The Impact of Illicit Financial Flows on the Economies of Developing Countries.

Case study of
Republic of Moldova.
Illicit financial flows are, essentially, money or capital earned illegally and moved for use in
another country. They are supposed to disappear from all the records in the country of origin, being
typically generated by criminal activities, corruption, avoidance of taxes and incentives. The money
that is lost could be used for public services, like health or education, as well as social security, all
of which are much needed in the developing countries. Such activities are particularly damaging for
the economies of these countries, due to their less powerful markets and financial/social policies. In
the following research, I am going to elaborate on the impact of illicit financial flows on some of the
developing countries and demonstrate how bad they are to an economy.
In order to make it clearer, here are some examples of illicit flows:
1) Money laundering: the process of making illegally obtained money look like it’s legal. An
example of such activity is drug trafficking. Felix Gallardo, a Mexican trafficker, owned a hotel and
many other entities which got him revenues. Along with them, he successfully (till some point)
conducted a drug cartel. Therefore, he mixed the money from all of his illegal and legal actions and
made it all look legal.
2) Tax evasion: when an enterprise or an individual avoid paying their tax liabilities. When caught,
tax evaders risk criminal charges and/or harsh sanctions. Examples of such ventures are: falsifying
income records or deliberately avoiding tax payments. Leona Helmsley, who affirmed that “We
don’t pay taxes. Only the little pay taxes.”, has been charged several times and spent 18 months in
jail.
3) International bribery and corruption: giving/offering benefits to foreign public officials. It is an
actual issue of today, due to the Coronavirus pandemic. Bribery and corruption can lower the
potential of the world’s countries to deal with the virus. Along with that, there are various African
states facing such problems, like: Democratic Republic of Congo, Nigeria, Ghana, where civils
suffer tremendously. According to the Transparency international 2019 data, the most corrupt
countries in the world are: Somalia (9/100), Democratic Republic of Congo (18/100), Congo
(19/100), Venezuela (16/100) and many others. As we can see, the majority is situated in Africa.
The score shows the level of corruption in a state: the lower the CPI score is, the more corrupt a
country is. [1]
There are more types of illicit financial flows: stolen asset recovery, donor agencies and so on.
So, what is the impact of illicit flows, mainly corruption on the economy of the Republic of
Moldova? Our country is ranked as the 120th least corrupt nation of the 180 countries, having a CPI
score of 32. This is not very reassuring, is it? Here is some orientation data based on the chart
elaborated by tradingeconomics.com [2]:
A dramatic change is also forecasted for the second and third quarters of 2020:
Quarter (2020) Actual Q2 Q3 Q4
GDP Growth -1.20 -8 -2.5 0.8
Rate (%)
GDP Annual 0.20 -7.3 -3.6 1.4
Growth Rate
(%)
Unemployment 4.30 7.7 8.5 9.1
Rate (%)
Inflation Rate 5.90 5.8 4.7 5
(%)
Interest Rate 4.50 4 3.5 3.5
(%)
Source: elaborated by the author based on the data from tradingeconomics.com
As we can see, there is going to be a serious change in the indicators above, and some of them will
probably stabilize in the 4th quarter of 2020. This occurrence is obviously linked with the global
pandemic, however it still is this way because of the illegal activity happening in Moldova due to
the illicit flows. [3]
As we all know, Moldova is dependent on foreign direct investment and remittances.
Therefore, there are many short-term and long-term loans received by the RM from other countries.
The debt payment is assured by the National Bank of Moldova and is mainly based on the reduction
of foreign exchange reserves and the attraction of external loans. Thus, the illicit flows here are
generated both by off-the-book foreign financial transfers and illegal exports of production.
Republic of Moldova is currently among the worst performing European countries. Output is
not enough in order to sustain a decent life and the population is continuously declining due to the
discouraged workers who look for jobs in other countries. A vast economic problem is corruption,
which is now considered to be “part of the system”. This way, even though there are functioning
anti-corruption institutions, along with legislation, they do not do much. The enforcement is
mediocre. Also, there are very few whistle-blowers, due to the poor protection offered by state.
Because of all that, corruption is flourishing. According to an IMF study from March 2020, “The
share of firms which expect to pay bribes is significantly higher than the world average.”. [4]
How can such illegal activity be combatted? Moldova is very exposed to corruption, and in
this case, a strong AML/CFT (Anti-Money Laundering and Combating the Financing of Terrorism)
framework is needed. A good policy can protect the economy from illicit flows and all their
variations. It also provides the transparency of the system. There are some international guidelines
used by the Financial Action Task Force (FATF) in order to determine the strength of a country’s
AML/CTF. They are based on 4 aspects: transparency, preventive measures (corrupt actions are
prevented from operating in all sectors, and are also reported), criminal justice (corrupt and money-
laundering activities are criminally charged), international cooperation. Our country shows
vulnerability in its framework, this is why it is very difficult to deal with illegal financial actions.
The infamous banking fraud of 2015, when $1 billion have vanished from three of Moldova’s
leading banks is the demonstration of how poorly our country deals with illegal money circulation.
Even in 2020, after 5 years of “investigation”, the assets’ worth has not been recovered. Along with
the policy stated above, there are some more ways to improve the Moldovan economy by
minimizing illegal outflows: proper prosecution of crimes related to taxes, convey tax evasion
schemes, improving the State Tax Service and strengthening it, limiting revenue losses by making
tax expenditures more efficient, addressing the VAT fraud, etc. [4]
In conclusion, I must say that illicit financial flows have a tremendous impact on any
country’s economy, especially on that of the developing ones. There are various types of such illegal
activities. I have taken the particular example of Republic of Moldova, which is situated on the 120th
place of the least corrupt countries of the world. This says a lot about our policies and our dealing
with illegitimate actions. Along with that, a serious external shock to our economy at the moment is
the pandemic of COVID-19 and how it will influence the macroeconomic indicators in RM. It is to
be noted that the pandemic is only fueling the fire caused by the illicit financial flows. In my
opinion, the Moldovan economy is performing at an unsatisfactory level. The underground sector
impedes the proper, positive development of the current situation, and the government does not do
anything meaningful about it, probably because they take part in such actions as well. It is just
convenient for the officials to hide the truth. Even the IMF states that Moldova is underperforming
and vulnerable to corruption and unlawful transactions. There are many, significant procedures to be
made in order to win the battle with such actions. The AML/CTF framework has to be considerably
improved, due to the many lacunae in its application in the RM. However, I believe that our country
has a great future and the battle with the underground sector’s activity will, somehow, successfully
be ended. I think that anything can be resolved with will and power, and, of course, with no illicit
financial outflows.

Author: Iuliana Cazacu, EMREI-193

References:
1. Corruption Perceptions Index (2019). Available at: https://www.transparency.org/cpi2019
2. Moldova Corruption Rank. Available at: https://tradingeconomics.com/moldova/corruption-rank
3. Moldova - Economic Forecasts (2020-2022 Outlook). Available at:
https://tradingeconomics.com/moldova/forecast
4. Sílvia Domit- “Republic of MOLDOVAoldova Selected Iissues” (IMF, March 2020). Available
at: file:///C:/Users/User/Downloads/1MDAEA2020002.pdf
5. Tatiana Petrova, Victoria Iordachi, Dorina Clichici – “Assessment of Illegal Capital Flows in the
Republic of Moldova” (2017). Available at:
http://dspace.ince.md/jspui/bitstream/123456789/358/3/Petrova%2CT.%2CIordachi%2CV.
%2CClichici%2CD.Assessment_of_illegal_capital_flows_in_the_Republic_of_Moldova.pdf