Developing countries lose $1tn a year due to poor governance and lax regulations. A new OECD report suggests how governments can collaborate to clamp down on illicit finance

Any discussion on illicit financial flows – money that leaves countries through illicit activities like money laundering and bribery – seems to prompt the question: how much money are we talking about?

A lot of effort currently goes into estimating it, but perhaps the crucial question to ask is what countries are doing to address it. A new report from the Organisation for Economic Co-operation and Development (OECD) measures responses to illicit financial flows from developing countries and analyses how OECD countries are tackling issues of money laundering, bribery, tax evasion, and asset recovery.

In these policy areas, international standards have been in place for years. The report finds that most countries have regulations in line with the standards, but also that they could do more to stop illicit flows. By comparing country performance and by contrasting achievements in the relevant policy areas, this analysis offers strong recommendations on how advanced economies can contribute to fighting crime in developing countries – while simultaneously making their own systems stronger.

Of the OECD's 34 member countries, not one is fully compliant with the beneficial ownership recommendations on legal arrangements. Lax rules on declaring who really owns a company ('beneficial ownership') make it almost impossible to trace illicit money. Transparency on who owns what company can help win the fight against illicit flows. Establishing a comprehensive, transparent public registry of companies is relatively cheap, yet makes the investigation of corporate structures easier.

Governments should also require financial institutions and similar service providers to conduct 'due diligence' – in other words, carry out background research on whoever orders their services. Often, a quick internet search will reveal surprising similarities between the names of the seemingly innocuous client and an arms dealer in a conflict zone. These recommendations are not new: most are noted in the financial action task force's 40 recommendations from 2003, updated in 2012.

Combating cross-border tax evasion

Exchange of information between tax authorities is a key weapon against cross-border tax evasion. More than 120 jurisdictions, including many developing countries, have committed to the international standard on exchange of information on request. Since 2009, the OECD's Global Forum on Transparency and Exchange of Information has been working to ensure that this standard is implemented properly. The global architecture on exchange of information has seen dramatic progress. Since 2000, OECD countries have signed roughly 1,300 agreements with developing countries, enabling them to request information for tax purposes.

Following commitments from the G8 and G20 countries, the OECD, together with the G20 countries, is currently developing a single global standard on automatic exchange of information. This will enable tax authorities share information automatically with foreign partners, not just when asked.

For donor agencies, this means funding capacity building. Developing countries need support to translate complex tax information into convictions of tax evaders.

Freezing, recovering and repatriating stolen assets

Between 2010 and 2012, OECD countries returned $147m and froze almost $1.4bn worth of stolen assets. While the cost of investigators who can find and trace stolen funds is relatively high, these figures show that there is an impressive return to be gained, which can in turn be used to fund development efforts.

Analyses have shown that countries with a consistent and comprehensive asset recovery strategy recover the largest amounts of assets. As with tax evasion, an important factor here is capacity. Sending in experienced investigators is one way to help developing countries gain convictions.

International bribery

As of 2012, 221 individuals and 90 companies have been sanctioned for foreign bribery. This suggests a growing political will to punish bribe payers; but approximately half of the OECD countries have yet to sanction a single offender. Considering that bribery is rife in many international business transactions, it's hard to believe that some of the world's most commercially active countries have not seen cases of corruption.

Given that most countries have laws criminalising bribery, the weak link (again) seems to be enforcement. Governments need to ensure that their enforcement authorities are equipped to prosecute consistently. Developing countries in particular need support for their prosecution systems.

While we may never know the exact extent of the problem, illicit flows of money from developing countries can nevertheless be tackled; the tools exist that are proven to do the job. The figures also show that some progress is being made. OECD countries recognise that instead of trying to measure a problem as shadowy, complex and difficult to quantify as illicit financial flows, the focus should be on addressing these flows more effectively. That will take a whole raft of preventative and enforcement measures. If governments consistently put their commitments into action and enforce regulations, the crimes of money laundering, bribery and tax evasion may start to pay criminals a lot less.

Lena Diesing works for the governance for development and peace team, within the global partnerships and policy division of the Organisation for Economic Cooperation and Development. Follow @LenaDiesing on Twitter

This article was updated on 26 March, 2014

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