Definition of Illicit Trade and Illicit Financial Flows

Illicit trade is a growing threat in a digital-driven globalized economy. By definition, the term “illicit” signals that these practices are not permitted by law or that they are disapproved of by society. 

Illicit trade concerns “any commercial practice or transaction related to the production, acquisition, sale, purchase, shipment, movement, transfer, receipt, possession or distribution of any illicit product defined as such by international law, or any licit product for non-licit purposes as defined by international law”, as well as any conduct intended to facilitate such activities. Its practice includes both in-kind goods and services deemed illegal as they are considered to be dangerous, morally, socially or politically inappropriate, or not in line with existing market regulations. For instance, while both the trade in counterfeit goods and the smuggling of goods belong to what is often referred to as “the grey market”, they differ in the manner in which they are illicit. Counterfeit goods imitate authentic products and are illegally reproduced and sold by a party other than the original trademark holder. With smuggling, authentic legal products are bought in low-tax countries, but illegally shipped and resold in countries with higher prices, evading customs duties. Despite the recognition of the major patterns in the different forms of illicit trade, it has no agreed definition at the international level (TradeLab).

Illicit trade is either allowed by or done with intent to acquire financial resources, therefore illicit financial flows (IFFs) become a key aspect of illicit trade flows. IFFs allude to “cross-border financial transfers, which contravene national or international laws” (United Nations). This wide category encompasses several different types of financial transfers, including:

• Funds with criminal origin, such as the proceeds of crime (i.e. tax evasion or money laundering or fraud)

• Funds with a criminal destination (i.e. bribery, terrorist financing or conflict financing)

• Transfers to, by, or for, entities subject to financial sanctions under UN Security Council Resolutions (i.e. Terrorist organisations)

• Transfers that seek to evade anti-money laundering, counter-terrorist financing measures or other legal requirements (i.e. transparency or capital controls)

Illicit Trade and Illicit Financial Flows as two sides of the same coin

Given the strong interconnection between Illicit Trade and IFFs, they can be interpreted as two sides of the same transaction (Nicolaou-Manias, 2020). Fundamentally, Illicit Trade deals with in-kind goods and services in grey markets that need IFFs to complete the transaction. Eventually, money laundering techniques are used to simulate that the obtained funds originate from a legitimate source (Chen, 2020).

Dimensions of Illicit Trade

Illicit trade is difficult to both identify and quantify. Estimated figures are, however, useful to indicate the magnitude of the matter. 

According to the World Economic Forum, Illicit Trade creates an annual drain on the global economy of USD 2.2 trillion – nearly 3% of the world’s economy. If illicit trade was a country, its economy would be larger than Brazil’s, Italy’s, or Canada’s, and as large as Mexico’s and Indonesia’s combined (UNCTAD).

If numbers are analyzed from a sectoral approach, estimations are as follows:

Drivers of Illicit Trade and Illicit Financial Flows

Globalization

The Illicit Trade of goods and services is not stopped by borders, they rather exploit them. Globalization has provided opportunities for illicit trade to expand the scope and scale of their transactions, and the list of illicit practices extends alongside technological innovation. Illicit networks benefit from new technologies to attract consumers and recruit members in their networks, using the internet both as a platform where illicit practices take place, and as a tool that serves an illicit purpose (Radisch, 2016). Illicit Trade is often referred to as the dark side of globalization.

Existing demand for illicit in-kind goods and services

The parallel markets in which Illicit Trade operates respond to basic laws of supply and demand, including the need to find an equilibrium among the two. Illicit Trade is often perceived as a one-sided problem where suppliers destabilize the regulated economy at the national and international level. Nonetheless, illicit supplies do respond to an existing demand which is fueled by the consumer. Illicit Trade embodies a joint illicit agreement in which suppliers and consumers are integral parts of the process. The demand for illicit goods and services will most likely remain constant, regardless of changes in the supply of goods. In other words: demand is quite inelastic, particularly when the goods in question are addictive. This calls into question the feasibility of law enforcement as a means to control illicit trade of services and goods.

Impact of Illicit Trade and Illicit Financial Flows.

The UN Sustainable Development Goals (UN SDGs)

In the same fashion, the Illicit Trade of goods and services entail negative consequences for the global society at large. They violate principles of governing action, compromise the environment, undermine the economy and pose a serious threat to human rights (Radisch, 2016). As highlighted by the United Nations Conference on Trade and Development (UNCTAD), Illicit Trade also compromises the achievement of all of the United Nations Sustainable Development Goals (SDGs). Illicit Trade practices displace legitimate economic activity, deprive governments of revenues for investment in vital public services and increase the costs of achieving the SDGs, by eroding the progress already made (UNCTAD). 

Global security and the rule of law

From a global approach, Illicit Trade constitutes a key component of the Illicit Global Economy. The financial drain caused by illicit practices not only entails a serious impact on legitimate business revenues and local economies. When illicit financial resources are re-invested in illicit purposes (i.e. terrorism), they also pose a serious threat for national and international security (FATF). 

Criminal networks portray a fundamental role trafficking in-kind goods and services. Its corrosive effects erode trust in government and the rule of law, creates threats to political stability and undermines the public sector integrity (Radisch, 2016). Likewise, the control of resources by criminal organizations induce between-groups violence at the first stage and, potentially, further expand it by funding wars in which violence is aggravated and perpetuated.

Illicit Trade happens in the shadow, but their impact remains widespread and visible at the very first sight. To know more about the drivers, scale, impacts and relevance of Illicit Trade and IFFs, please visit the different sections on the website.

References

Naylor, R. T. (2002). Wages of crime: Black markets, illegal finance, and the underworld economy. McGill-Queen's University Press.