Estimating illicit financial flows resulting from drug trafficking and other transnational organized crimes : research report

Summary: The purpose of this study was to examine the magnitude of illicit funds generated by drug trafficking and organized crime, and the extent to which they are laundered. Research in this area is still limited and results difficult to compare, but likely orders of magnitude may be estimated, though they should be treated with caution. The most widely quoted figure for the extent of money laundered has been the IMF 'consensus range' of 2% to 5% of global GDP. The best estimate for the amount available for laundering through the financial system, emerging from a meta-analysis of existing estimates, would be equivalent to 2.7% of global GDP. Expressed as a proportion of national GDP, all crime proceeds appear to be generally higher in developing countries and tend to be laundered abroad more frequently. The results also suggest that the 'interception rate' for anti-money-laundering efforts at the global level remains low. Globally, it appears that much less than 1% (probably around 0.2%) of the proceeds of crime laundered via the financial system are seized and frozen. The presented outcome still relies on a large number of assumptions (number of traffickers, market structure, factors influencing the decisions of moneylaunderers) whose validity needs to be tested, opening a whole set of new research questions for the future. Analysis of the socio-economic impact suggests that the most severe consequence of criminal funds is the further perpetuation and promotion of criminal activities. In the drug area, research indicates that the socio-economic costs related to drug abuse are twice as high as the income generated by organized crime; in some countries (USA, UK) one can even find a 3:1 ratio. Criminal funds, even if invested in the legal economy, may create a number of problems, from distortions of the resource allocation, to 'crowding out' licit sectors and undermining the reputation of local institutions, which, in turn, can hamper investment and economic growth. The situation is less clear-cut for financial centres receiving illicit funds, but the long-term consequences may be negative if they do not actively fight money-laundering.