Study: The state and the legalisation of illicit financial flows

So far, most research on illicit financial flows has focused on illicit outflows from low-income countries and the role of non-state actors in generating IFFs. Less attention has been paid to processes through which IFFs enter formal value chains – effectively becoming legalised before leaving the country – or the crucial role of state institutions as gatekeepers.

Using the case of Bolivia, Fritz Brugger, Joschka J. Proksik and Felicitas Fischer examined how the legalisation of IFFs works in practice. Gold is produced by 1600 cooperatives, with few fully formalised and adhering to environmental, fiscal, and labour policies. Most gold is sold not by cooperatives but by individuals without proper due diligence and documentation. Beyond domestic gold production, Bolivia has also earned a reputation as a hub for smuggled gold from Peru, Brazil and Colombia due to its porous borders. Despite significant illicit production and trade and lack of traceability, over 40 tons of gold are officially and legally exported per year.

Regulating IFFs  with political interest mediation in mind
The study analysed the motives and underlying conditions that lead state institutions to allow informal production the formal export of illicitly sourced or transferred gold shipments. Put simply, state institutions regulate IFFs to manoevre existing centers of political power, benefitting mainly influential cooperatives and their vast electoral constituencies. Legalising IFFs maintains the political status quo but hampers domestic revenue collection.

The study highlights the need to examine the role of not only state institutions in IFFs but also international regulation to curb IFFs.

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