With So Much Debate On Twin Deficits, Forex & External Debt Crisis: Why No Focus On The Impact Of & Control Over Illicit Financial Flows?

By Chandra Jayaratne –MARCH 25, 2022

Chandra Jayaratne

In recent days, the leaders in governance, the executive, legislators, intellectuals and the media have engaged in many analyses, debates and strategic way forward suggestions to get Sri Lanka and its people out of a critical socio-economic morass, due to years of mismanaged twin deficits, external accounts and asset liability management; which as a consequence can drag the nation down to a level that it joins the group tagged as ‘failed states’.

The suggested strategic corrective action options were varied; with most professionals and business persons recommending a float of the exchange rate, adjusting interest rates to market, cutout wasteful spends, defer all capital projects, with an external debt restructure alongside an IMF bailout assistance, whilst supporting the targeted poor and the vulnerable with cash transfers; the home grown solution of the Ministry of Finance and the Central Bank Road Map were dependent on attracting non debt creating inflows, forced conversion of export earnings, seeking short term bail out swaps, import restrictions, seeking longer term tenor loans from friendly nations, selling strategic assets, granting long term supply contracts and concessions mainly in the energy and port sectors in return for long term credit and upfront fees, placing reliance on the revival of the economy via normalization of tourism flows and potential investments/value creation via the Port City, possibly topped up with the sale proceeds of world’s largest single natural blue sapphire, whilst holding down exchange rate and settling maturing debt commitments; the socialist academics called for moratoriums on repatriation of dividends/ royalties/ technical services fees along with freight/airline ticket sales, postponing debt resettlements for up to five years, totally defaulting on all external debt obligations, become self reliant without imports, beginning with restricting imports only to essential food, medicines, petroleum products and raw materials for exports.

It is very strange and puzzling as to why the key stakeholders engaged in the above analysis and debates failed to pursue the critical option of minimizing illicit financial flows (IFFs), especially cross border IFFs!

“One of many lessons that the Millennium Development Decade taught all stakeholders is that sustainable development requires looking at entire systems of economic and governance related enablers and disablers of growth and domestic resource mobilization: in other words to consider those factors which enable and disenable sustainable outcomes in economic growth, governance and security, politically commit to pursuing the enablers and preventing the disablers, and implementing a policy framework which will increase the effectiveness of implementation. Illicit financial flows (IFFs) constitute a major disabler to sustainable development. They can have a direct impact on a country’s ability to raise, retain and mobilize its own resources to finance sustainable development. International commitments to urgently address IFFs have accelerated in recent years: the Addis Ababa Action Agenda urge all countries to ratify and accede to the United Nations Convention against Corruption; to support the Stolen Asset Recovery Initiative; to combat money laundering and terrorism financing; and to ensure effective implementation of the United Nations Convention against Transnational Organized Crime. Similarly, the 2030 Agenda for Sustainable Development and the Sustainable Development Goals call on countries to significantly reduce illicit financial and arms flows by 2030 (SDG target 16.4); to substantially reduce corruption and bribery in all their forms (16.5); to develop effective, accountable and transparent institutions (16.6); to strengthen domestic resource mobilization, including through international support to developing countries (17.1); and to enhance global macroeconomic stability (17.13).

The term “illicit financial flows” (IFFs) is not defined in the international normative framework. IFFs are defined broadly as all cross-border financial transfers, which contravene national or international laws. This wide category encompasses several different types of financial transfers, made for different reasons, including: funds with criminal origin, such as the proceeds of crime (for example tax evasion, money laundering, fraud and corruption); funds with a criminal destination, such as bribery, terrorist financing or conflict financing; transfers to, by, or for, entities subject to financial sanctions under UN Security Council Resolutions such as 1267 (1999) and its successor resolutions; and transfers that seek to evade anti-money laundering/counter-terrorist financing measures or other legal requirements (such as transparency or capital controls). [i] “

Illicit financial flows in its broader definition cover illegal movements of money or capital from one country to another. Global Financial Integrity classifies this movement as an illicit flow when funds are illegally earned, transferred, and/or utilized across an international border.

“The challenge in global and national efforts to stem capital flight is to explain its drivers and dynamics. In other words, how is capital ‘leaking out’ of the economy and what are the main causes of these leakages? The main conduits of capital flight are: (1) Balance of Payments leakages; (2) export mis-invoicing; (3) import mis-invoicing; (4) unreported remittances[ii].

IFFs in Sri Lanka can be traced to arise from the following:

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