Discussion: (0 comments)
There are no comments available.
A public policy blog from AEI
Perfect estimates of the cost of illegal activity do not exist. Crimes routinely go unreported and black market economic activity by definition is under the radar. But rough estimates and simple logic can help determine whether the US and the world derive more utility from leaving illicit finance alone or going for the gold.
The US Treasury’s National Money Laundering Risk Assessment estimated in 2015 that “about $300 billion is generated annually in illicit proceeds.” That’s huge. This means that yearly illicit revenues in the US are roughly equivalent to the entire nominal GDP of Ireland.
Now, assume that this $300 billion is a net positive to the U.S. economy. Investment is investment, right? And then there are the lawyers, real estate agents, and other enablers who invest, hide, and help spend billions in laundered funds year after year. That’s worth some cash to the economy too, right? Not really. Because Treasury assesses that these illicit proceeds are derived primarily from drug trafficking and fraud, consider the costs:
This cost, plus the $500 billion in drug damage, leaves the total cost of domestic illicit activity at $700 billion (leaving out other types of crime like gambling, prostitution, and slavery). Against a theoretical benefit that comes in at a minimum of the straight $300 billion injection from illicit activity (if we have a morals free economic calculus), that equals to a gross cost of $400 billion a year just within American borders. This back of the envelope analysis makes it clear that going after illicit finance is pragmatic and rational. In fact, this line of thought should be applied also internationally.
Several recent articles clearly articulate the role of illicit finance in foreign policy and national security. Nicholas Eberstadt lays out a well-reasoned and detailed plan for solving the standoff with North Korea by attacking the rogue regime’s illicit financial flows. Mark Dubowitz of the Foundation for the Defense of Democracies writes that an effective way to support Iranian demonstrators would be to go after the Ayatollah’s estimated $200 billion in business interests. And in Foreign Policy’s “ISIS Inc.” the authors quote Iraqis confirming that the retreating terrorist organization smuggled half a billion dollars out of Iraq and Syria, pretty much ensuring their re-emergence somewhere else.
Global Financial Integrity (GFI) — a DC-based research and advisory organization — estimates inflows and outflows of illicit finance. They estimate outflows from developing and emerging economies at $1 trillion a year. Most of this money lands in Western economies. For example, a politician, terrorist, or criminal stealing from coffers or conducting business in Kenya, Yemen, or Pakistan, given the choice, will not try to hide money in those countries. First, moving it across sovereign borders makes it more difficult to track. Second, developing economies often have poor property rights regimes and markets that are not very deep or liquid. One thing often overlooked is that this $1 trillion in illicit outflows can represent a benefit to Western economic growth — but at what cost?
Consider the billions in foreign economic assistance, generated from taxes, which pour back into developing countries every year from developed countries like the US. Add in the pricey military assistance sent to places like Egypt, Pakistan, Afghanistan, and Iraq. Try to calculate the costs of the Syrian Civil War, started by a kleptocratic butcher and exacerbated by terrorist financing, or the reputational costs of Putin’s global campaign against democratic values. Include the potential costs of a nuclear war with North Korea or Iran — where proliferation is fueled by illicit finance. There’s also the global drug trade. Total costs are unimaginable in this view, but definitely more than a theoretical $1 trillion benefit.
Kleptocrats, terrorists, and criminals often engage in illegal, deadly, and destructive behavior because they can profit from it. Take away the profit and incentives often disappear. The math is simple and it doesn’t take perfect numbers to understand the magnitude or the logic. The brain power, political power, and economic might is there, waiting to go to work dismantling illicit finance. According to this cost-benefit analysis it is economically rational to take action; all that is lacking is the political will.
There are no comments available.
1789 Massachusetts Avenue, NW, Washington, DC 20036
© 2018 American Enterprise Institute