The Battle over Policies to Curb Trade-Related Illicit Financial Flows: Findings from a Q-methodology Study

Abstract

Illicit financial flows (IFFs) deprive low-income countries of essential revenues while donors’ willingness to fund aid budgets dwindles. IFFs related to foreign direct investment and trade include transfer mispricing, trade mispricing and profit shifting. Policy options to curb IFFs range from short-term fixes to mid-term measures that adjust legal instruments and improve coordination between countries, to more fundamental structural reforms that require a longer time horizon. Which policies are effective and should be pursued is a highly contested point, slowing down the progress of reform. This is unsurprising as reducing IFFs involves a distributional conflict: more for those deprived of revenues now means less for those who currently benefit. We conduct a Q-methodology study among IFF policy experts. We use Q-methodology to reveal participants’ policy preferences and tease out lines of contestation and areas of agreement to identify the policy space available in which to advance reform. We find tensions existing amid preferences for short-term fixes and for more comprehensive structural reforms; tensions regarding the question of extending legal liability to those facilitating and assisting in the creation of IFFs; and tensions over whether and to what extent host countries should be empowered to curb IFFs using their legislative sovereignty. Policy measures to increase targeted transparency that is directly actionable to tax administrations in host countries are the most likely to garner approval from all stakeholders.

Keywords

• foreign direct investment (FDI)
• tax evasion
• tax and development
• commodities
• illicit financial flows (IFFs)
• trade mispricing