Harnessing Open Account Trade — A Major Enabler for Illicit Financial Flows from Developing Countries
Can blockchain technology come to the rescue? Will the African Continental Free Trade Area leverage its Digital Trade Protocol?
By Yuefen Li
The current geopolitical landscape has made domestic resource mobilization an even more important imperative for developing countries. In this context, it is more urgent than ever to combat illicit financial flows (IFFs) whose staggering amount from developing countries has outstrippedthe combinedsum of official development assistance (ODA) and foreign direct investment (FDI)going into the developing world. The IFFs from the financial channel is significant, but the greater proportion ofIFFs actually stems from trade channels rather than from financial channels. It is particularly concerning that the flexibility and legitimacy of international trade have been exploited to cover IFFs. Trade mis-invoicingisthe largest component of IFFs from developing countries. A major reason for trade being used to undertake illicit, fraudulent or criminal activities is because 80%-85% of the more than US$ 24 trillion international trade is conducted via open account trade (OAT), which has minimum scrutiny as it is conducted on a bilateral basis between the importer and exporter, not transparent and with minimal involvement of the financial institutions and customs authorities. OAT payment does not require documents to prove quality, quantity and other information about the product being shipped and is made through automatic payment systems which lack the oversight provided by any third party. OAT gives trade mis-invoicing great ease, flexibility, minimal cost and minimal risk. Therefore, if the world is serious about combatting IFFs, it is urgent and imperative to close loopholes in the OAT for IFFs, making it transparent, trackable and involving third party monitoring and scrutiny. The functionalities and features of Blockchain technology (BCT), though its implementation is still nascent, can be a good candidate to make OAT more modern, transparent to regulators, traceable, more efficient and above all minimize IFFs.The goals of the African Continental Free Trade Area (AfCFTA)’sDigital Trade Protocol (DTP)includeboosting intra-African trade through unifying and harmonizing regulatory framework for Africa’s digital economy and regional trade, promoting cross-border data flows and paperless trade,and enhancing cybersecurity measures.Theexploration of Blockchain adoption to reduce OAT’s risks for IFFs and make trade more effective aligns well with DTP’s goals.
COMBATTING ILLICIT FINANCIAL FLOWS (IFFS) AND ENHANCING DOMESTIC RESOURCE MOBILISATION (DRM) FOR FINANCING DEVELOPMENT: A DECADE UNDER REVIEW
Hosted by the South African G20 Development Working Group and the South Centre, funded by the International Economic Partnership Programme
Date: 30 April 2025
Time: 13:15 to 14:30
Venue: Room CR-D United Nations Headquarters, New York
The side event focuses on the importance of reducing illicit financial flows (IFFs) and enhancing domestic resource mobilisation (DRM) to support the financing for development initiatives.
Honduras’ Tax Justice Law: Increasing tax collection to achieve the SDGs without increasing tax rates
By Abdul Muheet Chowdhary, Kuldeep Sharma and Kolawole Omole
In April 2023, the government of Honduras submitted a tax reform bill called the “Tax Justice Law” to the National Congress through which it intends to reform the Honduran tax system with potential for improved revenue collection, that too, without introducing new taxes or increasing tax rates. The law aims at Constitutional recognition that tax collection must be progressive, change the principle of taxation from territorial to worldwide taxation of income, introduce Ultimate Beneficial Ownership requirements that inter alia aim to repeal bearer shares, facilitate exchange of information with other jurisdictions, eliminate banking secrecy for tax purposes, implement credit method in domestic legislation to eliminate double taxation, amend the Constitution so as to limit tax exemptions to a maximum period of 10 years, restore transfer pricing audits to check abusive claim of tax incentives and eliminate the possibility of forgiving tax debts. The provisions contained in the Tax Justice Law are timely and welcome, particularly in light of the Global Minimum Tax. They can improve government revenues, reduce public debt and create the fiscal space for achieving the Sustainable Development Goals.
Statement of the South Centre at the Sixth Intersessional Meeting of the Human Rights Council on Human Rights and the 2030 Agenda
18 January 2024
Leveraging human rights in the fight against illicit financial flows and corruption through greater international tax cooperation and fiscal transparency
Value Addition or Trade Misinvoicing: Coal Trading in the Asia-Pacific
By Manuel F. Montes and Peter Lunenborg
Statistics on coal trade between India, Singapore and Indonesia suggest that trade misinvoicing is used as a vehicle for illicit financial flows. At present this practice is not well addressed by the Organisation for Economic Co-operation and Development’s tax standards. Asia-Pacific countries should intensify cooperation on this issue. Other international organizations with a mandate in this area could also play a role, for instance the World Trade Organization. Ultimately, increased cooperation would help to achieve Sustainable Development Goal 16.4 which inter alia aims, by 2030, to significantly reduce illicit financial flows.
South Centre Statement to the Non-Aligned Movement (NAM) Ministerial Meeting
July 5-6, 2023
Baku, Azerbaijan
The South Centre supports developing countries with policy-oriented research, advice on international negotiations and capacity building. Since its inception, the South Centre has maintained a close relationship with NAM. We are strong supporters of its principles, appreciate its achievements, and believe in the central role that NAM can play in reforming the multilateral system.
The South Centre will continue to work with NAM and its member countries to support them in their efforts to shape a fairer multilateral system that is responsive to the needs of the Global South.
Illicit Financial Flows and Stolen Asset Recovery: The Global North Must Act
by Abdul Muheet Chowdhary and Sebastien Babou Diasso
Domestic resource mobilization is essential for developing countries to achieve the Sustainable Development Goals by the deadline of 2030. Concomitantly, Illicit Financial Flows (IFFs), which also lead to asset theft, are major means through which these countries are losing resources. This research paper analyzes the World Bank’s Stolen Asset Recovery (STAR) database and shows that countries from where assets have been stolen are mostly developing countries, and countries where the stolen assets have been hidden are developed countries. The paper also shows that regarding the pending or ongoing asset recovery cases, there is a clear pattern where the majority of countries waiting to have their assets returned are developing countries, and those who must return them are developed countries. There is an unexplained and unjustified delay by developed countries in the process of returning the frozen assets to developing countries which needs to be addressed as soon as possible. There is also an evaluation of international legal reforms which can be implemented to accelerate the asset recovery process. However, all these will need the full commitment of Global North countries where most of the stolen assets are hidden and which bear the brunt of responsibility for returning them to the developing countries.
Combating Illicit Financial Flows : “Now or Never”
Statement of H.E. Thabo Mbeki, Chairperson of the African Union High Level Panel on IFFs
“I fully support the creation of a globally inclusive, intergovernmental process at the UN. I urged all international organisations and Member States to resist attempts to block this important step forward, and thus call into question our global commitment to fighting illicit financial flows and corporate tax abuse in support of the Sustainable Development Goals.”
* H.E. Thabo Mbeki is also the Chair of the Board of the South Centre.
Second African Fiscal Policy Forum (Part one): Curbing Illicit Financial Flows from Africa and Accelerating Asset Recovery for Sustainable Development
Date: Thursday, 1st of December 2022 Time: 03:00 – 06:00 PM (Addis Ababa Time)
The event will be hybrid.
In person: Addis Ababa
Following the outcomes of the First Forum held in December 2021, this Second Series will be held in three iterations. This first part of the Second African Fiscal Policy Forum will bring together key stakeholders to discuss the current global processes towards combatting IFFs, the role of African regional institutions, and the importance of supporting Africa’s Domestic Resource Mobilization efforts.
Organizers: Coalition for Dialogue on Africa, CODESRIA, South Centre, Rosa Luxemburg Siftung
A Global Asset Registry to track hidden fortunes and for asset recovery
By Ricardo Martner
Financial opacity and offshore hidden wealth have become a major economic and political problem. Tax havens continue to exist and provide financial secrecy services that allow the richest individuals in the world to hide their wealth from national tax authorities. Implementing a Global Asset Registry could help tax authorities to identify, record and tax all wealth, regardless of where it is held. It would also be a critical tool in efforts to recover stolen assets of countries suffering from widespread corruption.
Two Pillar Solution for Taxing the Digitalized Economy: Policy Implications and Guidance for the Global South
by Irene Ovonji-Odida, Veronica Grondona, Abdul Muheet Chowdhary
The taxation of the digitalized economy is the single most important topic in international tax negotiations today. The OECD has devised a “Two Pillar solution” to the problem. Pillar One is focusing on a reallocation of taxing rights to market jurisdictions, which are largely expected to be developing countries, and Pillar Two is instituting a global minimum tax. The Pillar One solution, known as Amount A, will be codified into a Multilateral Convention (MLC) and is expected to be placed before countries for signature in early 2023. The solution ushers in a new paradigm in the taxation of multinational enterprises but has immense complexity and likely minimal revenue gains for most developing countries. It will also require them to give up the right of unilateral tax measures on all out-of-scope companies, meaning they will only be able to tax the fewer than 100 companies likely to be in-scope, if at all. The decision to sign or not is thus a historic one, as it will lock developing countries into a constricted new framework, at a time when revenue needs are especially critical to recover the economies from COVID-19 in the context of a turbulent state of the global economy.
However, the United Nations too has a solution, known as Article 12B. This operates in a different manner and is a minor modification to the existing decentralized international tax system which is based on bilateral tax treaties, and which developing countries are more familiar with. It is also likely to generate far higher revenues than Amount A, and does not restrict any of their sovereign taxing rights. This Research Paper assesses the various implications for developing countries from adopting the OECD’s or the United Nations’s respective solutions and concludes with a possible global South response to the Two Pillar solution.
Outcomes and Recommendations of the CoDA-South Centre Dialogue Series on Illicit Financial Flows (IFFs): Comparing Tax Revenues to Be Raised by Developing Countries from the OECD and UN Solutions for Taxing the Digital Economy
