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Curbing Illicit Financial Flows from Resource-rich Developing Countries: Improving Natural Resource Governance to Finance the SDGs

English title Curbing Illicit Financial Flows from Resource-rich Developing Countries: Improving Natural Resource Governance to Finance the SDGs
Applicant Carbonnier Gilles
Number 169564
Funding scheme r4d (Swiss Programme for Research on Global Issues for Development)
Research institution Institut de Hautes Etudes Internationales et du Développement
Institution of higher education Graduate Institute of International and Development Studies - IHEID
Main discipline Economics
Start/End 01.09.2017 - 31.08.2020
Approved amount 1'516'834.00
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All Disciplines (3)

Discipline
Economics
Legal sciences
Political science

Keywords (12)

Development finance; illicit financial flows; natural resource governance; commodity trading; Ghana; Laos; Peru; South Africa; Sierra Leone; ASEAN; trade and transfer mispricing; tax and investment regimes

Lay Summary (German)

Lead
Die Umsetzung der 2015 von der internationalen Gemeinschaft verabschiedeten Ziele für eine nachhaltige Entwicklung (Sustainable Development Goals, SDGs) sollen von Staaten großenteils durch die Mobilisierung nationaler Ressourcen realisiert werden. In rohstoffreichen Entwicklungsländern sind diese Bemühungen extrem erschwert durch unlautere Finanzflüsse (illicit financial flows, IFFs), die Steuereinnahmen untergraben. Die genauen Mechanismen sind ungenügend erforscht und oft missverstanden; das Entwickeln von wirkungsvollen Gegenmaßnahmen ohne Evidenzgrundlage ist schwierig. Unlautere Finanzflüsse entstehen mehrheitlich durch die manipulative Fehlbewertung von Rohstoffexportgütern (um Ausfuhrzolle und Firmensteuern zu vermeiden), sowie durch die missbräuchliche Ausgestaltung unternehmensinterner Verrechnungspreise (wenn z.B. der Handel zwischen Unternehmen derselben multinationalen Konzerngruppe erfolgt).
Lay summary

Forschungsziele

Einerseits möchte dieses Projekt den Wissensstand zu unlauteren Finanzflüssen im Rohstoffhandel erweitern. Andererseits will es neue Richtlinien auf nationaler und internationaler Ebene entwickeln, die helfen, entsprechende Finanzflüsse effektiv zu unterbinden. Vier zusammenhängende Forschungsfragen werden bearbeitet:

  1. Wie können wir unlautere Finanzflüsse besser berechnen?
  2. Welche Umstände (insbesondere rechtlicher und regulatorischer Natur) erklären die anhaltende Präsenz derartiger Finanzpraktiken?
  3. Wer sind die Hauptakteure in diesem Prozess und wie können sie zur Reduzierung von unlauteren Finanzflüssen beitragen?
  4. Welches sind die vielversprechendsten politischen Maßnahmen, die unlautere Finanzflüsse auf nationaler, regionaler und globaler Ebene effektiv einzuschränken könnten?

Das Projekt stützt sich auf Erkenntnisse aus den Politik-, Rechts- und Wirtschaftswissenschaften, einschließlich der politischen Ökonomie. Es fördert explizit durch Partnerschaften in Ghana, Laos und der Schweiz den wissenschaftlichen Nachwuchs. Außerdem wird das Projekt von einem internationalen Fachgremium unterstützt, das sich aus Entscheidungsträgern und hochrangigen Expert/inn/en zusammensetzt.

 Gesellschaftlicher Hintergrund

Seit der Finanzkrise 2008 und der Verabschiedung der SDGs 2015 werden „unlautere Finanzflüsse“ immer häufiger in Politik- und Forschungskreisen thematisiert. Datenlage und Forschungsmethodik sind jedoch weiterhin unzulänglich. Dieses Projekt untersucht die gegenwärtige Situation in betroffenen Entwicklungsländern und in den wichtigsten Handelszentren (Genf und London). Zusammen mit staatlichen und nichtstaatlichen Akteuren auf nationaler, regionaler und globaler Ebene versucht dieses Projekt, Entwicklungsländern zu einer besseren Besteuerungsgrundlage zu verhelfen und somit eine effektivere Umsetzung der SDGs zu ermöglichen.

Direct link to Lay Summary Last update: 16.03.2017

Lay Summary (English)

Lead
The implementation of the sustainable development goals (SDGs), adopted by the international community in 2015, is supposed to be financed primarily through domestic resource mobilisation. Yet for resource-rich developing countries in particular, this endeavour is undermined by significant levels of illicit financial flows (IFFs) that erode their tax base. Not only is this an under-researched and poorly understood issue, but the design of effective countermeasures is difficult without an evidence base. The majority of such IFFs result from trade mispricing (under-invoicing of commodity exports to reduce export duties and corporate income tax) or abusive transfer pricing (trade mispricing between affiliates of the same multinational group).
Lay summary

Aims of the project

The objective of the project is twofold: to improve our knowledge and understanding of commodity trade-related illicit financial flows(IFFs) and, on that basis, to design and promote policies (national and international) to effectively curb such IFFs. The project addresses four interrelated research questions:

  1. How can we improve the way the volume of IFFs is measured?
  2. What are the main incentives and legal/regulatory issues that explain the persistence of IFFs?
  3. Who are the major stakeholders involved and how do/can they contribute to reducing IFFs?
  4. What are the most promising policy responses at national, regional and global levels, to effectively curb commodity trade-related IFFs?

Drawing on economics, law, political science, and political economy analysis, this project explicitly promotes young researchers through partnerships in Ghana, Laos and Switzerland. It is supported by an international advisory board made up of policymakers and experts with in-depth knowledge about commodity trade and IFFs.

Scientific and societal context

Since the 2008 financial crisis and the adoption of the SDGsin 2015, the issue of IFFs has garnered increasing policy traction and scholarly attention. However, research to date suffers from data and methodological flaws. By looking at the factors at play in both developing countries and major trading hubs (Geneva and London), this project engages relevant state and non-state actors at national, regional and international levels. Ultimately, the aim of the project is to strengthen the capacities of resource-rich developing countries to consolidate their tax base to implement the SDGs

Direct link to Lay Summary Last update: 16.03.2017

Responsible applicant and co-applicants

Employees

Collaboration

Group / person Country
Types of collaboration
United Nations Economic Commission for Africa (UNECA) Ethiopia (Africa)
- in-depth/constructive exchanges on approaches, methods or results
Extractive Industries Transparency Initiative (EITI) Norway (Europe)
- in-depth/constructive exchanges on approaches, methods or results
Universidad del Pacífico Peru (South America)
- in-depth/constructive exchanges on approaches, methods or results
Cambridge University Great Britain and Northern Ireland (Europe)
- in-depth/constructive exchanges on approaches, methods or results
United Nations Conference on Trade and Development (UNCTAD) Switzerland (Europe)
- in-depth/constructive exchanges on approaches, methods or results
- Research Infrastructure
South African Institute of International Affairs (SAIIA) South Africa (Africa)
- in-depth/constructive exchanges on approaches, methods or results
University of British Colombia Canada (North America)
- in-depth/constructive exchanges on approaches, methods or results
Chatham House Great Britain and Northern Ireland (Europe)
- in-depth/constructive exchanges on approaches, methods or results

Scientific events

Active participation

Title Type of contribution Title of article or contribution Date Place Persons involved
Seminar on Commodity Dependence and Sustainable Development Talk given at a conference Curbing Illicit Financial Flows 21.06.2019 United Nations, Geneva, Switzerland Mehrotra Rahul; Brugger Fritz;
Corruption and Illicit Financial Flows in the Extractive Industry Value Chains: What Have We Learned and Where Do We Go from Here? Individual talk Illicit Financial Flows in the Extractive Industry Value Chains 15.05.2018 King’s College London, Switzerland Musselli Irene; Bürgi Bonanomi Elisabeth;


Self-organised

Title Date Place
Commodity trade mispricing, the case of Lao PDR 20.12.2019 Faculty of Law, National University, Vientiane City, Laos
Abnormal Pricing in International Commodity Trade: Evidence from Lao P.D.R 24.04.2019 National Institute for Economic Research (NIER), Vientiane City, Laos

Knowledge transfer events

Active participation

Title Type of contribution Date Place Persons involved
Commodity Trading: Understanding the tax-related challenges for home and host countries Workshop 03.12.2019 International Institute for Sustainable Development (IISD) - Webinar, Switzerland Mehrotra Rahul;
Commodity Meetup Talk 28.11.2019 Bücherei, Viktoriarain 12, Bern, Switzerland Musselli Irene; Bürgi Bonanomi Elisabeth;
Gold refining/trading in Switzerland – a global perspective Workshop 26.11.2019 State Secretariat for Economic Affairs SECO, Bern, Switzerland Brugger Fritz;
Policy coherence for development and IFFs. Talk 16.11.2018 Scuola universitaria professionale della Svizzera italiana (SUPSI), Switzerland Musselli Irene;
Expert meeting on statistical methodologies for measuring illicit financial flows (IFFs) Workshop 20.06.2018 United Nations Conference on Trade and Development (UNCTAD), Geneva, Switzerland Bürgi Bonanomi Elisabeth; Musselli Irene; Marur Siddhant; Mehrotra Rahul;
Commodity Trading Hub Switzerland – avoiding IFF and protecting Human Rights Workshop 12.04.2018 Institute of Science, Technology and Policy (ISTP), ETH Zurich, Switzerland Brugger Fritz;
Parlamentarische Gruppe Suisse-Solidarité internationale Talk 05.03.2018 Hotel Bern, Zeughausgasse 9, Bern, Switzerland Bürgi Bonanomi Elisabeth;
Presentation to Swiss Parliament Foreign Relations Committee Talk 07.11.2017 Der Nationalrat, Switzerland Carbonnier Gilles;
Meeting with the UN Independent Expert on foreign debt and human rights Workshop 26.09.2017 Center for Development and Environment (CDE), Switzerland Bürgi Bonanomi Elisabeth; Musselli Irene;


Self-organised

Title Date Place
Swiss R4D Consortium - UNCTAD ALDC Meeting 08.07.2019 United Nations, Geneva, Switzerland

Communication with the public

Communication Title Media Place Year
Media relations: print media, online media How to Assess Commodity-trade Related Illicit Financial Flows? L'Agefi Commodities Italian-speaking Switzerland International Western Switzerland Rhaeto-Romanic Switzerland German-speaking Switzerland 2019
Print (books, brochures, leaflets) Stellungnahme zum Entwurf der Botschaft des Bundesratszur Internationalen Zusammenarbeit 2021-2024 German-speaking Switzerland International 2019
New media (web, blogs, podcasts, news feeds etc.) The least developed countries remain de facto excluded from tax information exchange Centre for Development and Environment (CDE) Spotlight International 2019
Media relations: print media, online media Expert advocates domestic resource mobilisation to speed development Ghana News Agency International 2018
Media relations: print media, online media GRA calls for stronger collaboration between academia and industry Ghana Nation International 2018
Media relations: print media, online media ISSER partners top institutions to find better methods of tracking illicit financial flows myjoyonline.com International 2018

Associated projects

Number Title Start Funding scheme
185603 Sustainable Trade Relations for Diversified Food Systems 01.07.2019 NRP 73 Sustainable Economy

Abstract

Addressing illicit financial flows (IFFs) has gained increasing policy traction in recent years in OECD countries, in particular with regard to trade mispricing and abusive transfer pricing. There is a momentum to address IFFs from developing countries to help them mobilize the domestic resources required to implement the Sustainable Development Goals (SDGs). Yet, there continues to be a significant lack of rigorous academic studies on IFFs from developing countries, with most of the existing research being produced by NGOs, transnational advocacy groups and think tanks. Moreover, the little academic research that does exist tends to take a mono-disciplinary perspective, highlighting the centrality of trade-related IFFs while recognizing that the available data, methods and understanding of the incentives shaping the behaviour of key stakeholders do not allow to rigorously assess the phenomenon.Focusing on commodity trade misinvoicing as well as abusive transfer pricing - practices that tend to erode the tax base in developing countries that export natural resources - this research project aims to harness the potential of multi-disciplinary, collaborative research. Looking at IFF push and pull factors, the project addresses the following questions: (i) How can the magnitude and drivers of trade-related IFFs be assessed in a rigorous manner, overcoming data and methodological constraints? (ii) What are the key regulatory, institutional and political-economy issues involved with regard to taxation at critical junctures along the value chain? (iii) What are the roles and responsibilities of the major state and non-state actors involved, both at national and global levels? (iv) How can global and domestic regulatory and institutional frameworks be improved to effectively curb IFFs? Drawing on economics, law, political science, this interdisciplinary project seeks to engage in intensive process-tracing across multiple sources of data and methods in order to examine the mechanisms, strategies and policy innovations through which IFFs can be significantly reduced in given institutional, legal, political and economic settings. In parallel to a global analysis of IFFs, the project works closely with research partners in two resource-rich developing countries featuring very different historical and institutional contexts (Ghana and Laos), in relation to two of the world’s largest commodity trading hubs (Geneva/Switzerland and London/UK). In the second phase of the project (years 4-6), the analytical framework developed in the first phase will then be expanded to a post-conflict, fragile context (Sierra Leone) and two resource-rich upper-middle income countries (Peru and South Africa). The project will also explore the role of ASEAN, a regional organization whose members comprise both commodity exporters (e.g. Myanmar) and a trading hub (Singapore). The team will collaborate closely with associated researchers from reputable universities as well as from the Royal Institute of International Affairs (Chatham House), the EITI, UNECA and SAIIA. The team will further benefit from the feedback, advice and outreach provided by an Advisory Group of hand-picked individuals, from all major stakeholder groups, who have already agreed to take on this role. Continuous stakeholder engagement lies at the heart of the project, with pathways to impact including sustained interactions with research communities, policy-makers and public officials, multinational and national firms and business associations, civil society, and the media. Beyond academic journal articles, a website, dissemination events and series of briefs and papers, the project will establish an online observatory of commodity-trade-related IFFs together with permanent mechanisms to trace IFFs in selected countries. Outreach to scholars, policy-makers and other stakeholders at both the global and national level will be furthered through the production of a documentary film (including a shorter online version), as well as the offering of online training modules for key audiences.
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