Blockchain and the Fight Against Illicit Financial Flows

19 février 2018

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Illicit financial flows have been recognized as the “most damaging condition facing the developing world”[1] where they equal 3.9 percent of lost GDP annually.[2] In sub-Saharan Africa, this number increases to 6.1 percent of GDP, which is greater than total direct foreign investment[3] and more than ten times larger than yearly totals in development and relief aid.[4] These net losses have staggering consequences for global health and development in the world’s poorest countries, where food insecurity, malnutrition, and the global burden of disease are concentrated.

The sources of these illicit outflows are numerous. The leading cause, however, is hidden behind a web of otherwise legal activities, as fraudulent invoicing of commercial trade comprises 83.4 percent of all illicit outflows in developing countries.[5] In particular, the largest such outflows are found within the natural resource sector.[6] Here, informal, “grey” economies often exist alongside formal economic activities.

These shadow economies consists of illegal and unethical mining, smuggling, and tax avoidance, set in an environment that deprives the local population of the economic benefits that accrue from resource extraction.[7] In the resource rich countries that make up half of the world’s poorest countries as measured by per capita GDP,[8] invoice fraud wreaks even greater havoc on development.

Misinvoiced resources cross borders and change hands, are mixed with other inventory, and are ultimately sold in high-income countries for consumption in the manufacturing, electronics, and jewelry sectors, among many other industries. Locally, the unmonitored extraction and trade of minerals enables money laundering, corruption, environmental destruction, health hazards, and child labor.[9] Regionally, it funnels funds towards illegal arms, terrorism, wars, and other conflicts or politically destabilizing activities.[10] [11]

Many communities and regions have neither the means nor the infrastructure to make use of legitimate supply chains, and often lack information on the destinations, quantities, and value of their goods. This prohibits them from capitalizing on their own resources and pursuing sustainable economic opportunities, perpetuating the problematic cycles of insecurity and health burdens that cause severe human suffering.

A variety of policy initiatives in sub-Saharan Africa and the rest of the developing world have targeted illicit flows within the natural resource sector, most notably the Extractive Industries Transparency Initiative (EITI), the Open Budget Initiative, and the Collaborative Africa Budget Reform Initiative (CABRI). These policies focus reform efforts on strengthening civil society and budget transparency. A major OECD report cites 1,300 new tax information-sharing agreements as evidence of “progress” in the fight against illicit financial flows.[12]

The problem with these initiatives and metrics, however, is that they require strong, consistent integration and implementation by governments at both the national and bilateral level. Because illicit financial flows and trade misinvoicing are closely correlated with state fragility and corruption, these policies have failed to achieve any noticeable impact in stemming illicit flows and preventing negative outcomes associated with informal natural resource economies.

If centralized policy has been and continues to be unsuccessful in addressing issues of illicit financial and resource flows, alternative policy paradigms may offer insights and possibilities that are better equipped to work within the political, economic, and infrastructure realities in developing countries, and especially sub-Saharan Africa.

The policy alternative I recommend reverses this historical emphasis on centralized controls and instead explores a decentralized paradigm made possible by two recent technologies, one of which has already been fully integrated into the economies of developing countries. These two technologies are mobile data and blockchain technology for supply chain monitoring.

The poorest 20 percent of households in the world are more likely to have a mobile phone than access to toilets or clean water.[13] Mobile technologies were responsible for 3.8 percent of global GDP and 5.4 percent of sub-Saharan African GDP in 2014. This share of GDP is projected to reach 10 percent in sub-Saharan Africa by 2025.[14] With the ubiquity of mobile technology has come an incredible range of services that have been more fully adapted and embraced in the developing world, and sub-Saharan Africa in particular, than they have in the developed world.

This includes mobile money, e-health services, and more. Over half of the world’s mobile money service providers are located in sub-Saharan Africa, where 11.5 percent of adults in used mobile money accounts in 2014, compared to less than 1 percent of Europeans or North Americans.[15] In 2016, industry leader M-Pesa boasted 19 million active customers and mobile money revenues of 548 million USD.[16] With its growing capacity and unique fit in the infrastructure landscape of the developing world, mobile-compatible and mobile-integrated policies, businesses, and solutions are better suited for penetrating rural resource-rich areas and places where government reach is limited.

Use of the second technology, blockchain, amplifies the potential effects of policies that leverage the possibilities of mobile services. Still in its developmental infancy, blockchain has not yet been integrated at scale in any sector as it slowly expands beyond its cryptocurrency roots and moves into modern supply chain applications. Thus far, blockchain solutions for supply chain monitoring have been developed and integrated by IBM, Toyota, and others. In the natural resource sphere, blockchain has already been developed for the supply chain tracing of diamonds from mine to point-of-sale.[17] Its potential for uptake and future application across the mineral and natural resources sector offers a promising technological solution to the problem of illicit financial flows and misinvoicing.

Because of the inherent decentralization and immutability of data within blockchains, it offers a unique opportunity to bypass traditional tracking and transparency initiatives that require strong central governance and low levels of corruption. It could, to a significant extent, bypass the persistent issues of authority and corruption by democratizing information around data consensus, rather than official channels and occasional studies based off limited and often manipulated information. Within the framework of a coherent policy initiative that integrates all relevant stakeholders (states, transnational organizations, businesses, NGOs, other monitors and oversight bodies), a international supply chains supported by blockchain would decrease the ease with which resources can be hidden, numbers altered, and trade misinvoiced.

Such a policy would reproduce on a global scale what Everledger has integrated into the diamond industry and Walmart has piloted to ensure the safety of their in-store food products.[18][19] Both systems tag materials entering the supply chain and prevent tampering or alteration to the unique certificates connected to each data point in the supply chain. For Walmart, this meant cutting the time necessary to trace a package of mangoes from farm to store down to two seconds, a process that previously took days or weeks due to fragmented data systems that varied across 3rd party suppliers and within Walmart’s own international systems.

In addition to improving traceability, blockchain could also provide a more efficient platform for existing information sharing agreements championed by existing trade policies. In combination with mobile technology, such an initiative would have the potential to achieve penetration and “democratization” of data at even the most remote extraction sites.

No technology is a panacea for basic problems of governance, corruption, inequality, and poverty. To avoid this error in thinking, it may be better to consider blockchain as a paradigm rather than a specific technology. Blockchain can support decentralization of data and supply chains in ways that were impossible. While current policy on these topics reflects an old paradigm of centralized control, the new paradigm offers a different way of thinking that may (or may not) prove more effective at achieving transparency and legality in international trade.

The possibilities this affords merit additional research and thinking in the area. It also merits the continued development and implementation of blockchain solutions across a growing number of sectors. Many sectors have already begun integrating blockchain solutions. These projects will help develop the experience and understanding necessary to harness blockchain technology to help address the wide range of complex problems posed by globalization and global supply chains.



[1] Dev Kar and Joseph Spanjers. Illicit Financial Flows from Developing Countries: 2003-2012 (Washington: Global Financial Integrity, 2014).

[2] Ibid.

[3] Ibid.

[4] “Millennium Development Goals Indicators: Net ODA, million US$” (United Nations Statistics Division, 2015).

[5] Dev Kar and Joseph Spanjers. Illicit Financial Flows from Developing Countries: 2004-2013 (Washington: Global Financial Integrity, 2015).

[6] Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-2009 (African Development Bank and Global Financial Integrity, 2013).

[7] Claudia Costa Storti, and Paul De Grauwe. Illicit trade and the global economy (Cambridge, MA: The MIT Press, 2012).

[8] “2017 World Economic Outlook Database” (International Monetary Fund, 2017).

[9] James A. Nelson, Maria E. DeBoyrie, and Simon J. Pak. “Capital movement through trade misinvoicing: the case of Africa.” Journal of Financial Crime 14, no. 4 (2007): 474-89.

[10] Dev Kar and Joseph Spanjers. Illicit Financial Flows from Developing Countries: 2004-2013 (Washington: Global Financial Integrity, 2015).

[11] “Measuring OECD Responses to Illicit Financial Flows from Developing Countries” (Organization for Economic Co-operation and Development, 2013).

[12] Ibid.

[13] “World Development Report 2016: Digital Dividends Overview” (Washington, DC: The World Bank, 2016).

[14] “Lions Go Digital: The Internet’s Transformative Potential in Africa” (McKinsey Global Institute, 2013).

[15] Mutsa Chironga, Hilary De Grandis, and Yassir Zouaoui, ““Mobile financial services in Africa: Winning the battle for the customer” (McKinsey Global Institute, 2017).

[16] Ibid.

[17] Jeff John Roberts, “The Diamond Industry Is Obsessed With the Blockchain” (Fortune Magazine, 2017).

[18] A Close Look at Everledger—How Blockchain Secures Luxury Goods (Altoros, 2017).

[19] IBM & Walmart Launching Blockchain Food Safety Alliance In China With Fortune 500’s (Forbes, 2017).

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Originally from the US state of Maine, Michael is currently pursuing his Masters in International Security Studies at the University of St. Andrews in Scotland. He previously spent three years working on global health and economic development projects in Central and Eastern Africa and the Middle East.