Capital flight and illicit financial flows

Capital flight is not quite the same as another widely used term – illicit financial flows – but there is a big overlap. When people hear the term ‘capital flight’ they often think of money running away from a country to a tax haven abroad, in the process doing harm to the home economy and society. The money may flee for various reasons: to escape tax, criminal investigation, risk and economic turbulence, confiscation, currency risk, or in pursuit of higher returns elsewhere. It is often, perhaps usually, illicit.

One good definition of capital flight is “the transfer of assets abroad to reduce loss of principal, loss of return, or loss of control over one’s financial wealth due to government-sanctioned activities.” This definition makes two things immediately clear. First, they involve the concepts of ‘escape’ and ‘elsewhere’ – which are foundational for our understanding of what tax havens or secrecy jurisdictions are. Second, capital flight is intensely political, involving relationships between government and wealthy citizens. This is all about power, wealth, conflict and the state.

The term illicit financial flows is commonly defined as the cross-border movement of money that is illegally obtained, transferred, or used. The term has limitations because by definition it excludes many important phenomena such as abusive activities that may not necessarily involve lawbreaking. Yet it also has a big advantage: whereas the word “flight” in “capital flight” puts the spotlight on the (poorer) countries that are victims of the phenomenon, suggesting that the onus is on them to address the problems, “illicit financial flows” does a better job of clarifying that this is a two-way street, involving the victim countries and the tax havens receiving it.

You can track your country’s vulnerability to illicit financial flows with our Illicit Financial Flows Vulnerability Tracker which helps countries identify the trading partners and channels that pose the greatest risks to their economies.

If you’d like further reading on this subject, here are two other studies we would highlight:

• The Price of Offshore, Revisited. James S. Henry estimated $21-32 trillion in unreported, largely untaxed private wealth sitting offshore in 2010. For a sample of 139 mostly low-middle income countries, aggregate external debts were $4.1 trillion in 2010. But add their foreign reserves and the offshore private holdings of their wealthiest citizens, the picture flips into reverse: these countries had aggregate debts of minus $10.1-13.1 trillion, collectively making them major net creditors to the world. The report highlights the close relationship between the governments of these countries taking out large loans and subsequent capital flight, often within weeks of the loans being received. It also highlights the role of ‘hidden’ flight that does not involve outflows, but instead involves the growth of untaxed assets offshore.You can watch a video here of the Tax Justice Network’s senior advisor James Henry discussing The Price of Offshore, Revisited on Democracy Now.
• Capital Flight from Sub-Saharan African Countries, 1970 – 2010 – James K. Boyce, Léonce Ndikumana. The 33 countries covered by this report lost a total $814 billion dollars from 1970 to 2010, for an accumulated capital stock (factoring in modest interest payments) of $1.06 trillion in 2010. This far exceeds their external liabilities of $189 billion, also making the region a “net creditor” to the rest of the world. The problem is that the assets are held by a small number of wealthy individuals, while their debts are shouldered by their populations through their governments.