Corrupt Money’s Negative Economic Impact Can Be Measured, Says World Bank Study

December 1, 2011

Corruption and tax evasion are the main sources of ill-gotten money in developing countries

In Malawi, income that is acquired through corruption amounts to about 5 percent of GDP, while tax evasion is estimated to equal 8 to 12 percent of GDP. In Namibia, while corruption is considered to be significant, tax evasion is by far the largest measurable source of ill-gotten money, equivalent to an estimated 9 percent of GDP.  

"While these figures are estimates, this study shows that ill-gotten money and its associated economic impact can be more systematically quantified, and that the effect is negative. This will hopefully mobilize efforts to establish more effective anti-money laundering policies," says Stuart Yikona, World Bank Senior Financial Sector Specialist and one of the report’s authors.

Conducted in collaboration with country experts, the study measures the magnitude of corrupt money and shows how the recycling of ill-gotten money and other related underlying criminal acts negatively affect economic development and poverty reduction.

The high economic cost of criminal activities such as corruption, tax evasion and its related “dirty money” flows reinforces the need for developing country policy makers and practitioners to act effectively –and early- to curb such activities. Corruption and tax evasion affect national budgets, ultimately undercutting the provision of public services in education, health and infrastructure, for example.

The importance of well-designed anti-money laundering  tools in combating corruption    

The study also confirms that well-designed anti-money laundering measures such as the use of financial intelligence can be useful tools in combating corruption, tax evasion and other financial crimes. Therefore, it is important that developing countries adopt customized legal regimes and institutions to go after dirty money when implementing international anti-money laundering standards.  These regimes should reflect the local political, economic and social context.

The study supports national efforts to formulate anti-money laundering policies by providing a framework that can be used to analyze the amounts and effects of ill-gotten money. “The study guides countries to conduct a cost-benefit analysis on the implementation of their anti-money laundering policies,” says Leonie Dunn, Director of the Namibia Financial Intelligence Centre. “Governments can evaluate whether or not sufficient measures have been taken to estimate the risks illicit money flows pose to economic development and to effectively address those risks.”  As a follow up to this study, Namibia will conduct a national money laundering risk assessment in 2012 to explore how anti-money laundering policies can be reformulated to focus on the real dangers of ill-gotten money flows to the economy.

Tom Malikebu, Deputy Director of the Malawi Financial Intelligence Unit, adds that “this study provides an insight into the sources and magnitude of ill-gotten funds. Such insight is a stepping stone in prioritizing resources for combating crimes that have the most detrimental effect on Malawi’s economy.”

Ill-Gotten Money and the Economy is part of the Financial Market Integrity’s support for the efforts of policymakers and practitioners to eliminate safe havens for the proceeds of corruption and other financial crimes.

Media Contacts
In Pretoria
Mmenyane Seoposengwe
In Lilongwe
Zeria Banda

FACT: Income derived from corruption is 5% of GDP in Malawi.

FACT: Tax evasion is estimated at 9% of GDP in Namibia.