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SDG indicator 16.4.1 calls for the measurement of the “total value” of inward and outward IFFs. 

The indicator measures the total value of inward and outward illicit financial flows (IFFs) in current United States dollars. IFFs are financial flows that are illicitly generated (e.g., originating in criminal activities or tax evasion), illicitly transferred (e.g., violating currency controls) or illicitly used (e.g., for financing terrorism).

Ministry of National Security, Belize Police Department, Financial Intelligence Unit

Ministry of National Security, Belize Police Department, Financial Intelligence Unit

Annual

Current United States dollars

The UNODC (2015) International Classification of Crime for Statistical Purposes (ICCS) provides definitions of several behaviors, events, and activities that may generate IFFs such as theft-type activities and terrorism, illicit trafficking and corruption, as well as many activities related to tax and commercial practices.2 Other relevant concepts include:

• Inward IFFs: Illicit financial flows entering a country.
•  Outward IFFs: Illicit financial flows leaving a country.
•  Illicit income generation: This refers to the set of transactions that either directly generate illicit income for an actor during a productive or non-productive illicit activity, or that is performed in the context of the production of illicit goods and services. A transaction constitutes an IFF when it crosses country borders.
• Illicit income management: These transactions use the illicit income to invest in (legal or illegal) financial and non-financial assets or to consume (legal or illegal) goods and services. A transaction constitutes an IFFs when it crosses country borders.
•  Illicit markets comprise all transactions related to the production and the trade with a certain illicit good or service. Regardless of the illicit nature, these market activities are considered as being economically productive, because value-added is generated at each transaction. The value-added describes the net increase in value (price times quantity) of the product at each transaction. 

Illicit financial flows refer to activities that are considered as criminal offenses and to a series of behaviors in the area of tax and commercial practices. The International Classification of Crime for Statistical Purposes (ICCS) provides definitions of relevant offenses.

There are four main types of activities that can generate IFFs:

• Tax and commercial IFFs: These include illegal practices such as tariff, duty and revenue offenses, tax evasion, corporate offenses, and market manipulation, and other selected practices. Some activities that are non-observed, hidden or informal or part of the so-called shadow, underground or grey economy may generate IFFs. The practices are typically motivated by increasing profits and avoiding taxes. Related activities included in the ICCS comprise tax evasion, tariff, duty and revenue offenses, competition offenses, import/export offenses, acts against trade regulations, restrictions or embargoes and investment or stack/shares offenses. Also, tax avoidance includes transfer mispricing, debt shifting, relocation of intellectual property, tax treaty shopping, tax deferral and changing corporate structures and headquarter locations and other tax avoidance practices. When these activities directly or indirectly generate flows crossing country borders, they generate IFFs.
•  IFFs from corruption: The United Nations Convention against Corruption (UNCAC) defines acts considered as corruption, and they are consistently defined in the ICCS, such as bribery, embezzlement, abuse of functions, trading in influence, illicit enrichment and other acts of corruption in the scope. When these acts – directly or indirectly - generate cross-border flows, they generate IFFs.
• Theft-type activities and financing of crime and terrorism: Theft-type activities are nonproductive activities that entail a forced, involuntary and illicit transfer of economic resources between two actors. Terrorism financing and financing of crime are illicit, voluntary transfers of funds between two actors. Examples of theft-type activities are theft, extortion, illicit enrichment, and kidnapping. When the related financial flows cross country borders, they constitute IFFs.
• IFFs from illegal markets: Domestic and international trade in illicit goods and services. Such processes often involve a degree of a criminal organization and are aimed at creating profit. They include any type of trafficking in goods such as drugs, firearms, or services such as smuggling of migrants. IFFs are generated by the flows related to international trade of illicit goods and services, as well as by cross-border flows from managing the illicit income from such activities.

Bottom-up and direct measurement A bottom-up and direct measurement approach is proposed for constructing the indicator. Bottom-up methods estimate IFFs directly in relation to the four main activities and build them up departing from the overall economic income that illicit activities generate.

In addition to the disaggregation by the four main types of IFF, countries may also disaggregate the indicator by:

• payment method (cash/trade flows / cryptocurrencies)
• resulting assets (offshore wealth / real estate etc.)
• actors (characters of individuals/types of businesses etc.).

A two-step process was developed that aids member states in calculating the indicator 16.4.1. The methodology has been tested in 5 countries. The methodology foresees:

1.  A risk assessment that identifies the major and most relevant sources of IFF in a country. This risk assessment can follow and build on existing risk assessments, e.g. the ones mandated by the Financial Action Task Force (FATF).
2.  Once the activities that generate the most important flows are identified, the flows are estimated in a disaggregated manner.

As a first step in constructing the IFF indicator is to focus, for each IFF type, on IFF generated during the Illicit income generation: this refers to the set of transactions – such as those related to international trade of illicit goods - that either directly generates illicit income for an actor during a productive or nonproductive illicit activity, or that is performed in the context of the illicit production of goods and services

At a second stage, IFFs in relation to Illicit income management are estimated. These refer to IFFs generated when income generated from illegal activities is invested abroad (e.g., into the property). To assess these flows, quantitative and qualitative information held by financial authorities, central banks and other entities concerned with money laundering and financial crimes can be used.

SDG indicator 16.4.1 is useful as an indication of the overall size of the problem and for measuring progress as a more granular measurement of IFFs helps to identify the main sources and channels of IFFs and can guide interventions targeting IFFs.

The definition of illicit financial flows for statistical purposes aims to provide a comprehensive definition of the phenomenon to be measured. It does not focus on a specific measurement approach (e.g., IFF being measured through discrepancies in trade statistics between countries). 

All the metadata shown in this document was gathered from United Nation Statistics Division. The metadata was extracted from https://unstats.un.org/sdgs/metadata/.