What should we be worried about? Estimating bilateral illicit financial risk envelopes for major developed and developing economies

While recent years have seen mounting efforts to curtail illicit financial flows (IFFs), gauging the scale, location, and nature of IFFs remains a major methodological challenge. Here we introduce a new illicit financial risk envelope estimation approach that attempts to build on the strengths of existing illicit financial vulnerability assessment methodologies, while mitigating their weaknesses, and use this to estimate the composition and scale of illicit financial risks for 10 major developed and developing economies. By bringing together three new large-scale datasets of illicit financial and offshore investment networks, we are able to produce empirically calibrated estimates of relative as well as total illicit financial flow and stock risks, on a combined actor nationality and proximate bilateral international geographic basis, across the channels of trade, banking, and foreign direct as well as portfolio investment. The results suggest that there are major differences in the composition of illicit financial risks impacting developing as opposed to developed countries: with developing country risks centered on trade and FDI-round-tripping by local actors, while developed countries have a more complex pattern of risks largely centered on international banking and portfolio investment, and predominantly driven by foreign developing country actors. The results also indicate that the worldwide composition of illicit financial risks is likely heavily skewed towards actors from countries with weak rule of law on a nationality basis, and towards jurisdictions with high levels of financial secrecy on a proximate geographic basis. This suggests that ongoing efforts to boost financial transparency, in key areas such as beneficial ownership reporting, are likely to yield substantial benefits in the combatting of illicit financial activities.