Indicator 16.4.1 Total value of inward and outward illicit financial flows (in current United States dollars)

Indicator 16.4.1: Total value of inward and outward illicit financial flows (in current United States dollars)

Target 16.4: By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime

United Nations Office on Drugs and Crime (UNODC) and United Nations Conference on Trade and Development (UNCTAD)

Definition:

The indicator measures the total value of inward and outward illicit financial flows (IFFs) in current United States dollars. IFFs are defined as “financial flows that are illicit in origin, transfer or use, that reflect an exchange of value and that cross country borders”.

Concepts:

IFFs have the following features:

• Illicit in origin, transfer or use. A flow of value is considered illicit if it is illicitly generated (e.g., originates from criminal activities or tax evasion), illicitly transferred (e.g., violating currency controls) or illicitly used (e.g., for financing terrorism). The flow can be legallygenerated, transferred or used, but it must be illicit in at least one of these aspects. Some flows that are not strictly illegal may fall within the definition of IFFs for statistical purposes, for example, cross-border aggressive tax avoidance which erodes the tax base of a country where that income was generated.
• Exchange of value, rather than purely financial transfers. Exchange of value includes exchange of goods and services, and financial and non-financial assets. For instance, illicit cross-border bartering, meaning the illicit exchange of goods and services for other goods and services, is a common practice in illegal markets and it is considered as IFF.
• IFFs measure a flow of value over a given time - as opposed to a stock measure, which would be the accumulation of value.
• Flows that cross a border.^[1] This includes assets that cross borders and assets where the ownership changes from a resident of a country to a non-resident, even if the assets remain in the same jurisdiction.

There are four main types of activities that can generate IFFs:

• Illicit tax and commercial practices: These include illicit practices by legal entities as well as arrangements and individuals with the objective of concealing revenues and reducing tax burden through evading controls and regulations. This category can be divided into two components:
  • IFFs from illegal commercial activities and tax evasion. These include illegal practices such as tariff, duty and revenue offences, tax evasion, competition offences and market manipulation amongst others, as included in the International Classification of Crime for Statistical Purposes (ICCS)^[2]. Most of these activities are non-observed, hidden or part of the shadow, underground or informal economy that may generate IFFs.
  • IFFs from aggressive tax avoidance. Illicit flows can also be generated from legal economic activities through aggressive tax avoidance. This can take place through the manipulation of transfer pricing, strategic location of debt and intellectual property, tax treaty shopping and the use of hybrid instruments and entities. These flows need to be carefully considered, as they generally arise from legal business transactions and only the illicit part of the cross-border flows belongs within the scope of IFFs.
• IFFs from illegal markets: These include trade in illicit goods and services when the corresponding financial flows cross borders. The focus is on criminal activities where income is generated through exchange (trade) of illegal goods or services. Such processes often involve a degree of criminal organisation aimed at creating profit. They include any type of trafficking in goods, such as drugs and firearms, or services, such as smuggling of migrants. IFFs emerge from transnational trade in illicit goods and services, as well as from cross-border flows from managing the illicit income from such activities.
• IFFs from corruption: The United Nations Convention against Corruption (UNCAC) defines acts considered as corruption, and they are consistently defined in the ICCS, such as bribery, embezzlement, abuse of functions, trading in influence, illicit enrichment and other acts of corruption in the scope. When these acts – directly or indirectly - generate cross-border flows, they generate IFFs.
• Exploitation-type activities, and financing of crime and terrorism: Exploitation-type activities are non-productive activities that entail a forced, involuntary and illicit transfer of economic resources between two actors. Terrorism financing and financing of crime are illicit, voluntary transfers of funds between two actors. Examples of exploitation-type activities are sexual exploitation, theft, extortion, illicit enrichment, and kidnapping. When the related financial flows cross country borders, they constitute IFFs.

Other relevant concepts include:

• Inward IFFs: IFFs entering a country.
• Outward IFFs: IFFs leaving a country.
• Illicit income generation: This refers to the set of transactions that either directly generate illicit income for an actor during a productive or non-productive illicit activity, or that are performed in the context of the production of illicit goods and services. A transaction constitutes an IFF when it crosses country borders.
• Illicit income management: These transactions use illicit income to invest in (legal or illegal) financial and non-financial assets or to consume (legal or illegal) goods and services. A transaction constitutes an IFFs when it crosses country borders.
• Illegal markets comprise all transactions related to the production and the trade with a certain illicit good or service. Regardless of the illicit nature, these market activities are considered as being economically productive, because value added is generated at each transaction. The value added describes the net increase in value (price times quantity) of the product at each transaction.

Current United States dollars

The measurement of illicit financial flows (IFFs) requires combining data held by different entities of the national statistical system and beyond, especially national statistical offices, customs and tax authorities, financial intelligence units and central banks. The balance of payments and system of national accounts data on illegal economic activities and non-observed economy provide a good starting point for the measurement of IFFs. Trade transactions data, held by customs, are essential for analysing the commercial IFFs, including trade misinvoicing. Statistics on international trade in goods and services, financial and business statistics as well as foreign affiliates statistics collate relevant data for estimating commercial IFFs. Similarly, tax returns at individual (person or firm) level can be used for analysing IFFs related to tax avoidance and evasion. Additionally, where established, large case units (LCUs) of national statistical offices offer indispensable expert knowledge particularly in the field of profit shifting and related tax and commercial IFFs.

Given the transnational nature of the indicator, data availability in other countries can support the calculation of national measures.^[4] The following existing data collection systems collect data relevant to IFFs from countries globally and can also be resources for countries to measure their IFFs.

UNODC Annual Reports Questionnaire (ARQ) collects the following data, which allow to understand current scale of drug supply market:

• Annual seizures of drugs in amounts and number of cases
• Trafficking routes (origin, transit and destination countries) and main transportation modes (air, land, sea and mail)
• Range and typical prices of drugs in retail and wholesale levels of supply market
• Range and typical purities of drugs in retail and wholesale levels of supply market
• Illicit cultivation, eradication and production of drug crops
• Illicit manufacture of plant-based or synthetic drug-related end products (clandestine laboratories detected and dismantled)

The global data collection on firearm trafficking collects data on seizures, prices and trafficking routes and it is an essential tool to understanding the dynamics of illegal firearms markets and flows.^[5]

UNODC collects data on trafficking victims identified in their respective countries using a common questionnaire with a standard set of indicators, including official information on detected cases and on origin-destination of trafficking flows.

UNODC, in partnership with the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) also maintains a global database of wildlife seizure incidents. This is mainly based on data submitted by the Parties to CITES.^[6]. Thanks to these data and to data collected by other official and open source data sources, UNODC compiles the WISE (World Wildlife Seizure Database), which provides key information on detected trafficking volumes and origin-destination routes, and estimated monetary value of the items seized. Such data are a key source to understand and identify IFFs generated by wildlife trafficking activities.

Other global data sources can be used to directly support, or supplement existing national data sources in measuring IFFs, particularly tax and commercial IFFs. These include, among others:

• United Nations International Trade Statistics Database (United Nations Comtrade) or IMF Direction of Trade Statistics (DOTS) for international trade data;
• Global Transport Costs Dataset for International Trade by UNCTAD, the World Bank, and Equitable Maritime Consulting, or OECD International Transport and Insurance Costs of Merchandise Trade for addressing different valuation of international trade flows;
• OECD Country-by-Country Reporting, OECD Analytical Database on Individual Multinationals and Affiliates, OECD Activity of Multinational Enterprises, Global Groups Register and other for tracking activities and aggressive tax avoidance by multinational enterprise groups.
• The locational banking statistics from the Bank of International Settlements to estimate the flows related to undeclared offshore wealth, i.e., IFFs from tax evasion.

Data providers are natural (individuals) or legal persons (businesses or institutions) who report their data for different purposes. Thus, relevant data are held by national statistical offices, central banks, tax authorities, customs, financial intelligence centres, criminal justice institutions, including courts, police, military, etc. They collect primary data from individuals, businesses, institutions and other statistical units either for statistical purposes or for their administrative work. Focal points at the national level are responsible for compiling the indicator and submitting it in collaboration with the national statistical office.

The statistical definition of illicit financial flows (IFFs) provides a comprehensive definition of the phenomenon to be measured. It does not focus on a specific measurement approach only, like trade asymmetry, but relies on a combination of methods to estimate different types of IFFs.

The disaggregated and bottom-up measurement approach is in line with existing frameworks such as the System of National Accounts (SNA) and the Balance of Payments (BOP) and it follows international efforts to measure non-observed or illegal economic activities.

SDG Indicator 16.4.1 calls for the measurement of the “total value” of inward and outward IFFs. While this is useful as an indication of the overall size of the problem and for measuring progress, a more granular measurement of IFFs helps to identify the main sources and channels of IFFs and can guide interventions targeting IFFs.

Countries are affected by different types of IFFs and it is suggested that main types of IFFs are defined at country level. This limits the possibility of measuring all types of IFFs in a comprehensive manner and comparability may be affected by different coverage from one country to another. However, the goal is to capture the most significant flows at country level and a gradual process of improving the exhaustiveness of the indicator is expected, following the model of measuring illegal economic activities and the non-observed economy in the balance of payments and national accounts.

There is a risk of double-counting when adding together explicit estimates of activities generating IFFs. Estimates for IFFs should not be simply added together, because they may already include parts of others (e.g., drug trafficking and bribery) and there may be double-counting. During the expert consultations, double counting was discussed and will be addressed in the comprehensive guidelines, namely the upcoming Statistical Framework to measure IFFs, issued to Member States.

A bottom-up and direct measurement approach is preferred for constructing the indicator. Bottom-up methods estimate illicit financial flows (IFFs) directly in relation to the four main activities and build them up departing from the overall economic income that illicit activities generate. Direct refers to the fact that data referring to the various stages of the economic processes generating IFFs are individually measured (via surveys, administrative data or other transparent methods) and are not the exclusive result of model-based procedures. The measurement approach is in line with the “Eurostat Handbook on the compilation of statistics on illegal economic activities in national accounts and balance of payments”^[7] for the estimation of the contribution of illegal activities to the GDP.^[8] The proposed compilation methods follow the principles developed in economic measurement frameworks such as the System of National Accounts and the Balance of Payments.

In 2021, UNCTAD released a draft Methodological guidelines to measure tax and commercial illicit financial flows. They identify a suite of methods for the measurement of the main types of tax and commercial IFFs, specifically two methods for each of the three main types of tax and commercial IFFs:

1. Trade misinvoicing by entities
   • Method #1 - Partner Country Method Plus
   • Method #2 - Price Filter Method Plus
2. Aggressive tax avoidance or profit shifting by multinational enterprise groups (MNEs)
   • Method #3 – Global distribution of MNEs’ profits and corporate taxes
   • Method #4 – MNE vs comparable non-MNE profit shifting
3. Transfer of wealth to evade taxes by individuals
   • Method #5 – Flows of undeclared offshore assets indicator
   • Method #6 – Flows of offshore financial wealth by country

UNODC has developed and continues to enhance methods to address IFFs from criminal activities, such as smuggling of migrants, drugs trafficking, illegal mining, wildlife trafficking, trafficking in persons, and corruption, providing guidance and expert support to national authorities undertaking measurement.

The methodology foresees:

1. A risk assessment that identifies the major and most relevant sources of IFFs in a country. This risk assessment can follow and build on existing risk assessments, e.g., the ones mandated by the Financial Action Task Force (FATF).^[9]
2. Once the activities that generate the most important flows are identified, the flows are estimated in a disaggregated manner and then summed up for the indicator.

Given the broad scope of activities generating IFFs, each type of flow needs to be treated in a separate manner.

A two-step process was developed that aids Member States in calculating Indicator 16.4.1.

As a first step in constructing the IFFs Indicator is to focus, for each IFF type, on IFFs generated during the illicit income generation: this refers to the set of transactions – such as those related to international trade of illicit goods - that either directly generate illicit income for an actor during a productive or non-productive illicit activity, or that are performed in the context of the illicit production of goods and services.

At a second stage, IFFs in relation to illicit income management are estimated. These refer e.g., to IFFs generated when income generated from illegal activities is invested abroad (e.g., into property). To assess these flows, quantitative and qualitative information held by financial authorities, central banks and other entities concerned with money laundering and financial crimes can be used. Further methodological deliberations on income generation / income management are being undertaken by the custodian agencies to be refined, finalized and included in a comprehensive Statistical Framework for the measurement of IFFs.

The methodological work of custodians on aggregation to measure IFFs as a single SDG indicator proposes a matrix approach, allowing activities identified to be analysed with respect to an aggregated income generation (IG) and income management (IM) approach as well as according to methods used to measure IFFs from these activities (see Figure 1). Using such a matrix, areas of (potential) overlap between different methods and types of IFFs can be identified – in the figure, by observing which areas are covered by a specific method (marked in green; light green indicates merely partial coverage by a particular method). Further practical studies in countries will be needed to design suitable and robust aggregation methods in the future.

Figure 1. Activity-method matrix for aggregated IG-IM representation of IFF measurement

Source: Deliberations by Task Force on the Statistical Measurement

It is advised that the estimates of IFFs are reported as the (best) estimate, accompanied by a lower and an upper bound estimate to account for uncertainties in the data sources and methods. Custodian agencies are currently developing further guidance to Member States to be included in the Statistical Framework for measurement of IFFs.

2024-07-29

United Nations Office on Drugs and Crime (UNODC) and United Nations Conference on Trade and Development (UNCTAD)

Indicator 16.4.2 refers to the illicit trade in firearms

Indicator 16.2.2 to trafficking in persons

Indicators 16.5.1 and 16.5.2 to corruption and bribery in all forms

Indicator 10.7.2 is concerned with migration policies

Indicators 15.7.1 and 15.c.1 Proportion of traded wildlife that was poached or illicitly trafficked

3