Corrupt money’s negative economic impact can be measured, shows WB study

Income derived from corruption can be equivalent to a significant percentage of a country’s GDP, shows a new study by the World Bank entitled Ill-Gotten Money and the Economy, Experiences from Malawi and Namibia.

In Malawi, income that is acquired through corruption amounts to about five per cent of GDP, while tax evasion is estimated to equal eight to 12 per cent of GDP. In Namibia, while corruption is considered to be significant, tax evasion is by far the largest measurable source of ill-gotten money, equivalent to an estimated nine per cent of GDP.  

“While these figures are estimates, this study shows that ill-gotten money and its associated economic impact can be more systematically quantified, and that the effect is negative. This will hopefully mobilise efforts to establish more effective anti-money laundering policies,” says Stuart Yikona, World Bank Senior Financial Sector Specialist and one of the report’s authors.

Conducted in collaboration with country experts, the study measures the magnitude of corrupt money and shows how the recycling of ill-gotten money and other related underlying criminal acts negatively affect economic development and poverty reduction. The high economic cost of criminal activities such as corruption, tax evasion and its related “dirty money” flows reinforces the need for developing country policy makers and practitioners to act effectively –and early- to curb such activities. Corruption and tax evasion affect national budgets, ultimately undercutting the provision of public services in education, health and infrastructure, for example.

Importance of well-designed anti-money laundering tools in combating corruption:

The study also confirms that well-designed anti-money laundering measures such as the use of financial intelligence can be useful tools in combating corruption, tax evasion and other financial crimes. Therefore, it is important that developing countries adopt customised legal regimes and institutions to go after dirty money when implementing international anti-money laundering standards.  These regimes should reflect the local political, economic and social context.

The study supports national efforts to formulate anti-money laundering policies by providing a framework that can be used to analyse the amounts and effects of ill-gotten money. “The study guides countries to conduct a cost-benefit analysis on the implementation of their anti-money laundering policies,” says Leonie Dunn, Director of the Namibia Financial Intelligence Centre.

“Governments can evaluate whether or not sufficient measures have been taken to estimate the risks illicit money flows pose to economic development and to effectively address those risks.”  As a follow up to this study, Namibia will conduct a national money laundering risk assessment in 2012 to explore how anti-money laundering policies can be reformulated to focus on the real dangers of ill-gotten money flows to the economy. Tom Malikebu, Deputy Director of the Malawi Financial Intelligence Unit, adds that “this study provides an insight into the sources and magnitude of ill-gotten funds. Such insight is a stepping stone in prioritising resources for combating crimes that have the most detrimental effect on Malawi’s economy.”

Ill-Gotten Money and the Economy is part of the Financial Market Integrity’s support for the efforts of policymakers and practitioners to eliminate safe havens for the proceeds of corruption and other financial crimes.