Ill-Gotten Money and the Economy, Experiences from Malawi and Namibia

This 2011 World Bank study reveals the magnitude of "dirty" and 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.

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.

The significance of  ill-gotten money on the economy

The objective of this study is to show how economies are affected by flows of ‘dirty money’ coming from criminal activities such as corruption and tax evasion. The study examines the effects of dirty money flows through an economic lens, thereby bridging the gap in the understanding that persists between economists and law enforcement agencies about corrupt money’s effects. The study also confirms that it is important for developing countries to adopt customized legal regimes and institutions to go after dirty money.  These regimes should reflect the local political, economic and social context.

The study focuses on two developing countries: Malawi, a low-income country, and Namibia, a middle-income country. The findings of the study include:

In Malawi:

• Corruption and tax evasion are the main sources of ill-gotten money.
• Income derived from corruption amounts to an estimated 5 percent of GDP in Malawi.
• Tax evasion is estimated at 8 to 12 percent of GDP.
• Country authorities have used financial intelligence to go after tax evaders. Between 2008 and July 2011, the Malawi Revenue Authority recovered approximately 340 million Malawi Kwacha (US$2 million) by using available anti-money laundering tools.

In Namibia: 

• Crime and public corruption, and their effects on the economy, are significant. Another area of concern is the illicit diamond trade, followed by drug trafficking and car smuggling.
• Tax evasion—at an estimated 9 percent of GDP—is by far the largest source of ill-gotten money in Namibia and is clearly a challenge for the authorities.
• Namibia is another example of how ‘going after dirty money’ is already being practiced to fight tax evasion; the largest number of suspicious transaction reports of financial intelligence are sent to the Inland Revenue authority.

In both countries:

• The majority of the proceeds of crime or corruption are spent on daily consumption (family  expenses). If daily needs are met, money from crime and corruption is spent on luxury and  lifestyle items.

How were the data for the study gathered?

We based our findings on a combination of: available crime statistics and other relevant data; suspicious transaction reports information; literature research; anecdotal information and perceptions of various experts in Malawi and Namibia; and basic macro-economic research.

Possible follow-up research

Conducting similar studies in other developing countries might be a next step in testing the existence of such patterns and effects of the circulation of ill-gotten money in developing economies. Such research should focus on, among other issues, development of data and information management, as well as the flows of ill-gotten money in a cash-based economy.