Illicit financial flows and country level legitimacy

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Insights from U4 Anti-Corruption Resource Centre

12 min readOct 16, 2017

Putting the IFF agenda in action at the country level. Part 3 of 9

We need ways to work with local powers’ perceptions of legitimate policies. Photo by United Nations — Voters in North Darfur

Illicit financial flows (IFF) became an international concern in the late 2000s and are now an established policy concern in the development context. Still, policy makers have yet to address important questions about putting anti-IFF programs into practice. This third blog post in our series discusses the question of legitimacy from a policy maker perspective.

Obstacles to reform progress

For successful development to occur, local politics and the economy matter. This means policy makers must do more than establish normative ideals and call for strong formal institutions (Khan and Jomo; Whitfield and Therkildsen). After years of governance reforms in developing countries, it is clear that many formal institutions are not functional because there are a wide range of different obstacles to their effective functioning. Many of those obstacles have very little to do with a lack of technical capacities for governance as the primary problem (Andrews et al.; World Bank; Mungiu-Pippidi, 2011).

An often repeated suggestion is that policy makers take a critical look at their assumptions about how norms of good governance are established, including anti-IFF policies. Paying much closer attention to the interests and power relations of local stakeholders and the governance regimes within which they exist can help expose many of the weakest assumptions (Whitfield and Therkildsen; Khan; Grindle, Mungiu-Pippidi, 2015).

Many obstacles to well-functioning institutions have very little to do with a lack of technical capacities for governance as the primary problem.

Legitimacy and anti-IFF policies

Developing and implementing effective anti-IFF programmes requires policy trade-offs. Effective policy implementation cannot be achieved without the political will to do so (Akmeemana et al.). That primarily concerns a national political process rather than a technical prescription implemented in a political vacuum (Mungiu-Pippidi, 2015). To achieve the necessary stakeholder buy-in, policy makers need to focus on legitimacy from the implementing country’s point of view.

Achieve stakeholder buy-in by focusing on legitimacy from the implementing country’s point of view.

Yet there is no universally applicable norm of legitimacy (Bellina et al.; Falk et al). (If there were, we would not need the political process to reconcile conflicting interests and opinions.) So, how can we determine whether anti-IFF policies are legitimate in a specific context? Knowing that would inform us whether they stand a chance of being effectively implemented. And who should make the decision that anti-IFF policies are legitimate?

Legitimacy can be based on process (‘process legitimacy’). For example, a policy can be legitimate if policy makers follow established and fair procedural requirements to reach a final policy. In that case, the final policy would be legitimate regardless of its content, so long as the proper process was followed.

As Philp explains (emphasis added):

“Politics involves claims to authority and legitimacy, an appeal to certain principles, such as fairness, non-arbitrariness, non-domination etc., together with a de facto ability to secure order and compliance in areas where conflict would otherwise generate disorder and violence, and the establishment of procedures and processes that have some normative weight independent from the outcomes that the procedure delivers (so we accept the outcome not because we agree with it, but because it is the outcome of the process).” (Philp, forthcoming article)

Alternatively, a policy’s legitimacy depends on the actual outcome — that is, the results of the policy (‘outcome legitimacy’) — or on the quality of the source of a policy (‘source legitimacy’).

What legitimacy?

In the anti-IFF arena, both process, outcome and source legitimacy matter. On the one hand, policy makers need to set forth clear guidelines for creating anti-IFF programmes. In this process, international stakeholders must respect the sovereignty of domestic stakeholders (OECD; Jackson). On the other hand, domestic stakeholders must recognise fundamental principles of international law and development cooperation if their decisions are to be viewed as legitimate at the international level (Nicolaidis and Shaffer).

Consequently, all stakeholders must ideally invoke principles of justice and fairness at both the domestic and international level. But that is easier said than done. Although sovereignty between nations formally applies, asymmetric relationships is reality in most international policy contexts ( Kennedy). Countries that depend on others for their sustenance are hardly equally sovereign nations compared to those that do not. This goes to show that legitimate formal processes do not necessarily yield legitimate outcomes.

...the strength of a political argument depends on how the country expressing the demand relates to it…

The third legitimacy aspect concerns credibility and the motivations for engaging in advocating anti-IFF policies. Any country with a strong legitimate and diversified economy that asks other countries to eliminate secrecy — while itself maintaining institutionalised secrecy in spite of being fully capable of removing it —lacks legitimacy. That source-legitimacy concerns the fact that the strength of a political argument also depends on how the country or person expressing the demand relates to it (compare with the ‘clean hands doctrine’).

There is an assumption that a big finding like the massive loss to development from IFF provides all the legitimacy that is needed.

International development actors including advocacy groups, researchers, practitioners, technical experts and politicians, often overlook these three types of legitimacy and their relevance for policy development and its eventual implementation. Instead, what we find is an assumption that a big finding like the massive loss to development from IFF provides all the legitimacy that is needed. The consequences of maintaining status quo is unacceptable, so change is assumed legitimate. But at country level it is a different matter (Brunnée et al.; Brunnée and Toope).

Country level legitimacy

…the question of local political costs and benefits is unavoidable.

When considering the issue of anti-IFF legitimacy at country level, the question of local political costs and benefits is unavoidable. For example, if IFF coming into a country create a discernible developmental effect, does this ever “legitimise” those funds? Under what circumstances? Who decides? And what can be learnt about the relationship between political rulers and IFF coming in and out of the country? How does that relationship relate to stability, resilience and long-term development? Those questions are in no way irrelevant from a normative perspective as possible outcomes of national and local politics are constrained by the equilibrium of status quo, realities of power and legitimate expectations on those who wield it. Where politics fail, disorder and violence are the immediate alternatives, unless repression steps in.

Unfortunately, policy proposals accounting for the costs of abandoning IFF-facilitating factors like secrecy have yet to emerge.

Any country with a strong legitimate economy that asks other countries to eliminate secrecy — while itself maintaining institutionalised secrecy in spite of being fully capable of removing it — lacks legitimacy. Photo by Mike Wilson

Consequently, the answers to those questions would certainly enrich the understanding of the interests at play, and of the viable and desirable options to achieve a change. Importantly, that knowledge would offer a way to work with the local powers’ perceptions of legitimate policies and inform potentially successful trade-offs to include in an anti-IFF strategy and its policies.

Unfortunately, policy proposals accounting for the costs of abandoning IFF-facilitating factors like secrecy have yet to emerge. Rather, policy makers rely on generally applicable, soft law approaches like the FATF Recommendations establishing institutional ideals, coupled with the threat of economic sanctions for non-compliance (OECD).

The effectiveness of that approach to achieve compliance across countries must be questioned. The depressing results of the 2015 Financial Secrecy Index show the extent of secrecy maintained also by the most developed countries representing a much larger share of the global economy than developing countries (Tax Justice Network; Findley et al.).

The new approach to assess countries’ implementation of the FATF Recommendations provides in-depth descriptions and analysis of how criminal abuse of financial systems are prevented. To date, only one of 38 assessed countries implement the Recommendations to a satisfactory degree (FATF). This suggests the approach needs a serious rethink as the assumptions for its effectiveness appears anything but realistic relative to its objectives. To separate technical solutions from the ability to implement them is understandable and customary in international policy fora. But does that make the solutions better? How to assess the quality of technical solutions that remain unimplemented, or that are unimplementable beyond a limited few countries?

A greater understanding of the status of process and outcome legitimacy will help answer why international commitments are ignored.

International commitments are undone when they are ignored. Why they are ignored will differ from one context to the next, but a greater understanding of the status of process and outcome legitimacy will certainly help answering why. On the other hand, where the commitment is not really there in the first place, the question of legitimacy may be a blind alley. It is indeed easy to find agreeing to normative ideals legitimate. Soft law helps achieve wide global support, as do international law conventions followed up through peer reviews that focus on form rather than effective function. But it is something else to agree to hard targets of their effective implementation coupled with an equally hard sanctions regime that kicks in due to non-compliance. The quality of commitment differs as the contents of the agreement differ.

Regarding the part of anti-IFF policies that rely on implementing FATF Recommendations, we need to review how its assumptions of legitimacy and interest alignment relate to reality, including the compliance mechanism . If they do not hold, anti-IFF policies need alternative approaches to change, or perhaps even a recalibration of goals.

Doing anti-IFF policies differently

Many leading policy makers, donors, and practitioners have begun to stress a need to move away from traditional “gap-filling” technical official development assistance (ODA) and move towards new initiatives. These include “doing development differently” (DDD) and “thinking and working politically” (TWP) (Akmeemana et al.). Both initiatives emphasise that neither the scale of aid nor the technical quality of programming are the main reasons for weak developmental impacts.

…neither the scale of aid nor the technical quality of programming are the main reasons for weak developmental impacts.

Instead, the problem is a lack of understanding of the complexity of development. That is, current approaches favour simple solutions and do not account for political dynamics (Akmeemana et al.). Growing evidence suggests that “flexible, adaptive, politically smart programs can produce tangible results, well beyond traditional programs on the same issues”( Akmeemana et al.).

The TWP and the DDD agendas emphasise three core principles for improving development interventions (Akmeemana et al.):

1. Strong political analysis, insights, and understanding.

2. Detailed appreciation of, and response to, the local context.

3. Flexibility and adaptability in programme design and implementation.

Policy makers addressing IFF concerns should consider these principles in assessing the validity of many of the anti-IFF assumptions. As suggested above, they may want to ask the following questions before developing anti-IFF agendas:

How does the general IFF agenda relate to domestic politics and governance realities across developing countries?
What parts of the IFF agenda could be varied based on domestic politics (e.g. different perceptions of fairness and wealth distribution)?
How can the agenda be designed to create a shift away from inequality and towards inclusive development?
Is the IFF agenda likely to lead to increased domestic revenues and subsequent inclusive development through legitimate political processes?
How can the agenda be adapted if it becomes clear that it benefits the elite through poor government spending choices or extraction of public funds for non-public benefit? (Acemoglu and Robinson; Blundo and de Sardan)
Will the anti-IFF agenda need to be coupled with redistribution policies to achieve developmental effects?

The core principles and the questions above are not a recipe for what works, regardless of context. In contexts where problems are complex, the eventual policy solutions have to be bespoke. Rather, the recipe for what works would need to focus on what process works to find a suitable solution (Wajli).

Subsequently, donors who want to concretely support anti-IFF measures at the country level should try to find the answers to these questions. In particular, they should pay close attention to how and by whom anti-IFF policies should be adapted to the very different national contexts where IFF occur. If legitimacy cannot be secured at country level, there are no reasons to expect any effective implementation. A government agreement to implement a donor-funded reform is no guarantee reforms will have an effect on governance beyond form. And, a universal technical approach to preventing IFF across developing countries offers little promise, as it builds on too many weak assumptions for policies to be effective. Yet, those approaches are all too common.

What do you think?

How relevant is the question of legitimacy at country level? Whose perceptions matter? And what contextual circumstances impact on country level legitimacy? How should policymakers and practitioners relate to it? Please share your thoughts in responses below.

References

Acemoglu, D. and J. A. Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty (New York: Random House, 2012)

Akmeemana, S; Booth, D.; Brown, D.; Cammack, D.; Foresti, M.; Garber, L.; Green, D.; Hudson, D.; Kossof, S.; Marquette, H.; McCulloch, N.; Menocal, A. R.; O’Keefe, M.; Parks, T.; Teskey, G.; Unsworth, S.; Whaites, A.; and L. Williams, “The Case for Thinking and Working Politically: The Implications of ‘Doing Development Differently’”, DCD/DAC/GOVNET/RD(2015)3/RDI (Paris: OECD, 2015)

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

Bellina, S.; Darbon, D.; Sundstøl Eriksen, S.S.; Sending, O.J., The Legitimacy of the State in Fragile Situations -Report for the OECD DAC International Network on Conflict and Fragility (Oslo: Norad, 2009)

Blundo, G. and de Sardan, J-P. O., Everyday Corruption and the State: Citizens and Public Officials in Africa (London: Zed Books, 2006)

Brunnée, J.; Doelle, M.; Rajamani, L. (eds.), Promoting Compliance in an Evolving Climate Regime (Cambridge, UK: Cambridge University Press, 2012)

Brunnée, J. and S. J. Toope, Legitimacy and Legality in International Law -An Interactional Account (Cambridge, UK: Cambridge University Press, 2010).

FATF, ”Mutual Evaluations,” FATF website (2017)

Falk, R.; Juergensmeyer, M., and Popovski, V. (eds.), Legality and Legitimacy in Global Affairs (Oxford: Oxford University Press, 2012)

Findley, M. G.; Nielson, D. L. and Sharman, J. C., Global Shell Games: Experiments in Transnational Relations, Crime, and Terrorism (Cambridge, UK: Cambridge University Press, 2014)

Findley, M. G., Nielson, D. and Sharman, J. C., “Causes of Noncompliance with International Law: A Field Experiment on Anonymous Incorporation,” American Journal of Political Science 59 (2015): 146–161

Grindle, M. S., Jobs for the Boys: Patronage and the State in Comparative Perspective (Cambridge, MA: Harvard University Press, 2012)

Jackson, R., Sovereignty: Evolution of an Idea (Cambridge, MA: Polity, 2007)

Kennedy, D., A World of Struggle -How Power, Law, and Expertise Shape Global Political Economy (Woodstock, UK: Princeton University Press, 2016)

Khan, M. H. and Jomo, K. S. (eds.), Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia (Cambridge, UK: Cambridge University Press, 2000)

Khan, M. H., “Political Settlements and the Governance of Growth-Enhancing Institutions” (London: SOAS, 2010)

Mungiu-Pippidi, A., Contextual Choices in Fighting Corruption: Lessons Learned (Oslo: Norad, 2011)

Mungiu-Pippidi, A., The Quest for Good Governance: How Societies Develop Control of Corruption (Cambridge, UK: Cambridge University Press, 2015)

Nicolaidis, K. A. and G. Shaffer, ”Transnational Mutual Recognition Regimes: Governance Without Global Government”. IILJ Working Paper №2005/6; Law and Contemporary Problems 68, Univ. of Wisconsin Legal Studies Research Paper №1007 (2005): 263–318

OECD, Illicit Financial Flows from Developing Countries: Measuring OECD Responses (Paris: OECD, 2014)

OECD, “The Busan Partnership for Effective Development Co-operation,” OECD website (2017)

Philp, M., “Politics and ‘the Pure of Heart’: Realism and Corruption” (forthcoming)

Tax Justice Network, Financial Secrecy Index (Tax Justice Network, 2015)

Whitfield, L. and O. Therkildsen, “What Drives States to Support the Development of Productive Sectors? Strategies Ruling Elites Pursue for Political Survival and Their Policy Implications,” DIIS Working Paper 2011: 15 (Copenhagen: Danish Institute for International Studies, 2011)

Walji, A., “Why innovation seldom scales, and what to do about it”, in Innovations for International Development by Ramalingam, B. and K. Bound (London: Nesta, 2016)

World Bank, World Development Report 2017: Governance and the Law (Washington: World Bank, 2017)

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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.