05 March 2025
Which Money to Follow? Evaluating Country-Specific Vulnerabilities to Illicit Financial Flows
Which Money to Follow? Evaluating Country-Specific Vulnerabilities to Illicit Financial Flows
Understanding the Challenge of Illicit Financial Flows
Illicit financial flows (IFFs) pose a significant threat to economies worldwide, undermining governance, distorting markets, and draining resources from development. Despite decades of global efforts against money laundering, including the establishment of the Financial Action Task Force (FATF) in 1989, money laundering continues unabated. One major challenge is the lack of reliable data and effective methodologies to measure and assess these risks accurately. Many National Risk Assessments (NRAs) rely heavily on expert opinions, which can be subjective and outdated, limiting their usefulness in addressing the dynamic nature of illicit flows.
A New Multidisciplinary Approach to Risk Assessment
This study introduces a novel, cost-effective methodology that combines quantitative data on bilateral economic activities with qualitative assessments of regulatory frameworks across countries. By integrating publicly available, up-to-date data on trade, foreign direct investment (FDI), and portfolio investments with a legal analysis of financial secrecy loopholes in partner countries, the approach offers a transparent and replicable way to evaluate vulnerabilities to IFFs.
The methodology focuses on three key economic channels commonly exploited for illicit flows: inward and outward FDI, inward and outward portfolio investments, and trade (imports and exports). It assesses the risk by measuring the financial secrecy levels of partner jurisdictions involved in transactions and weighting these by the volume of economic activity.
Case Studies: Nigeria, Brazil, and Indonesia
Applying this method to three populous Global South countries — Nigeria, Brazil, and Indonesia — yields detailed insights into their exposure and vulnerability to IFFs through different channels.
Nigeria: Risks in Inward Foreign Direct Investment
Nigeria exhibits significant vulnerability through inward FDI, with about 11% of its GDP exposed to investments originating from highly secretive countries. The Cayman Islands, Netherlands, Bermuda, United States, Mauritius, and others contribute substantially to this risk. Complex corporate structures and shell companies in these jurisdictions facilitate money laundering by obscuring ownership and fund origins.
Brazil: Risks in Outward Portfolio Investments
Brazil shows high vulnerability in outward portfolio investments, where Brazilian investors place substantial funds into foreign securities in jurisdictions with weak AML regulations. The United States emerges as the top destination for these investments, followed by the Cayman Islands, Japan, Switzerland, and others. Notably, Brazil’s NRA does not sufficiently address risks linked to outward portfolio investments or the involvement of major secrecy jurisdictions.
Indonesia: Risks in Imports
Indonesia is highly vulnerable across all economic channels but particularly exposed through imports from countries with high secrecy scores such as China, Vietnam, Singapore, and the United States. Sectors like electronics, minerals, textiles, and metals show elevated risks of trade-based money laundering through price manipulation techniques such as over- or under-invoicing.
Enhancing National Risk Assessments with Transparent Data Integration
Existing NRAs often lack systematic evaluations of geographic risks or rely on non-transparent expert judgments. This study’s approach complements current NRAs by providing timely, data-driven risk profiles that can be updated as new data becomes available. It identifies specific economic channels and partner countries that contribute most significantly to IFF risks, allowing for more targeted regulatory focus and resource allocation.
Conclusion: Towards More Effective Anti-Money Laundering Strategies
The proposed methodology addresses critical gaps in current risk assessment practices by combining legal scrutiny with economic flow analysis in a scalable framework. While it does not capture all dimensions of money laundering risks — particularly domestic or non-secrecy-related activities — it provides a robust baseline for identifying and prioritizing cross-border vulnerabilities. Future enhancements could expand data sources and incorporate dynamic network analyses to further refine risk detection and policy response.
