IMF Blog post |  Policymakers need fuller view of consequences of illicit flows, including tallies of the fiscal, monetary, financial, and structural costs.
The fight against financial crime isn’t lost, but the world needs to do more to limit the economic impact of crime.
Money laundering is a necessary component of the organized crime that too frequently spans borders, skirts taxes, funds terrorism and corrupts officials—and it comes with hefty macroeconomic costs. Bad actors are also embracing new technologies on top of their traditional techniques, all of which makes economic growth less inclusive and sustainable, fueling inequality and informality.
The international community has made significant progress toward strengthening safeguards against money laundering and terrorist financing, with help from the IMF and other organizations. We decided a decade ago to take a more bespoke approach to identifying key risks, working with member countries and international partners, particularly, the Financial Action Task Force, the international standard-setter in this area.
But the overall efforts are still broadly insufficient. For example, as the FATF noted last year, there is still a major gap between progress countries have made on technical compliance, such as enacting new laws, and on the effectiveness of these efforts. For example, very little laundered ill-gotten proceeds are ever confiscated.
Accordingly, the IMF recently reviewed our strategy on anti-money laundering and combatting the financing of terrorism (AML/CFT). The goal is to better help our 190 member economies address these critical financial integrity issues.
High costs
We must first recognize that financial crime affects lives and livelihoods, especially those of the most vulnerable, and that the costs it imposes are very high—and increasing. Direct costs vary and can include lower revenues, higher expenditures, sanctions, lost banking services, and even increased financial instability.
For example, and as recent IMF work has shown in the Nordic Baltic Region, AML/CFT deficiencies are associated not only with large drops in stock prices for the most directly affected banks, but also declines in share prices of other lenders who simply happen to be in the same country, as well as banks in the region that have similar cross-border exposures.

The indirect costs are even greater because they are imposed across an economy, whether by fueling boom-and-bust cycles or making home prices unaffordable. Potential financial stability impacts include bank runs and lost foreign investment. Large-scale money laundering can even spur volatility in international capital flows, undermine good governance, spark political instability, and just generally erode trust—in governments and institutions.
Liquidity, as measured by deposit flows, tends to deteriorate around financial integrity events for the affected bank while other domestic banks’ liquidity could benefit from positive substitution effects in the short-term.

Another important consideration is that illicit financial flows are a global problem. Insufficient AML/CFT frameworks in some countries, including international financial centers, can attract criminal proceeds from abroad. In countries exporting illicit flows, we see there is less opportunity, higher inequality, higher poverty, more illegal immigration, misused resources, and environmental degradation. For example, one study shows that illicit financial flows in Africa (an estimated $1.3 trillion since 1980 has left sub-Saharan Africa) drain domestic revenues that could be used for the continent’s development, have a strong and negative effect on investment rates, notably private investment, and are curtailing Africa’s savings rate. These effects can also have a cascading effect on countries transiting or receiving the illicit proceeds.
This underscores why we must better understand how money laundering and terrorist financing can hurt individuals, countries, and even the global economy. And because of the wide-ranging consequences, we are deepening AML/CFT considerations across all the work that we do, while urging our members to safeguard their financial sectors and broader economy to help ensure global financial stability.
Deeper understanding
Analysis of money laundering and terrorist financing historically focused on threats and vulnerabilities. Both are central to gauging and containing risks, but more is needed. Knowing the full extent of consequences for economies requires being able to understand the fiscal, monetary, financial sector and structural costs of illicit flows. This is needed to document just how financial integrity affects both a given country’s financial stability and broader economy, plus how global financial stability might be affected.
Accordingly, the IMF Executive Board has endorsed a plan for the institution to expand its data analytics capacity to focus on these issues and deepen the coordinated approach across all of our key work areas, including IMF surveillance, lending engagements, capacity development and Financial Sector Assessment Programs. This new approach will also give the IMF new evidence to answer key questions including:

Which sectors are most vulnerable for money laundering, from banks and real estate to virtual assets and precious metals?
What countries export illicit flows, allow them to transit, and what countries integrate them?
How do these illicit flows affect the economy, including its prospects for inclusive and sustainable growth and development?

Even after decades of progress in financial integrity, the Fund and the international community must persist and press on in this fight. Crime is a moving target, but we can—and must—broaden and deepen our containment efforts. This includes improving cooperation among stakeholders, including governments, international bodies, and civil society. For our part, the IMF will use its strength as a macroeconomic institution with global reach to help its members assess the impact of financial crimes and illicit flows and design and implement policies to address them. The cost of failure is simply too high.
—See our new AML/CFT page for the recent Executive Board paper: 2023 Review of the Fund’s Anti-Money Laundering and Combating the Financing of Terrorism Strategy and the background papers.
 
For more information, please contact the authors:
> Carolina Claver, Senior Financial Sector Expert – Financial Integrity Group, IMF
> Chady El Khoury, Deputy-Unit Chief of the Financial Integrity Group, IMF
> Rhoda Weeks-Brown, General Counsel and Director –  Legal Department, IMF
 
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High energy prices triggered by Russia’s war of aggression against Ukraine prompted governments to reduce excise taxes during 2022, leading to lower tax levels in many countries, according to new OECD analysis.
Revenue Statistics 2023 shows that the average tax-to-GDP ratio in the OECD fell by 0.15 percentage points (p.p.) in 2022, to 34.0%. This was only the third such decline since the Global Financial Crisis in 2008-09: the level fell by 0.6 p.p. in 2017 and by 0.1 p.p. in 2019.
Revenues from excise taxes fell as a share of GDP in 2022 in 34 of the 36 countries for which preliminary data is available, declining in absolute terms in 21 of these. In some countries, notably in Europe, these declines were related to reductions in energy taxes as well as lower demand for energy products. Revenues from value-added tax (VAT) also declined as a share of GDP in 19 countries, in part due to policies to cushion consumers against high prices for energy and food.
The decline in revenues from excise taxes in 2022 was partly offset by increases in revenues from corporate income taxes (CIT), which rose as a share of GDP in more than three-quarters of OECD countries amid higher corporate profits, especially in the energy and agricultural sectors. CIT revenues in Norway rose by 8.8% of GDP due to exceptional profits in the energy sector.
Overall tax revenues declined as a share of GDP in 21 of the 36 countries in 2022, increased in 14 countries and remained at the same level in one. The largest decline was observed in Denmark (-5.5 p.p., to 41.9%) while the largest increases were seen in Korea (2.2 p.p., to 32.0%) and Norway (1.8 p.p., to 44.3%).
The decline in the OECD’s average tax-to-GDP ratio followed two years of increases during the COVID-19 pandemic, of 0.15 p.p. in 2020 and 0.6 p.p. in 2021. Tax-to-GDP ratios in 2022 ranged from 16.9% in Mexico to 46.1% in France.
A special feature in the new report examines the extent to which tax revenues in OECD countries have kept pace with economic growth in recent decades by analysing tax buoyancy for different tax types for the period from 1980 to 2021. The study finds that tax revenues typically increased at the same rate as GDP over this period; revenues from CIT were the most buoyant over the long run – increasing faster than economic growth – while revenues from excise taxes were the least buoyant, increasing at a slower rate than GDP.
To access the Revenue Statistics report, data, overview and country notes, go to https://oe.cd/revenue-statistics.
 
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IMF Blog post |  Ensuring a lower-carbon future is not only necessary but also good for the economy, according to the latest climate scenarios from the Network for Greening the Financial System, a group of 127 central banks and financial supervisors working to manage climate risks and boost green investment.
The NGFS data come as world leaders gather in Dubai for the 28th United Nations Climate Change Conference, or COP28, to forge agreement on how to keep the planet from overheating.
As the Chart of the Week shows, making an orderly transition to net zero by 2050 could result in global gross domestic product being 7 percent higher than under current policies.

This year will be the warmest on record, according to the World Meteorological Organization. While temperatures are rising unevenly across the world, on average they are up 1.2 degrees Celsius from pre-industrial levels.
Economic and financial risks are rising too. NGFS models show that droughts and heatwaves are the largest source of risk across regions. Specifically, countries in Europe and Asia are most exposed to heatwaves, while countries in Africa, North America, and the Middle East are most vulnerable to droughts.
Transitioning to a low-carbon economy will have negative impacts on demand from higher carbon prices and energy costs. But these can be partially offset by recycling carbon revenues into government investment and lower employment taxes. Most importantly, lowering emissions will reduce the physical impacts of climate change, which lowers macroeconomic costs.
Transitioning to a net-zero economy will require substantial investment in green electricity and energy storage. How economies approach making this investment poses policy tradeoffs, as detailed in the October Fiscal Monitor.
The NGFS, established in 2017, aims to strengthen the global response in meeting Paris Agreement goals and helping the financial system manage risks. The climate scenarios, which are aligned with international best practices, supplement those of other international organizations such as the Intergovernmental Panel on Climate Change and the International Energy Agency.
The IMF is one of 20 international organizations that are NGFS observers, and actively contributes to the scenario design and analysis. A selection and visualization of key indicators from the NGFS climate scenarios is curated by the IMF on the Climate Change Indicators Dashboard.
 
For more information, please contact the author:
> Jens Mehrhoff, Senior Economist – Statistics Department, IMF
 
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