Country-level IFF research for counter-IFF support

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Insights from U4 Anti-Corruption Resource Centre

13 min readFeb 2, 2018

Improved and *contextually sensitive* approaches to change, as well as tested methodologies and considerable experiences from dealing with complex problems can guide country-level research. This is needed to reveal factors and dynamics surrounding the IFF problem. Photo: IAEA BY-NC-ND

Putting the IFF agenda into action at the country level. Part 9 of 9

Illicit financial flows (IFF) became an international concern in the late 2000s and are now an established policy concern in the development context. Still, policymakers have yet to address important questions about putting anti-IFF programmes into practice. This last blog post concludes this series of policy critique with some reflections on where the IFF agenda can progress to help improve counter-IFF measures at country level.

Getting country-level research right

By committing to the United Nations’ Sustainable Development Goals (SDGs), donors have committed to preventing IFF in developing countries. Before a donor supports anti-IFF strategies in a particular country, it needs to understand the country’s contextual situation to assess whether it has merit to do so (see Strategies for effective anti-IFF efforts; Forstater). It also needs to understand what IFF are (and what they are not) (see IFF definitions–crucial questions). That understanding is not self-evident, both due to unclear definitions but also due to the difficulty of distinguishing them by determining where they start and end. Some recent but yet unpublished country-level research has even suggested that certain domestic flows might be IFF linked to the informal economy within a country (OECD, forthcoming).

Some suggest domestic flows may be IFF linked to the informal economy — adding a further challenging lack of precision when discussing corruption-IFF relations.

This lack of precision is especially challenging when discussing the relation of corruption to IFF. Donors face considerable risk when they engage in and fund policies that are unlikely to achieve expected effects. Many areas are linked to the phenomena of IFF, and the relative influencing effects of those areas may differ considerably. In other words, if donors choose to support the wrong policies, their support will be wasted. Getting the country-level research right reduces the risk of supporting contextually unviable policy options. But what ought to be the focus of such country studies? Merely estimating volumes of IFF will not be enough beyond seeking to understand where to prioritise efforts.

There are considerable qualitative differences between establishing what IFF is, where they occur, how large they are, why they occur, how to address them, and what the benefits will be from reducing them. To be able to answer them, each question requires quite different expertise and experiences, and not least research focus and methodologies. For each of the questions corruption has a role that needs to be recognised. Commissioners of country-level research often assume all questions can be answered by researchers in one go.

Anti-IFF strategies need to consider the relationship between IFF and corruption in the country at hand.

A plausible assumption is that effective anti-IFF policies are built upon a strong understanding of the risk context in the specific country. For example, an anti-corruption strategy specifically focused on preventing IFF should target corruption risks in activities that directly or indirectly relate to IFF in that country when that is feasible (Eriksson; Mungiu-Pippidi). That is quite different from focusing only on preventing political (or “grand”) corruption, as now is the case (Chene; OECD, 2014). Rather, anti-IFF strategies need to consider the relationship between IFF and corruption in the country at hand. That is not because we know how to effectively address corruption in its various forms to subsequently be able to effectively address IFF. It is simply because we need to see how various types of corruption play a part in the system that maintains the problem of IFF. That knowledge will improve the chances of developing an anti-IFF strategy that is contextually relevant.

We need to see how various types of corruption play a part in the system that maintains the problem of IFF.

A politically technical eye

In a previous blog post, I raised questions about the way the OECD and Global Financial Integrity define IFF (GFI; OECD, 2014:16). But what I have particularly stressed is the need to acknowledge the political and economic situation relevant to changing the status quo. Both the Doing Development Differently (DDD) and the Thinking-and-Working-Politically (TWP) movements stress that ignoring the political aspects of governance change is no longer an option in development.

Country-level research on IFF needs to consider the political and economic circumstances that allow IFF to continue. A good map over those relationships helps to circle in on the immediate policy options as well as longer term strategic change processes (DFID). Using a systems approach to mapping the problem domestically links well with a political economy perspective (Chigas and Ricigliano; Dépelteau and Powell; Williams and Hummelbrunner; Eggers and Macmillan).

Using a systems approach to mapping the problem domestically links well with a political economy perspective.

Once country-level research has established a good picture of the problem of IFF, it is not always clear from the start how to best address a systemic problem. However, once policymakers develop a preliminary theory of change, they can focus attention on those parts of the system that seem to have the greatest influence on the problem and where progress appears possible. But country-level research does not stop there.

Any theory of change starts from the premise that not all assumptions that it builds on will prove correct. As implementation progresses, so does an emergent learning about the problem and its system, requiring continuous adjustment of strategies and the policies included (Jonsøhn; Andrews et al., 2012).

This approach recognises the importance of understanding influential relationships between macro- and micro-level power. The macro level often sets the frame for what is possible at lower levels (Khan). But it is important to recognise that this emergent learning does not only concern a refinement of the initial understanding of the system. The system itself may change in response to being under attack why a linear and static approach carries considerable risk relative to an adaptive approach. The consequence of realising that not all assumptions and realities about the problem and its system are known from the start, and that it changes its shape and responds to attacks or other shifts, requires a much stronger role for continuous country-level research. In fact, an adaptive approach is meaningless without it.

A linear and static approach carries considerable risk relative to an adaptive approach.

Responding to push back

The OECD’s forthcoming study of IFF in West Africa begins by focusing on certain illegal activities (the “illicit industry”) and then analysing the political economy of those activities (OECD, forthcoming). A pre-publication summary of the report notes that criminal economies create “networks to protect the flow of goods” (OECD, 2017:4). These networks contribute to corruption, conflict over resources, and social instability (OECD, 2017).

The study highlights many challenges of creating anti-IFF strategies that take into account the forces at work on the ground. It also sets forth ideas for addressing these challenges. The report’s recommendations fundamentally rely on governance through formal institutions and stress development approaches, economic incentives and controls, and security and justice (Diesing and Reitano). For example, recommendations outlined in the pre-publication summary include the following (OECD, 2017):

Take action in all countries — of origin, transit, and destination
Take a multidimensional approach to assessing and mitigating the harm, prioritising the most vulnerable
Prioritise and harmonise policy interventions at the national, regional and, if possible, international levels
Carefully target interventions based on careful analysis of the causes and victims of harm
Create an enabling environment through regulation, transparency and oversight

These recommendations echo many points I have made throughout this series. The problem of IFF is systemic and multi-dimensional. Facets of the problem exist at both the national and international levels. Harmonizing policies is critical, as is understanding the underlying causes and victims.

Policymakers need to consider not only the causes of the IFF themselves, but also the political and economic implications of potential anti-IFF strategies.

However, these recommendations also miss important facets of fighting IFF. In particular, policymakers need to consider not only the causes of the IFF themselves, but also the political and economic implications of potential anti-IFF strategies. They need to coordinate their policies in the strategies in view of how they are implemented at all levels, i.e. a continuously revised strategy is key.

Consider a situation when local power hierarchies are the likely beneficiaries of a criminal economy that generates IFF. Given the local power elite’s political and economic power, they can be expected to put up strong resistance to change. There are no reasons to believe that is a static response.

A different situation may be found at national level. Where corruption is systemic and patron-client relationships are stronger than rule of law, an anti-IFF strategy needs to reflect that reality. If that systemic corruption reaches to political levels, networks consisting of associates and partners to the ruling coalition (those actors that a government depends on to access and maintain power) are likely to protect financial flows. That may very well mean that no direct measures are possible at all, but only indirect measures aiming for a redistribution of societal power through various means, seeking to establish “virtuous circles” (Johnston and Mungiu-Pippidi). Still, we cannot know that without country-level research establihsing a clearer picture.

As polticial landscapes shift, so do the opportunities.

Obviously, we put our hopes on governments willing to adopt and effectively implement country-level reforms. The likelihood of their success in doing so depends on genuine political will to improve (Telgen et al.), capacity (resources and the degree of professionalisation of bureaucratic staff) and autonomy of regulators to comply with laws and regulations, or to implement them effectively (Fukuyama). This means where there is no political will to improve, donors have the option to prioritise other indirect policy measures that may encourage a change in that political will, provided such conditions exist (Andrews et al., 2017; Booth). As politicial landscapes shift, so do the opportunities.

Viewing context and IFF as a system

As this blog series has pointed out, there is no shortage of alternative, improved and contextually sensitive approaches to change originating from different disciplines than those currently pursued. Nor is there a lack of tested methodologies and experiences from dealing with complex problems. A nonprofit or government agency can use systems thinking to (Stroh, pp. 2–3):

Deepen the understanding of the problems to solve
Engage people in the communities they serve more effectively
Distill their insights into visual systems maps that “are worth a thousand words”
Identify strategic interventions that best leverage limited resources

For a policy maker, systems thinking can be used to (Stroh, p. 3):

Think more clearly about why the problem persists despite previous efforts to solve it
Anticipate and avoid long-term negative unintended consequences of proposed solutions
Identify high-leverage interventions that make the most of tax money
Powerfully communicate the benefits of the proposed measures to the concerned constituents based on these points

Given the centrality of secrecy in facilitating IFF, a consistent application of systems thinking will expose not only secrecy as a problem to be solved. Instead, a clearer picture of various actors’ relationships to secrecy will help expose interests and explain the type of motivations that maintain it. As suggested, economic interests that create a demand and a market for secrecy help point out the need to rethink the approach to remove secrecy (see Rethinking Policies to Remove Secrecy). A stronger economic perspective and being much more explicit about the means of economic competition and “war” between nations can help bring realism and improved strategic choices in moving forward.

Economic interests that create a demand and a market for secrecy help point out the need to rethink the approach to remove secrecy.

This “war” between nations, where some represent narrow organised crime interests, others more socially acceptable national interests, has implications for the feasibility of global collective action as the means to achieve change (see Rethinking Policies to Remove Secrecy).

Geoeconomics is the “use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results; and the effects of other nations’ economic actions on a country’s geopolitical goals” (Blackwill and Harris, p. 20). The instruments used are trade policy, investment policy, economic sanctions, the cybersphere, aid, monetary policy, and energy and commodity policies. Keeping this reality in mind, including how some uses of these instruments add to the demand for secrecy (Dick; Blackwill and Harris), it is clear that anti-IFF policies on removing secrecy need a rethink. Country-level research can help clarify this vital perspective for the development of both realistic and effective strategies, either at national or international level.

Conclusion

This blog series of policy critique was motivated by the frustratingly lopsided focus on controversial estimations of IFF rather than on how to arrive at contextually relevant strategies and policies for its prevention. At the same time, the concept itself presents considerable problems, as do the the extent of anti-IFF policies relative to the definition of IFF. Most of the issues discussed in this blog series concern fundamental issues that are important for working against IFF at country level. Governance realities in developing countries are anything but easy and clear, often far removed from what formal laws require. But effective policies to achieve wanted change can only be developed where they build on reality rather than an assumed reality represented by formal laws and institutions, and an understanding of the problems as complex rather than simple.

Considerable work remains to put anti-IFF measures into action at the country level.

If policymakers and practitioners working against IFF cannot begin to understand the messy reality better, they will neither develop useful anti-IFF strategies, nor effective policies resulting in positive change. Considerable work remains to put anti-IFF measures into action at the country level. The current situation begs the question if it is possible to do this effectively, given the currently weak understanding and concept of IFF (see IFF definitions–crucial questions)? I certainly hope so, although progress can be expected to be patchy.

As this blog series has shown, there are alternatives such as improved and contextually sensitive approaches to change, as well as tested methodologies and considerable experiences from dealing with complex problems. These can guide the country-level research needed to reveal the relevant factors and dynamics surrounding the problem of IFF. Whether the problem can eventually be resolved or effectively mitigated is however still an open question.

Note: The U4 Issue Improving Coherence in the Illicit Financial Flows Agenda by Fredrik Eriksson and Alex Erskine addresses problems related to the IFF agenda.

References

Andrews, M., Wild, L., M. Foresti, and S. Samji. n.d. “Doing Development Differently.” DDD Manifesto Community website.

Andrews, M., Pritchett, L., and M. Woolcock. 2012. “Escaping Capability Traps through Problem-Driven Iterative Adaptation (PDIA).” CGD Working Paper 299. Washington: Center for Global Development.

Andrews, M., Pritchett, L., and M. Woolcock. 2017. Building State Capacity. Evidence, Analysis, Action. Oxford: Oxford University Press.

Blackwell, R.D. and J.M. Harris. 2017. War by Other Means -Geoeconomics and Statecraft. Cambridge, Massachusetts: The Belknapp Press of Harvard University Press.

Booth, D. (ed.) 2016. Politically smart support to economic development. DFID experiences. London: ODI.

Chene, M. 2011. “The Potential of UNCAC to Combat Illicit Financial Flows.” U4 Expert Answer. Bergen: CMI.

Chigas, D., and R. Ricigliano. 2011. Systems Thinking in Conflict Assessment: Concepts and Application. Washington: USAID.

Dépelteau, F., and C. J. Powell. 2013. Applying Relational Sociology: Relations, Networks, and Society. New York: Palgrave Macmillan.

Diesing, L., and F. Reitano. 2017. ”IFF and Criminal Economies in West Africa — OECD Study Brings New Perspectives.” Bonn: Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ).

DFID. 2009. ”Political Economy Analysis How To Note.” London. DFID.

Dick, H. 2009. “The Shadow Economy: Markets, Crime and the State” in Wilson, E. (ed.), Government of the Shadows: Parapolitics and Criminal Sovereignty (London: Pluto Press): 97–116

Eggers, W. D., and P. Macmillan. 2013. The Solution Revolution: How Businesses, Government, and Social Enterprises Are Teaming Up to Solve Society’s Toughest Problems. Brighton: Harvard Business School.

Eriksson, F. 2017. ”The Rapid Economic Liberalisation and Ruthless Fight against Corruption in Georgia — Interview with Dr. Tamara Kovziridze.” U4 Practitioner Experience Note (Bergen: CMI).

Forstater, M. 2016. Illicit Flows and Trade Misinvoicing: Are We Looking under the Wrong Lamppost? CMI Insight №5. Bergen: CMI.

GFI. 2017. “Illicit Financial Flows.” GFI website.

Johnston, M. and Mungiu-Pippidi, A. 2017. Transitions to Good Governance Creating Virtuous Circles of Anti-corruption. London: Edward Elgar.

Jonsøhn, J. 2012. ”Theories of Change in Anti-Corruption Work: A Tool for Programme Design and Evaluation.” U4 Issue Paper 2012:6. Bergen: CMI.

Khan, M. 2010. Political Settlements and the Governance of Growth-Enhancing Institutions. London: SOAS.

Mungiu-Pippidi, A. 2015. The Quest for Good Governance. Cambridge: Cambridge University Press.

OECD. 2014. Illicit Financial Flows from Developing Countries: Measuring OECD Responses. Paris: OECD.

OECD. 2017. ”Illicit Financial Flows: The Economy of Illicit Trade in West Africa.” Overview of report forthcoming in February 2018. Paris: OECD.

OECD. Forthcoming 2018. Illicit Financial Flows: The Economy of Illicit Trade in West Africa. Paris: OECD.

Stroh, D.P. 2015. Systems Thinking for Social Change. White River Junction, Vermont: Chelsea Green.

Telgen, J., van der Krift, J., and A. Wake. 2016. Public Procurement Reform: Assessing Interventions Aimed at Improving Transparency, at 20. London: DFID.

Thinking and Working Politically (TWP). n.d. “Thinking and Working Politically: Home.” TWP website.

Transparency International. 2017. Corruption Perceptions Index 2016.

Williams, B., and R. Hummelbrunner. 2011. Systems Concepts in Action: A Practitioner’s Toolkit, at 16–26. Stanford, CA: Stanford Business Books.

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The U4 Anti-Corruption Resource Centre at CMI works to identify and communicate informed approaches to partners for reducing the harmful impact of corruption on sustainable and inclusive development.

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All views expressed in this post are those of the author(s), and do not necessarily reflect the opinions of the U4 partner agencies, or CMI/U4.