Illicit Financial Flows: Undermining Economies and Nations

By Dr. Matthew Loux and Bryce Loux  |  12/08/2025

In a globalized economy, capital can flow around the world at great speed. For developing countries, the focus on the greater mobilization of domestic resources is important to:

• The reduction of poverty
• The improvement of infrastructure
• The achievement of sustainable development

However, the goal to meet these efforts is countered with the demand for illicit financial flows (IFFs), money that is earned, transferred, or spent unlawfully. Often, those funds are often moved and converted into private investments that are concealed in other countries as a form of tax evasion. Illicit financial flows prevent governments from receiving necessary funds and taxes and also ruin the foundation of governance and its institutions.

What Creates Illicit Financial Flows?

Illicit financial flows are driven by many activities, including:

• Corruption – Corruption and the theft of public funds are constitutive acts. Embezzlement and bribery, or the diversion of state resources, are tax avoidance acts that result in funds being transferred to accounts outside a jurisdiction.
• Criminal activities – Drug and human trafficking, smuggling, theft, money laundering, tax evasion, and other crimes result in proceeds that need to be moved across borders.
• Illegal resource exploitation – The illegal exploitation of other countries’ natural resources, such as unreported logging, mining or fishing, also result in a draining of government resources. It also negatively affects a country’s environment, regime, and ecosystems.
• Terrorism – Terrorist financing pays for equipment, personnel housing, training camps, and communications channels.  
• Weak governance and institutions – Fragile enforcement, corruption, and the absence of financial oversight in a country facilitate IFFs. Unfortunately, poorly governed and weak institutions are the most fertile ground for IFFs.
• Global financial secrecy – Tax havens, anonymous shell companies, and opaque account ownership provide illicit wealth holders with a safe hiding place for money gained from illegal activities.
• Corporate profit shifting – Multinational corporations take advantage of loopholes through Base Erosion and Profit Shifting (BEPS) strategies.
• Resource dependence and conflict – Resource-rich or conflict-affected nations throughout the world are at greater risk of a loss of sustainable development, due to weak oversight of financial systems and the transfer of illegally earned funds.
• Financial innovation and technology – Sophisticated financial instruments such as Bitcoin aid additional illicit money movement across borders.
• Demand-side incentives – Developed countries have real estate, luxury, and offshore financial centers where illicit capital can easily flow.

The United Nations Trade and Development (UNCTAD) and the UN Office of Drugs and Crime (UNODC) observe that an illicit financial flow is an illicit flow of funds from one location to another.

However, the definition of illicit financial flows varies among financial professionals. Some use a narrow definition, while others take a broader approach that also includes harmful but legally permissible practices.

Illicit Financial Flows and Developing Countries

There is no denying that the scale of illicit financial flows is enormous, especially in some African countries. For instance, IFFs have caused Africa to lose about $89 billion a year or about 3.7% of Africa’s GDP.

This loss of financial resources results in a drain on funds that could be otherwise used in two main ways: the provision of social services and the building of infrastructure. For national governments, illicit funds and tax issues are critical problems for development agencies and governance.

The Methods of Transfer for Illegal Funds

Illegal funds can be moved in various ways, including:

• Trade mispricing and the manipulation of trade documents
• Physical cash smuggling
• Shell companies and other offshore jurisdictions, used to conceal the ownership of resources
• The use of informal financial transfer systems, such as Hawala networks
• Money laundering through the purchase of real estate, luxury goods, art, digital currencies, and other common forms of money laundering

The Challenges of Identifying Illicit Funds

Identifying and measuring illicit financial flows is complicated for various reasons, including: 

• Their hidden nature – Financial transactions may simply go unrecorded or be disguised as legal.
• Varying definitions – Different definitions of illicit flows provide a varying scope of analysis.
• Data gaps – Trade and capital flow statistics are untrustworthy in many countries.
• Complex channels – Overlapping methods of illicit financial flows make tracing and identifying them difficult.

International Cooperation Is Needed to Stop Illicit Financial Flows

Illicit financial flows are an ongoing international problem. However, there are various strategies that could be employed to stop or mitigate them, including:

• Strengthening domestic revenue systems – Governments can take bold steps by enhancing tax collection, increasing audit powers, and enforcing customs regulations. Tax agencies can be streamlined, and more attention can be paid to corruption to mitigate financial leakages out of the economy. 
• Increasing transparency – Public registers of company and trust owners can deter secrecy. Financial institutions should verify ownership and exercise due diligence, especially for public figures. Mutual legal assistance requests and technical assistance could also be helpful in identifying funds that cross country borders.
• Using stronger anti-money laundering and counter-terrorism financing tactics – Strong “Know Your Customer” policies and proactive transaction monitoring, coupled with robust reporting systems, can identify trends and facilitate the reporting of suspicious activities. This strategy should be coupled with international efforts to facilitate global cooperation, especially for trade-related IFFs, crime-related IFFs, and arms flows.
• Modernizing trade and customs – Advanced data analytics facilitate the prediction of misinvoicing. The collaboration of customs authorities via harmonized customs codes can provide regional cooperation and aid in the detection of trade-based money laundering. 
• Improving natural resource governance – Governance frameworks such as the Extractive Industries Transparency Initiative (EITI) promote the advocacy of payment and contract disclosure and resource accountability to ensure that illicit outflows during resource extraction do not deprive citizens of their due resource wealth.
• International alliances – Illegal financial flows defy domestic adoptions of national legislation. However, international treaties, legal assistance, and communication arrangements help permit and guide cross-border flows.  
• Asset recovery and sanctions – To administer sanctions, repatriate stolen resources, and recover assets of individuals, there needs to be more accountability. IFFs, asset recovery, and complex financial systems have recourse ceilings.   

Emerging Gaps with Illicit Finance

Stopping illicit financial flows will require constant vigilance. Financial professionals charged with detecting and blocking the illegal transfer of funds will need to contend with:

• Digital finance and cryptocurrencies – Peer-to-peer new technologies drive unaccountable, rapid cross-border resource movements and settlement adoptions.   
• Global value chains and corporate taxes – Profit shifting through multilayer cross-border corporate configurations and the detection of profit shifting evade corporate tax regulations and disguise illegal activities.   
• Trade-based money laundering – Trade in counterfeit goods and the illicit trade in wildlife and minerals involve significant unrecorded trade flows.   
• Data gaps – Addressing IFFs and recovering stolen assets or components will require improved statistical systems. 

Developing countries and can’t do much when their capital is drained, their governance is undermined, and internal corruption is rampant. Changes at all levels are needed. Stronger and more cohesive governance at the global level is necessary, but poor institutions at the local and regional levels need to be improved, too.

The transparency of governance and important relationships can be improved with stronger, more targeted use of governance technologies. Lastly, high-income countries need to be more balanced in the economic relationships they create and maintain with the national authorities of low and middle-income countries.

Stopping the IFFs is, the defeat of financial crime; it is also a fight for the fairness and justice to which the public is entitled. Public goals are often obstructed as policies are passed to attain implicit public objectives. As lost funds are reinstated to an economy, better public policy goals can be attained through adjustments to structural frameworks.

The Bachelor of Arts in International Relations and Global Security

For students interested in learning more about foreign policy, illicit financial flows, and global development, American Public University (APU) offers an online Bachelor of Arts in International Relations and Global Security. Taught by expert instructors, courses in this degree program include international law and regimes, international development, and international organizations. Other topics include American foreign policy and international relations.

Students can choose from one of five concentrations, such as:

• Middle Eastern studies
• Comparative politics and area studies
• Globalization and human security
• Peacekeeping
• International studies

For more details about this bachelor’s degree, visit APU’s security and global studies degree program page.