit trade in intangible goods includes the sale of passwords in cyberspace.
The illegal nature of illicit trade is not necessarily readily apparent, thereby making it more complicated to police and enforce. Additionally, the effects of illicit trade, such as corruption and human exploitation, may also not be as clearly visible, making it difficult to respond in an appropriate and timely manner.
Impacts and Challenges of Financial Crime
There is a strong link between illicit trade and illicit financial flows with other types of crime (specifically financial crime), such as fraud, human trafficking, drug trafficking, corruption, bribery, tax evasion and money laundering. Furthermore, the illicit economy contributes to numerous global threats, such as war, the proliferation of arms and weapons of mass destruction, and environmental degradation and extinction.
Additionally, online trade, which is fast, impersonal, anonymous, hugely profitable, and provides limited accountability for the actors involved, presents new and unique challenges. More specifically, cyber-theft of intangible assets and data, such as personally identifiable information (PII) and intellectual property, costs consumers and organizations billions of dollars. Finally, the COVID-19 pandemic has increased certain forms of illicit trade, as well as created new risks, which are likely to result in long-lasting consequences.
Illicit financial flows and illicit trade are relatively new areas of study even though they have existed since the beginning of commerce. The emergence of new technologies and the corresponding development of new criminal methodologies have quickly and dramatically changed illicit flows and illicit trade over the past few years. This transformation of the illicit economy has had various socio-economic effects, as well as political and even environmental impacts. New issues and trends continue to emerge, awareness of which is critical in order to adequately deal with the problem.
Louise I. Shelley, Dark Commerce. How a New Illicit Economy is Threatening Our Future, Princeton and Oxford: Princeton University Press, 2018.