draining development.pdf - Khazar University

Governance and Illicit Flows 33The more recent literature on illicit capital flows adopts an explicitlynormative perspective on capital flight that focuses primarily on adherenceto the law or perceived good practice. Illicit capital flows are flowsthat break the implicit rules asserted as desirable by the observer. A crossbordermovement of capital that, at any stage from its generation to its use,involves the deployment of illegal or abusive activities or practices is illicit.Probably the most well known example of this procedural or rule-basedperspective on capital flight is Baker’s notion of dirty money that distinguishescriminal, corrupt, and commercial forms of illicit capital flows (aterm used interchangeably with dirty money) (Baker 2005; Baker andNordin 2007). Criminal flows encompass “a boundless range of villainousactivities including racketeering, trafficking in counterfeit and contrabandgoods, alien smuggling, slave trading, embezzlement, forgery, securitiesfraud, credit fraud, burglary, sexual exploitation, prostitution, and more”(Baker 2005, 23). Corrupt flows stem “from bribery and theft by (foreign)government officials” trying to hide the proceeds from such activitiesabroad, and the commercial component of dirty money stems from taxevasion and mispriced or falsified asset swaps, including trade misinvoicingand abusive transfer pricing (Baker 2005, 23). Of these components ofdirty money, illicit commercial flows have been estimated to account foraround two-thirds of all illicit outflows, and proceeds from corruption forthe smallest part, around 5 percent of the total (Eurodad 2008b).This rule-based dirty money approach leads to a conceptual definitionof capital flight that is narrower than the definitions adopted bymore conventional approaches. First, definitions of capital flight here aremostly limited to unrecorded capital flows. Thus, Kapoor (2007, 6–7),for example, defines capital flight as the “unrecorded and (mostly)untaxed illicit leakage of capital and resources out of a country,” a definitiontaken up by Heggstad and Fjeldstad (2010, 7), who argue that itscharacteristics includethat the resources are domestic wealth that is permanently put out ofreach for domestic authorities. Much of the value is unrecorded, andattempts to hide the origin, destination and true ownership of the capitalare parts of the concept.This does not necessarily translate into the adoption of narrow statisticalmeasures of capital flight, such as hot money estimates that take account