Closing the Loopholes: Combating Illicit Finance and Tax Avoidance Worldwide

Author: Ilona Dumanska, Veronika Solilova

Date: 23-12-2025

Illicit financial flows (IFFs) are not just a byproduct of crime – they are a structural enabler of corruption, illicit trade, and institutional fragility. According to Nasdaq Verafin’s 2024 Global Financial Crime Report, an estimated $3.1 trillion in illicit funds circulated globally in 2023, including $782.9 billion from drug trafficking, $346.7 billion from human trafficking, and $11.5 billion from terrorist financing (Nasdaq Verafin, 2024). These flows distort markets, weaken governance, and undermine development.

The consequences are severe: IFFs drain public resources, fuel organized crime, and destabilize economies. Developing countries lose $200–$300 billion annually in tax revenue, equivalent to 4.8% of GDP, according to OECD estimates (OECD, 2014). This shortfall could finance universal primary education or double healthcare budgets in many low-income nations. Beyond outright criminality, aggressive tax avoidance and profit shifting by multinational corporations cost governments $240 billion per year, as reported by the OECD’s BEPS project (OECD, 2021). While technically legal, these practices exploit loopholes and secrecy jurisdictions, creating a parallel system that erodes fairness and fiscal stability.

Unilateral sanctions, aimed at curbing illicit activity, have reshaped global finance but often create overlapping compliance rules, trade diversion, and financial exclusion – especially for vulnerable economies. Fragmented regimes raise complexity and costs for businesses, while legal uncertainty grows. In some cases, sanctions push legitimate transactions into informal channels, introducing new risks to global financial integrity.

Closing these loopholes requires systemic reform. A multilateral sanctions transparency platform is critical to harmonize policies, reduce duplication, and provide clearer guidance for financial institutions. Real-time data sharing and coordinated enforcement would minimize unintended spillovers while strengthening compliance and maintaining global stability. Coupled with global efforts to curb tax avoidance—such as implementing a 15% global minimum corporate tax (expected to generate $150 billion annually) (OECD, 2021) and strengthening beneficial ownership registries – this approach would dismantle the infrastructure that enables both illicit actors and tax evaders.

Four Strategic Pillars for an Integrated Global Approach:

1. Intergovernmental Collaboration and Data-Sharing. IFFs thrive in blind spots between jurisdictions. Fragmented laws and weak cross-border cooperation allow illicit actors to exploit regulatory gaps. The top five secrecy jurisdictions – United States, Switzerland, Singapore, Hong Kong, and Luxembourg – account for more than half of global financial secrecy risk.

Harmonized standards, mutual legal assistance treaties, and real-time data-sharing are essential to close these gaps. Developing economies suffer most, losing up to 4.8% of GDP annually and spending significantly less on health and education compared to peers (OECD, 2014). Experts advocate for a mandatory global framework for automatic exchange of financial information, backed by enforceable compliance mechanisms (OECD, 2021).

2. Strengthening Beneficial Ownership Registries and Asset Recovery. Anonymous entities – shell companies, trusts, and nominee arrangements – are the backbone of IFFs. Robust asset recovery frameworks should include non-conviction-based forfeiture, expedited legal procedures, and international arbitration mechanisms. Integrating ownership data into financial intelligence systems can enable proactive risk profiling and disrupt illicit networks before they scale.
3. Leveraging Technology and Civil Society. Technology is both a weapon and a shield. Blockchain analytics, AI, and digital forensics help trace complex transaction chains. In 2023, cyber-enabled scams caused $10 billion in global losses, including billions from fraud and banking schemes (FBI, 2023; Interpol, 2023).

Yet technology alone is insufficient. Civil society often acts as the only watchdog in fragile states, exposing corruption and advocating reform. Financial Intelligence Units (FIUs) must be independent, well-resourced, and connected through public-private partnerships and open-source intelligence platforms.

Moving from fragmented efforts to systemic change requires clear levers for transparency, accountability, and enforcement. Recommended actions include:

1. Global Compliance Index to benchmark FATF standards.
2. Public Beneficial Ownership Registries with verified data.
3. Digital Traceability Standards for virtual assets.
4. Civil Society Engagement with whistleblower protections.
5. Conditionality in International Finance tied to anti-IFF benchmarks.
6. G20 Leadership to harmonize global standards.
7. Capacity Building for developing countries.
8. Sanctions Transparency Mechanism to align regimes.

Together, these measures strengthen accountability, close regulatory gaps, and promote inclusive governance, requiring political will, global cooperation, and investment in institutions.

Illicit financial flows are a global challenge demanding a global solution. By fostering collaboration, enhancing transparency, leveraging technology, and empowering civil society, we can dismantle the infrastructure of financial secrecy. This fight is not just about financial regulation – it’s about restoring trust, protecting human rights, and securing the foundations of global governance.

References:

1. (2024). Global financial crime report 2024. URL https://www.nasdaq.com/global-financial-crime-report
2. Organisation for Economic Co-operation and Development (OECD). (2014). Illicit financial flows from developing countries: Measuring OECD responses. URL https://doi.org/10.1787/9789264203501-en
3. Organisation for Economic Co-operation and Development (OECD). (2021). Base erosion and profit shifting (BEPS) project. URL https://www.oecd.org/en/topics/base-erosion-and-profit-shifting-beps.html
4. Federal Bureau of Investigation (FBI). (2023). Internet crime report 2023. URL https://www.fbi.gov/how-we-can-help-you/safety-resources/scams-and-safety/internet-crime

Interpol. (2023). Global crime trends report 2023. URL https://www.interpol.int/en/Crimes/Financial-crime